The number of open-end funds using alternative strategies and the assets flowing to them have increased dramatically in Europe in the past several years. Of the 1,149 such offerings tracked by Morningstar in Europe presently, 60% launched within the last four years and 65% in the last six years. All told, they held approximately EUR 117 billion in assets at last count.
Too often, however, these funds are bought and sold based on a vague notion that they do well in down markets or are capable of achieving an absolute, i.e., positive return. Some funds encourage this mode of thinking, with more than 220 using the "absolute return" label in their names. This may help gather assets in the short term, especially after a big downturn, but it does little to help investors understand the funds’ capabilities and how they might be responsibly used in a portfolio.
To help better serve investors and fund selectors, Morningstar recently launched a suite of 18 categories for open-end funds using alternative strategies. By design, these focus on the type of strategy deployed by the funds and the assets held. For example, funds that had previously been classified as "Absolute Return" or "Long/Short" have been placed in more refined groups that take their specific strategy into account. The new categories can be viewed here.
The categories are based on those deployed globally in the Morningstar hedge-fund database, and were adapted by our alternatives team to suit the nuances of the Pan-European universe. While we believe there is room for further refinement, they help give investors a much better basis for understanding and evaluating funds in this rapidly expanding area. Now, for example, a fund such as Allianz Volatility Strategy is grouped with similar offerings in the Alt – Volatility category, while JPM Global Absolute Return Bond is placed in the Alt – Long/Short Debt category.
The new system is in keeping with our long-standing practice of classifying funds according to what they do and what they own rather than performance or outcome goals. It is more of a challenge to accomplish this with alternatives given the limited transparency around derivatives exposures, but we believe the benefits to investors are well worth the effort.
You can read about these changes in more depth here.