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Absolute or target returns hold appeal; FINANCE.

Byline: sean raftery

Last month's column highlighted the possibility of quantitative easing being implemented; today it has become a reality.

UK base rates are now at a historic low of 0.5 per cent, the Bank of England's new monetary policy to fund asset purchases is driving gilt prices higher, and the returns on cash and gilt edged securities are also low.

A key example is the ten-year benchmark gilt yield which is now approximately 3.1 per cent.

The prospect of further short term deflation makes it difficult to consider purchasing, at least for now index linked gilts or similar securities, which appreciate in terms of capital and income in line with an underlying inflation measure.

For investors searching for a home for their cash, an absolute return or target return approach could be suitable.

Several traditional funds have always focused on the methodology of using conventional assets and selecting them for their low risk and steady returns.

The regulatory changes under UCITS III, have allowed for a highly regulated fund to be accessible to UK investors, offering a wider range of tools than long-only funds.

The introduction of the UCITS III directive resulted in sophisticated techniques previously only available in unregulated, less liquid and higher charging hedge funds, to become available within daily dealing and FSA regulated open-ended funds.

A typical objective might be to deliver positive returns or returns linked to LIBOR, which are very attractive to investors, especially during periods of economic uncertainty.

In the UK absolute funds are regulated by the FSA, have limits on gearing and utilise synthetic derivatives which can be used for long and short positions, such as contracts for difference, total return swaps, currency swaps, options, futures and credit default swaps.

This allows the funds to take, for example, a market neutral or market directional stance, which means they have the opportunity to make money in rising or falling markets.

Much is dependent on the skill of the investment manager, but the strategies allow much of the volatility associated with some asset classes to be removed, with the opportunity to gain positive returns.

The transparent nature of the FSA regulated UCITS III and daily dealing make them an attractive complement to long only funds, particularly in current market conditions.

Sean Raftery is executive director and head of the Birmingham office of Citi Quilter
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Title Annotation:Business
Publication:The Birmingham Post (England)
Date:Mar 25, 2009
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