7 Powerful Insights into Risk Adjusted Returns in Structured Funds — Separating Strengths & Pitfalls

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Introduction

Many investors are wondering if structured funds can regularly produce high results without taking on undue risk in the current volatile financial environment. The concept of risk adjusted returns in structured funds captures this core question. It implies that pursuing large profits alone is insufficient; we also need to take into account the level of risk required to produce those rewards. Structured funds, also known as specialised investment funds (SIFs) in India, are being promoted more and more as investment vehicles that combine opportunity with prudent risk management. Do they, however, actually produce better risk-adjusted returns? In this post, we’ll go into great detail about what this term implies, how it relates to structured funds, their benefits and downsides, and—most importantly—what to look out for when assessing these for your portfolio.

What Are Structured Funds & Why “Risk Adjusted Returns” Matter

Structured funds produce steady, risk-managed results by combining a variety of assets, including loans, derivatives, stocks, and occasionally alternatives. The concept of risk adjusted returns in structured funds goes beyond plain profit figures. It assesses the amount of risk assumed for every unit of return.

In structured funds, for instance, if two funds yield 10%, the one with lower volatility has superior risk-adjusted returns. To put it briefly, investors want efficient returns rather than just large returns.

Hedging, market-neutral positions, and dynamic allocations are some of the strategies used by structured funds to strike a balance between risk and return. The actual meaning of risk adjusted returns in structured funds is determined by this balance.

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The Promise — How Structured Funds Aim for Better Risk Adjusted Returns

The purpose of structured funds is to increase stability. Let’s explore how they can potentially enhance risk adjusted returns in structured funds:

• Derivative hedging: Fund managers can use futures and options to cover losses in erratic markets, which results in more reliable risk adjusted returns for structured funds.
• Diversified asset allocation: Diversified asset allocation reduces downside risk and improves the dependability of risk adjusted returns in structured funds by combining stocks, bonds, and REITs.
• Tax efficiency: In some arrangements, investors may profit from equity taxation regulations, which enhance structured fund returns that are risk-adjusted after taxes.
• Reduced volatility: Structured funds frequently exhibit smoother performance patterns due to their ability to short specific assets or hedge exposure, which increases risk-adjusted returns in unpredictable times.

The objective is unambiguous: attain consistent, inflation-beating growth while shielding investors from sharp fluctuations in the market.

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The Reality — Why Risk Adjusted Returns in Structured Funds Aren’t Always Superior

While the promise sounds strong, risk adjusted returns in structured funds aren’t guaranteed to be better in every market condition. There are several limitations:

• High fees: Management and performance-based fees are typically charged by structured funds, which reduce their net risk-adjusted returns.
• Complex methods: The adoption of derivative-based or long-short strategies might affect risk-adjusted returns in structured funds by making it harder for regular investors to evaluate actual risks.
• Short track record: There is currently little long-term data on consistent risk-adjusted returns in structured funds because several of the fund categories are still in their infancy.
• Issues with liquidity: In structured funds, high minimum investment requirements and lock-in periods can limit flexibility and have an indirect impact on risk-adjusted returns.
• Market stress risk: Hedging may not function as planned during crises, which lowers actual risk-adjusted returns in structured funds relative to theoretical models.

Hence, while structured funds have potential, investors should not assume that better risk adjusted returns in structured funds are automatic.

Key Metrics to Evaluate Risk Adjusted Returns in Structured Funds

Here are the crucial metrics to look at if you’re serious about evaluating risk-adjusted returns in structured funds:

• Sharpe Ratio: The fund’s excess return per unit of total volatility is measured by the Sharpe Ratio.
• Sortino Ratio: Only downside volatility is examined by the Sortino Ratio, which is crucial for assessing defensive risk-adjusted returns in structured funds.
• Maximum Drawdown: Indicates the biggest drop in the fund’s value from its peak to its lowest point, indicating actual risk.
• Alpha & Beta: In structured funds, a low beta fund that generates strong returns has better risk-adjusted returns.
• Rolling Returns: To assess consistency, examine returns over a number of time periods.
• Expense Ratio: In structured funds, higher costs immediately lower your risk-adjusted returns.

Investors can determine if they are actually making more money per unit of risk or merely assuming higher volatility by being aware of these metrics.

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When Risk Adjusted Returns in Structured Funds Shine

In some situations, structured funds can perform better:

• Market volatility: When markets fluctuate, their hedging techniques can preserve capital and enhance risk-adjusted returns in structured funds.
• Tax-sensitive portfolios: After-tax risk-adjusted returns in structured funds are increased by structured arrangements that are eligible for equity taxation.
• Seekers of diversification: For total portfolio risk-adjusted returns, investors wishing to add a non-correlated asset may find structured funds helpful.
• Moderate-return expectations: When compared to pure equities exposure, investors looking for 8–10% annualised returns with few drawdowns can frequently find appealing risk-adjusted returns in structured funds.

In essence, these funds seek to provide more consistent performance as opposed to rapid growth.

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Setting Realistic Expectations for Risk Adjusted Returns in Structured Funds

It is not reasonable to expect risk-free 20% yearly returns. The goal of risk adjusted returns in structured funds is to increase efficiency rather than completely remove risk.

For example:

• A structured fund may aim for 8–9% with comparable or lower volatility if an arbitrage fund yields 6%. This would result in greater risk-adjusted returns for structured funds.
• Although short-term performance may vary, well-managed funds can provide steady risk-adjusted returns over longer time horizons (3–5 years).

Monitoring the impact of fees is also essential. Over time, even a 1.5% charge can have a big impact on structured fund risk-adjusted performance.

Checklist to Maximize Risk Adjusted Returns in Structured Funds

Before investing, follow this checklist to ensure healthy risk adjusted returns in structured funds:

1. Recognise your strategy—whether it’s hybrid, arbitrage-plus, or long-short.
2. Examine volatility statistics— In structured funds, funds with a lower standard deviation typically yield better risk-adjusted returns.
3. Examine the Sharpe ratios— Better performance per risk unit is indicated by a greater Sharpe ratio.
4. Examine the management team—In structured funds, skill is essential to obtaining higher risk-adjusted returns.
5. Monitor regularly—To make sure your risk-adjusted returns in structured funds are constant, check performance every six to twelve months.

Your investment will be in accordance with your objectives and portfolio goals if you follow a methodical evaluation approach.

Also Read: Can Structured Investment Funds deliver better risk-adjusted returns?

Conclusion

A more astute approach to investing is demonstrated by structured funds’ pursuit of risk-adjusted returns. Investors increasingly prioritise sustainability, protection, and stability over sheer figures. Structured funds are in a good position to provide that balance because of their adaptable, hedged, and hybrid forms.

They do, however, necessitate cautious selection, strategy comprehension, and cost awareness. Metrics such as correlation, volatility, and Sharpe ratio can be used by investors to find structured funds that actually provide better risk-adjusted returns.

When used properly, they can improve long-term wealth creation and portfolio resilience, but only if the investor understands that the “risk-adjusted” component is equally as important as the “returns.”

FAQs

Disclaimer

This content is solely intended for informational purposes. Financial advice or recommendations are not what it is. Liquidity and market risk are associated with structured fund investments. Future outcomes are not guaranteed by past performance or risk-adjusted returns in structured funds. Prior to investing, please get advice from a registered financial advisor.