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Fitch warns of AR funds being potentially mis-sold to investors

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Ratings agency Fitch has issued a two-pronged attack on European Absolute Return funds, branding them “prone to performance disappointment” and al

Ratings agency Fitch has issued a two-pronged attack on European Absolute Return funds, branding them “prone to performance disappointment” and also warning of “miss-selling” to unsophisticated investors reported website ifaonline.co.uk this week. Fitch emphasized to investors the need to understand this “sophisticated segment” of the market which has grown by 80 per cent since January 2009 to approximately EUR140billion in AUM as of March 2011 according to the ratings agency. It expects growth within the sector to continue, though rather as a function of sales than performance. The problem with AR funds is that they share similar objectives to a wide range of funds: that is, delivering consistent positive returns irrespective of whether the markets are going up or down. There’s no commonly agreed definition of what actually constitutes an AR fund and it’s because of this that, in Fitch’s view, there exists an “increased risk of misselling as AR funds gain traction in the retail market”. With respect to the underwhelming performance of AR funds, Fitch added: “With greater emphasis on liquidity and downside protection, AR funds are not meant to fully capture market upside, which results in modest returns, leading to potential disappointment for less sophisticated or informed investors.”  

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