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An absolute return fund is a type of fund that aims to deliver positive absolute return regardless of whether a market is rising or falling.

A regular fund will typically buy shares with the expectation that they will rise in value. An absolute return fund will also do this in what is known as a ‘long’ position.

But an absolute return fund may also take ‘short’ position in shares – this is where a profit can be derived despite a fall in share price. The concept of ‘shorting’ relies on borrowing shares, selling them to the market and then returning them with a profit due to a fall in share price. The fall in share price would allow the investor or fund manager in this case to return the same amount of borrowed shares but at a lower price (presuming that the share price did actually fall).

Absolute return funds can also hold cash in order to protect investors from periods of extreme volatility.