This aggressive tactic has paid off handsomely in the past decade, but clearly might not do so in the future. The theory behind these approaches is simple. Commonfund believes this is sound, but also believes there are other ways to enhance return in the cash pool without assuming too much duration or equity market risk. You are likely familiar with the first two funds since they are two of the most widely used products Commonfund offers. The first targets the average return on three month Treasury Bills and the second uses the Merrill Lynch 1-3 Index as its benchmark.
Managers employ relatively low risk, long-short strategies in equities and fixed income.
The use of leverage in the portfolio is limited. Over time, the Fund has evolved to be more diversified and more risk controlled. Combining investments that have low correlations can produce a portfolio with attractive risk characteristics. Since the Absolute Return Fund is designed to be essentially uncorrelated with the general direction of interest rates and equity markets, adding it to almost any portfolio should help the risk profile. A cash portfolio is no exception.