EDELWEISS ABSOLUTE RETURN FUND - HOLD

Investors can continue to hold their investments in Edelweiss Absolute Return Fund. The fund is slowly moving up the ladder in the ranking chart of equity-oriented balanced funds. With a compounded annual return of 6.8 per cent, the fund trailed its benchmark Crisil MIP marginally.

However, with a good proportion held in equity, we compared the fund with the equity balanced fund category average and found that its returns match this category average since its inception. It also scores over this category when it comes to protecting the NAV during volatile markets, thanks to its exposure to derivatives, besides its debt holding.

Investors may watch for the fund's performance during any prolonged rally before taking fresh exposure.

Portfolio strategy

The primary objective of the scheme is to generate returns with low volatility. The portfolio construction for the equity portfolio is driven by a quantitative model.

The fund operates a combination of three strategies. One, although it allocates 65 per cent of assets to equity, by hedging its portfolio by 30 per cent, its net equity exposure on most occasions is 35 per cent. This is its hedging strategy to reduce volatility.

Two, it tries to take advantage of special situations such as mergers and de-listing offers by taking short-term bets. It recently increased its exposure to the stock of UTV Software Communication after news of its delisting. The fund invests 30 per cent of the assets mostly in short-term debt.

Suitability

The fund's strategy of taking exposure to stocks and hedging it with derivatives based on the market movement is entirely based on the decision of the fund manager even though it follows a quant model for selection of stocks.

Given its hedging strategy, if the markets suddenly move in the opposite direction, for instance there is a sudden rally, the fund will under-perform the market for a short duration.

This happened once during the first quarter of 2011. However, the fund reversed the situation by diluting its hedging component. Hence, timing of calls in both stocks and stock derivatives is paramount to achieving returns. Although the fund trailed top performing balanced schemes such as HDFC Balanced during market rallies, it managed to contain losses during market corrections by a good margin. This appears to be its key advantage over its category peers.

The fund is ideal for investors looking for stable returns with low risks. Investors can compare the fund with the balanced category to ensure that it keeps pace.

Performance

The fund was launched in 2009 and since then has done a good job of containing volatility in periods when the Nifty underwent sharp corrections of over 10 per cent. However, it failed to better its benchmark Crisil MIP because the latter has only a 20 per cent weight to equities, while the fund has at least 65 per cent.

The fund's return of 2.9 per cent in the last one year places it in the top of balanced fund category. The Sensex and Nifty lost about 10 per cent in this period. However, other categories of funds such as arbitrage funds have managed returns of 6-8 per cent in this period.

The fund's return is still noteworthy, given that it has a good 30 per cent exposure to the more volatile mid- and small-cap segment. Its quant based approach may have helped curtail losses in this category. The fund has gone for limited hedging in its recent portfolio. It may therefore be benefitting from the recent rally.

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