Absolute Return Blog

Skyrocketing commodity prices, geopolitical unrest, and natural disasters sparked volatility in equity markets this year.

Managing this type of risk is challenging, but critical to the goal of trying to mitigate the potential erosion of long-term returns. Investors concerned about the impact of macroeconomic events on their portfolios may want to learn more about market-neutral strategies. This type of strategy is not tied to a traditional benchmark that fluctuates with the market’s ups and downs. Market neutral strategies seek to produce returns largely independent of market volatility.

In recent weeks:

• The Chicago Board Options Exchange VIX — viewed as an indicator of investor sentiment and fear — had its biggest one-day jump in nine months on February 22, following concerns about political unrest in Egypt and Libya. On March 14, in the days after the Japan earthquake, the index reached 24.32, its highest level since August 2010.
• With political unrest and violence erupting in the Middle East and Northern Africa, concerns about oil supplies fueled volatile swings in the oil sector. Oil prices, as measured by the West Texas Intermediate (WTI) grade, rose as high as $105.44 per barrel on March 7, up from the recent low of $84.32 on February 15.
• Equity markets around the world experienced broad losses following Japan’s 9.0 magnitude earthquake and tsunami, which caused thousands of deaths and widespread destruction, including a nuclear power plant catastrophe. Japan’s Nikkei 225 Index shed nearly 17% in two days. The events sent shockwaves through equity markets across the globe. The Dow Jones Industrial Average posted two consecutive days of triple-digit losses in the aftermath.

Investors seeking to lessen the impact of market gyrations could consider market-neutral strategies, such as Putnam Absolute Return Funds. These funds seek positive 3-year returns of 1%, 3%, 5%, or 7% above inflation, as measured by T-bills, regardless of market conditions. The funds:

• Allow managers to invest in a wide range of strategies, with global flexibility
• Use investment tools to obtain exposure to markets and capture gains, regardless of whether the markets are flat or negative
• Have ultimate flexibility to invest beyond benchmark constraints

More on Putnam Absolute Return Funds.