At first glance, absolute return funds – which aim to earn positive returns in falling markets – appear to be a superior choice compared with funds of hedge funds.

Their appeal is they tend to offer smoother returns than long-only funds. And as they fall under the European Union’s Ucits III directive, which gave mutual fund managers the power to use derivatives to generate higher returns, rather than simply to reduce risk, they are permitted to take advantage of shorting, or betting that share prices will fall, as well as gearing.

Buying into absolute return funds offers some protection if the current market rally reverses. And the drawback is that these funds tend to charge high fees.

As part of the Financial Times’ latest major series, Mark Dampier, head of research at Hargreaves Lansdown, answers readers’ questions on absolute return funds on Thursday, October 8.

Post a question now to ask@ft.com or use the online submissions form below.

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