Absolute Return Funds & Liquid Alternatives: Genuine Diversifier or Fee Drag?
The challenge with absolute return and liquid alternatives is establishing whether a particular strategy can deliver a distinct and dependable portfolio role. Very different risk engines sit beneath the same broad label, often with materially different return drivers, stress behaviour and governance demands.
The useful question is therefore not whether a fund targets positive returns. It is: what risk is being taken, what does the strategy genuinely diversify, when should it work, and is the expected net benefit worth the cost and complexity?
What is the fund diversifying?
Role clarity comes first.
Is the fund expected to diversify equity beta, credit spreads, duration, liquidity risk, volatility shocks or manager style? If the role is vague, monitoring will be vague as well.
A market-neutral equity fund, discretionary macro strategy, long/short credit fund and multi-strategy liquid alternative should not be treated as interchangeable. They may share a category, but they do not share the same failure points.
The committee question is simple: what portfolio problem is this fund being asked to solve?
Strategy type matters more than the label
Absolute return is not a strategy description.
Market-neutral funds rely on stock selection, factor control and short-book discipline. Macro funds may depend on rates, currencies, commodities and manager judgement. Long/short funds may still carry meaningful net market or credit exposure. Multi-strategy funds may diversify across underlying strategies, but they can also make attribution harder when performance disappoints.
Allocators will recognise the lesson from GARS: when multiple return-seeking ideas sit inside one outcome-oriented fund, the issue is not only whether performance is positive or negative, but whether the committee can identify what worked, what failed, and whether the original portfolio role still holds. Strong performance in one area can offset weakness elsewhere, while the overall fee burden, implementation complexity and, where relevant, use of leverage may still matter. If risk is reduced across the platform, outcomes can suffer even where some underlying strategies were positioned well.
Selectors should ask where returns have come from, how risks are sized, how losses are controlled and whether manager behaviour has stayed consistent across regimes.
Correlation in calm markets can mislead
Low correlation is useful only if it holds when needed.
Some liquid alternatives diversify well in normal markets but become more exposed during stress, particularly where returns depend on leverage, liquidity, credit carry, crowded trades or derivative exposure.
Resilience varies materially across liquid alternative strategies. Equity market-neutral approaches have often held up better during equity sell-offs, while more directional long/short and macro funds can still suffer losses. UK allocators will recognise both the disappointment of strategies such as GARS and the more episodic success of BH Macro, whose sterling NAV gained materially in 2020 and in 2022. The contrast reinforces that diversification depends less on the category label than on the underlying return engine, implementation and market environment.
A credible review should compare rolling correlation, drawdown capture and performance through equity sell-offs, rate shocks, volatility spikes and liquidity squeezes. Did the fund make money, lose less, preserve optionality, or simply fail differently?
Diversification that disappears under pressure deserves a lower governance value.
Return targets need realism
Cash-plus or positive-return objectives can create false precision.
A target is not evidence of deliverability. The evidence should show a repeatable return source, sufficient opportunity set, disciplined risk budget and acceptable outcome after fees.
Evidence of repeatability matters. Long/short equity funds typically retain some directional market exposure, so they may cushion equity drawdowns rather than avoid them altogether. At the more market-neutral end, allocators may look to strategies such as Jupiter Merian Global Equity Absolute Return, which is constructed with broadly balanced long and short books and has historically maintained low equity-market correlation. The trade-off is usually lower participation in rising markets and a greater dependence on stock-selection skill consistently adding value.
A dull period is not automatically a failure if the fund is doing its defensive job. But persistent low returns, weak stress protection and limited upside participation create a harder question: is the portfolio being compensated for the complexity?
Where it may not fit
Not every mandate needs liquid alternatives.
They may be a poor fit for low-cost portfolios, simple governance structures, liquidity-sensitive mandates or adviser propositions where transparency and client explanation matter. Daily dealing does not remove the need to understand underlying liquidity, derivative exposure, leverage, counterparty risk and redemption management.
They may also duplicate existing exposures. A long/short credit fund may still be spread-sensitive. A macro fund may overlap with duration or currency positions. A multi-strategy fund may reduce volatility but increase governance opacity.
Failure points to watch
The main risks are often hidden in the detail.
Hidden beta can flatter returns in supportive markets. Complexity can make weak outcomes harder to diagnose. Fees can absorb much of the gross edge. Short books can hurt during sharp rebounds. Liquidity can look robust until the underlying market is tested.
The sharper due-diligence questions are:
What decision is being delegated?
What risks are being taken today?
Is performance coming from the intended source?
What would show the original role is breaking down?
What would make the strategy less repeatable from here?
When patience becomes unjustified
Underperformance alone is not always failure. Outperformance alone is not proof.
Monitoring should focus on role integrity: correlation drift, net and gross exposure, drawdown pattern, attribution quality, liquidity terms, manager turnover, fee impact and changes in risk-taking.
Patience is easier to defend when the process remains intact and the fund still does the job assigned to it. It becomes harder when the strategy is opaque, expensive, weak in stress periods and unable to explain its own return pattern.
Infundly view
Absolute return and liquid alternatives may still merit a place in portfolio research, but only where the role is explicit and the evidence is strong.
The governance case should not rest on the promise of positive returns. It should rest on a clear risk engine, observable diversification, credible stress behaviour, fee discipline and monitoring triggers that committees can defend.
A genuine diversifier earns its place by doing a job the rest of the portfolio cannot do. Otherwise, it risks becoming a fee drag with a sophisticated label.
Performance figures and data are illustrative, sourced from industry reports including Morningstar, and public strategy commentary as of mid-2026. Past performance is not indicative of future results.
Professional-use and risk note
This material is intended for professional advisers, regulated firms, discretionary managers, institutional investors and other professional investment decision-makers. It is not intended for retail clients and should not be relied upon by retail investors.
This material is provided for general information, research and professional discussion only. It does not constitute investment advice, a personal recommendation, investment management, arranging activity, or an invitation or inducement to engage in investment activity. Infundly is not authorised or regulated by the Financial Conduct Authority and does not provide personal financial advice.
The value of investments may fall as well as rise. Past performance is not a reliable indicator of future results. Opinions, figures and market observations may change without notice. Professional users remain responsible for their own due diligence, suitability assessments, approvals and client outcomes.