Tuesday January 18, 2011 at 12:00
The FSA's warning to fund managers to be careful how they use the phrase 'absolute return' when launching and marketing funds has implications for the UK structured products industry.
The phrase is regularly used in the hedge fund and managed futures industries to describe funds which seek to make a return independent of stock market direction. However, the FSA said it has connotations in everyday speech to suggest that a return is 'absolute' rather than 'conditional' and therefore that growth is guaranteed.
Some structured products plan managers have used the phrase 'absolute return' to describe either bull-bear structures or, following hedge fund nomenclature, to suggest that return is independent of the stock market.
While initial capital is guaranteed in some of these cases, growth is not always assured. Skandia's Protected Portfolio Investment had an Absolute Return option until the series ended. This mutual fund-linked product protects initial capital with participation at maturity in any rise in value of the fund basket.
Blue Sky Asset Management, meanwhile, launched two plans entitled Absolute Return Plan (I and II). Version II of the FTSE-linked bull-bear/cliquet/protected tracker, launched in January last year, registers a maximum 12% growth derived from the capped and collared absolute value of the rise or fall of the index in each annual period. The product has soft protection set at 50%; a minimum return of 142.5% is only triggered if the final index is at or above its initial level.