ABSOLUTE RETURN IS defined as a measure of the appreciation or depreciation, expressed as a percentage, that financial instruments such as stocks or mutual funds face over time. Absolute return products or solutions should make positive returns whether the overall market is up or down. If there has been a 10 per cent increase in the price of HSBC shares over the past year, then the holders of HSBC shares have achieved an absolute return of 10 per cent in that time. For high and ultra high net worth individuals, an absolute return is the simple expectation of a return on their investment whatever the underlying asset, whether it is structured products, property, hedge funds or private equity. Compared with the traditional discretionary portfolio of mutual funds, portfolios based on absolute return products are up when the market is up, and down when the market is down. 'As long as they are up more than the index or down less than the index, which is their benchmark, then they are doing a good job,' Barclays Wealth Asia chief executive Nigel Sze said. For high and ultra high net worth clients looking for absolute returns, the necessity of looking to alternative asset classes is paramount for three reasons: investment diversification; markets are more sophisticated and becoming more volatile so having instruments that can hedge even in a downturn could be useful for total portfolio return; and these clients now demand alternative asset classes and wealth managers must be able to select and recommend appropriate instruments. ING Private Banking managing director and head of Greater China region Sermon Kwan said absolute return was the key objective for a high net worth client who asked for investment advice. 'At the end of the day, if individual clients can produce money it is his or her own money so he or she is always looking for absolute returns,' he said. 'We don't specifically call our products absolute return products. We tell our clients that we try to find consistent returns on a year by year basis. To do this we use a good asset allocation and that should generate a positive return in every different market cycle.' An example of good asset allocation may include fixed-income products comprising investment grade and emerging market debt. These give a good base for a return, on top of which might be added structured products. 'Structured products remove some of the volatility of the stock market because many of them have a 10 to 15 per cent discount from the market price. By having that discount, a client can reduce volatility but still maintain pretty good returns on that portion of the allocation,' Mr Kwan said. Structured products were common investment instruments for high and ultra high net worth individuals, with their percentage in the asset allocation growing Mr Kwan said. Many high net worth investors now use structured products to replace part of their equity allocation, although some of these products are still equity related. 'Structured products now account for 20 to 30 per cent of an allocation but it depends on the client's risk appetite. 'Structured products, if linked with interest rates, enjoy less risk but the time of the tenor tends to be longer. Linked with equity, the risk is high but the tenor of the structured note is short. One is safer than the other in terms of risk but you can tie up your investment for a long time, maybe 15 years.' Mr Sze said there was plenty of money to be allocated in the glow of record high markets, increased liquidity, wealth generation and excess cash, so high and ultra high net worth investors were looking for different types of investments and higher returns. He also said these investors were increasingly interested in private equity. Private equity investment involves buying a share in an unlisted, privately held company. The goal is to tap companies' unrealised potential. A private equity manager is interested only in absolute positive return and it should be a return over a long-term investment horizon, usually seven to 10 years, sometimes up to 15 years. There are two major sub-classes of private equity: venture capital, which is seed or start-up financing; and buyouts, where an investor acquires a share in a more mature business that is soon to list. Communicating such opportunities to clients is a process beginning with asset allocation, the wealth manager's recommendations in what is available and what returns money invested should be achieving, which depend largely on a client's appetite for risk. What kind of money do high and ultra high net worth clients typically invest in absolute return solutions? Mr Sze said they should not invest more than 5 per cent of their total portfolio in private equity funds. 'The combined alternative asset class should be less than 7 per cent, so private equity should be within the 2 to 5 per cent range,' he said.