Absolute Return

What Is absolute return?

The return on an asset over a given time period is known as absolute return. This metric looks at how much an asset, such as a stock or a mutual fund, has appreciated or depreciated in value over time, expressed as a percentage.

Because absolute return is concerned with the return of a specific asset rather than comparing it to any other measure or benchmark, it differs from relative return.

Key Points:

  • The return on an asset over a given time period is known as absolute return.
  • Returns can be positive or negative, and they aren’t always linked to other market events.
  • Unlike relative return, absolute return makes no comparisons to other possible investments or to a benchmark.

How absolute return Works

The amount of money earned by an investment is referred to as the absolute return. The absolute return, also known as the total return, is a metric that measures an asset’s or portfolio’s gain or loss in the absence of any benchmark or other standard. Returns can be positive or negative, and they may or may not be correlated with other market events.

Relative and absolute returns

In general, a mutual fund aims to outperform its peers, its fund category, and the market as a whole in terms of returns. A relative return approach to fund investing is the name for this type of fund management. The asset’s success is frequently measured against a chosen benchmark, industry-standard, or overall market performance.

An absolute return fund, as an investment vehicle, seeks to generate positive returns by employing investment management techniques that differ from those used by traditional mutual funds. Short selling, futures, options, derivatives, arbitrage, leverage, and unconventional assets are all examples of absolute return investment strategies. Only gains or losses on the investment are considered when absolute returns are examined separately from any other performance measure.

The History of absolute return Funds

In 1949, Alfred Winslow Jones established the first absolute return fund in New York. The absolute return approach to fund investing, also known as a hedge fund, has become one of the world’s fastest-growing investment products in recent years.

Hedge Funds

A hedge fund is not a specific type of investment; rather, it is a pooled investment set up as a limited partnership or a limited liability company (LLC). Working with outside investors, a hedge fund manager raises funds. The funds are used by the manager to invest in long equities, such as common stock, according to a stated strategy.

Hedge funds can specialize in certain areas, such as real estate or patents, and they can also invest in private equity. Although anyone can invest in a hedge fund, the majority of participants are accredited and sophisticated investors.

Example of absolute return

The Vanguard 500 Index ETF (VOO) delivered an absolute return of 150.15 percent over a ten-year period ending December 31, 2017. This was in contrast to its 10-year annualized return of 8.37 percent during the same time frame. Furthermore, because the S&P 500 Index returned 153.07 percent in absolute terms during the same time period, absolute return differed from relative return, which was -2.92 percent.

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