What is Absolute Return?

Relative versus Absolute Return?

Conventional investment strategies and managers seek to beat a pre-defined benchmark or basket of market indices across one or more asset classes and hence they measure themselves relative to this benchmark or index.  This is true of most Mutual Funds and Financial Advisors and Planners.  Thus, if the benchmark, say the S&P 500 index is down 39% like in 2008, the manager or strategy is considered successful if it “beat” the market, even if they generated a 35% loss that year.  A relative return manager, hence, has a built in excuse for not performing well with your investment, i.e. the markets were at fault. 

Absolute Return Strategies

In contrast to relative return strategies, an Absolute Return strategy seeks to generate a positive return over a predefined period independent of whether an index or benchmark with similar risk characteristics is positive or negative over the same predefined period.  Also called “alternative” strategies, Absolute Return strategies can use fundamental, technical, or macro-economic indicators or a combination of these to determine investment positions or portfolio allocations that are adjusted with changing market conditions as represented by these indicators or otherwise.  Absolute Return strategies are almost as diverse as their developers and managers, and are not all created equal.  They can be simple or sophisticated, include one or more underlying strategies and risk management approaches, use instruments other than stocks or bonds (like options, futures, etc.) to hedge existing positions or enhance leverage, can take both long and short positions in different markets (i.e. align the investment with direction of prices), have different trading frequencies, and most importantly can perform differently with different degrees of risk.  In choosing Absolute Return strategies, the diligent investor will seek to gain an understanding of the underlying strategies, risks, and their performance before investing funds.