If 2006 was the year for property, 2007 could be the year of absolute returns. Key observers such as Amin Rajan, of consultancy Create, and Russell Reynolds Associates Amanda Foster are already predicting increasing inflows into absolute return-style products this year, and asset management groups have produced a series of new offerings in recent months.
The aim of an absolute return fund is simple - to generate positive returns in all market conditions.
The introduction of the Non-Ucits Retail Schemes (Nurs) allowed managers to hold assets such as gold and hedge funds for the first time, although only 20% of assets can be held in unregulated schemes like hedge funds. However not all asset management houses have followed the Nurs route and have taken on the challenge of delivering absolute returns in an innovative way.
Old Mutual, with its Prosper 80 offering, aims to deliver a cash plus 2% to 4% annual return by investing in a diversified portfolio of hedge funds and cash.
Investments are used to purchase medium-term notes, the value of which are linked to the performance of the group's Prosper Protected fund.
Chris Rule, senior product manager at Old Mutual, said the product appeals to investors looking for something that is low risk, defensive, offers capital protection, and is transparent.
He said: "It is structured like an ordinary unit trust, so it offers daily dealing, no penalties for buying and selling, a £5,000 minimum and low charges.
"At the same time, investors can access an investment strategy that is normally only available to high-net worth clients, who have £100,000 to spend and don't mind the monthly liquidity and lower transparency of a traditional hedge fund."
Prosper 80 comprises of 11 different investment processes, combining equities, bonds and commodities.
Three are run in house by Old Mutual – a global equity neutral strategy, a small and mid-cap hedge strategy and a statistical arbitrage fund.
There are also external managers providing fundamental stock picks, a quantative investment team, currency managers, commodities specialists trading in listed futures and a fixed income team.
Rule added: "The fund is not going to achieve 30% plus returns in a year, but we aim to make cash plus returns whatever the market conditions.
"During the May correction last year, the unit price rose 10bps, in June 43 bps and July 40bps. September was the only month last year when we lost money and we were up around 2% over November and December."
In addition the investment plan offers 80% protection of the highest ever fund price.
"Each time the fund price reaches a new high, the protected price rises to 80% of this with all gains locked in," said Rule
Launched in September 05, the fund has proved popular with investors and assets under management stand at £70m, across its euro, sterling and dollar share classes.
An alternative to Prosper 80 is Dexion Capital's range of four closed-end fund of hedge funds - Absolute, Equity Alternative, Trading and Alpha Strategies.
Dexion Absolute is the most popular of the four, boasting an impressive £780.2m of assets under management as of November 2006, just four years after its launch.
Andrew Gale, director of Dexion Capital, said the beauty of the closed-end fund of hedge funds is that it provides a diversification play for any private client portfolio.
"It is aiming to achieve a 1% a month return and does so with no correlation with the equity and bond markets," he said. "It also has very low volatility - 3.2% - and no minimum investment level. We also hedge back to sterling to neutralise currency volatility."
The fund is managed by Harris Alternatives in Chicago and is exposed to 48 different hedge funds.
It currently trades a 6% premium to NAV and generated NAV returns of around 8% in sterling terms over the 12 months to January 3 2007.
The closed end fund of hedge fund universe has been slowly gaining market share, with HSBC, Goldman Sachs and Man Investments all having entered the fray.
However, analyst Paul Locke of Teather & Greenwood said retail investors would benefit if more players were to enter the market. "I do not think the best players are in the market yet," he said. "I would love to see a concentrated four or five hedge fund portfolio come to the market from one of the big players such as Gartmore or Aberdeen, which have a real track record."