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Absolute Return Bonds Guide

Returns

What types of returns are available?
Absolute return bond funds may have a variety of target returns that may be compared with the interest rates offered on cash. A fund with a large cash or near-cash position and a lower target return will normally have a lower risk profile than one which relies more extensively on the use of bond market derivatives.

How are these returns achieved?
Absolute return bond funds are designed to bring together the fund manager's best ideas from across the full spectrum of bond investments, while at the same time aiming to keep risk at a relatively low level. Absolute return bond funds may also include the use of sophisticated financial instruments known as 'derivatives' requiring specialist investment skills. It is important that companies have the necessary policies and processes in place to help control derivative instruments as they can be used to increase as well as decrease risk.
The manager therefore needs to have efficient tools for monitoring risk on a continual basis. Indeed, in the case of derivatives, an effective risk management strategy is especially vital, as there are additional risks associated with investments in derivatives.
Bond market derivatives enable the fund manager to benefit from price movements in the underlying bonds without necessarily having to physically buy or sell the bonds. A comparatively small outlay for the derivative can therefore result in a much larger exposure to the underlying bonds than could otherwise be achieved for the same sum, so this exposure has to be managed carefully.
One way of controlling the degree of risk taken when managing an absolute return bond fund is to take a series of relatively small derivative positions rather than a few large exposures. This helps to reduce the impact on the fund should a particular strategy prove unsuccessful.
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