Introducing absolute return strategies in portfolios
20 APR, 2026
Absolute Return strategies occupy a distinctive niche in the investment universe. They aim to deliver consistent performance, typically expressed as Cash + x%, while offering diversification, downside protection, and resilience against inflation and rising interest rates. Yet despite their potential, adoption remains uneven. Unlocking their value requires a rethinking of how these strategies are positioned and integrated.
Barriers to adoption
Several obstacles explain the slow adoption:
- Perceived complexity: Absolute Return strategies often rely on arbitrage, derivatives, and hedging, which can appear opaque.
- Performance inconsistency: Track records may show uneven results, undermining confidence.
- Positioning ambiguity: Many investors confuse the goal of absolute performance with guaranteed returns, leading to misaligned expectations.
- Limited capacity: Many Absolute Return funds cannot generate strong alpha beyond a certain size, constraining scalability.
Pedagogy vs. performance
The challenge is both educational and practical. Without clear communication, underperformance is poorly tolerated. Managers must explain the role of absolute return strategies, whether as diversification tools, volatility dampeners, or opportunistic alpha generators, while demonstrating resilience across cycles.
Selectivity and active fund selection
Not all Absolute Return strategies are created equally. Selectivity is essential: investors must be active in fund selection, scrutinizing processes, risk controls, managers and track records. Performance depends more on the skill of fund managers than on market direction, and dispersion of returns across managers is significant. Passive allocation is insufficient; success requires a hands-on approach to identify managers capable of delivering consistent alpha.
Complementarity between funds
The complementarity of funds is a cornerstone of effective absolute return allocation. Combining different strategies, convertible arbitrage, Equity Market Neutral, Long/Short Equity, Long/Short Credit, Global macro, CTA, Event Driven, multi-strategy, creates a portfolio with low internal correlation.
This enhances diversification, reduces risk, and produces a superior risk/return profile compared to traditional portfolios. We should not analyze and select absolute return funds standalone, but to select a combination of complementary funds.
Trend Following and Cyclicality of Alpha
Alpha is inherently cyclical. Applying trend-following principles to absolute return strategies allows investors to rotate exposure across regimes.
Even traditionally directional strategies, such as credit, can be implemented with Trend Following strategy to deliver absolute return profiles. This adaptability broadens the appeal and reinforces the case for active management.
Risk reduction and leverage potential
Absolute return strategies offer low correlation with traditional assets, enabling meaningful risk reduction. Moreover, their design allows for leverage without necessarily increasing systemic risk, amplifying the potential for enhanced returns. In this sense, absolute return portfolios can achieve a better risk/return balance than conventional equity-bond mixes.
The case for 100% allocation
While provocative, one could argue that an ideal portfolio allocation is 100% Absolute Return strategies if we really want to optimize the risk adjusted return. With Cash + x% performance targets, resilience rising rates, and low correlation across funds and versus traditional asset classes, absolute return portfolios can deliver superior outcomes. The key lies in selectivity, complementarity, and active management.
Conclusion
Absolute Return strategies remain misunderstood, but their potential is undeniable. By being selective, actively managing fund choices, combining complementary approaches, and applying trend-following to alpha cycles and enlarging the investment universe of absolute return strategies by applying trend-following to directional asset classes such as credit, investors can build portfolios that outperform traditional models with a more stable pace of return & risk. With resilience, diversification, and adaptability, Absolute Return strategies offer a compelling path forward for the future of portfolio construction.
Thierry Crovetto
TCSF (TC Stratégie Financière)
Independent financial analyst specializing in fund selection and risk management
Professor of Finance at IUM (Omnes Education Group)
https://tcsf.mc/fr/
[email protected]
