Table of Contents
What is Absolute Return Strategies?
Absolute return strategies come under the umbrella of alternative investment or asset strategies. In the mathematical sense, the term absolute refers to the numerical value of a number that has no sign.
For example, the absolute value of -7 is 7.
In the financial context, “absolute return has the same meaning. This refers to an investment strategy that targets returns above zero, and in some cases, above the positive barrier rate, such as LIBOR.”
What is Hurdle Rate?
The hurdle rate is the numerical value of an investment’s performance, which is used by the portfolio manager as a target to beat.
Is Absolute Return same as Relative Return?
Absolute return is different from relative return because it relates to the return of a particular asset and does not compare to any other scale or benchmark.
Absolute return can also refer to the total return of a portfolio or fund (which is the total profit or loss), as compared to its relative profit which is a relative profit or loss). It is called relative because the performance of many mutual funds is a benchmark against an index.
According to the above definition, hedge funds are traditionally called an absolute return strategy industry. By its very nature, the various hedge fund strategies have, on average, yielded positively positive returns year after year, at least since the late 1990s.
Absolute Return Strategies
Absolute return strategies come under the umbrella of alternative investment or asset strategies. And this is in comparison to more traditional asset classes such as domestic stocks and bonds.
Now you may have an idea of what is the absolute return.
By definition,
This is the return that an asset or strategy achieves in a given period of time and does not really depend on the relevant benchmark scale, like the SMP for example.
So what this really means is that the return profile of this strategy usually rises or falls more freely in more traditional asset classes such as stocks and bonds.
The strategy I would like to focus on today is for the future. We like managed futures because they have been proven to increase diversification, reduce aggregate volatility and provide another source of return. What we found is that the inclusion of this asset class worked quite well during 2015 when we saw significant downward pressure on the board.
What are managed futures?
In short, it is an alternative investment that focuses on the cost of future security.
Therefore, in order to better understand how this strategy works, it is also important to understand what the future agreement is.
Simply put, a futures contract is an agreement between two parties to buy or sell something in the future at the price discussed today.
Now that most people think about what is being bought and sold,
It’s usually like an item like; Rice, wheat, hog gold, and currency.
While futures contracts began with items, they now cover much more. Stocks, bonds, indexes, things like that.
So to give you a better idea of how they work. For example, if I am a farmer and I know I need road fuel for my tractor, I can negotiate an agreement to close that price when I need it. If I did, I would expect the price of gas to go up.
So now you may be wondering how future contracts work with investments.
These contracts are standard and are traded in exchange. Because of this, fund managers, also known as CTAs or commodity trading advisors, are able to take positions on their own contracts. So they usually do this by buying longer or in markets that are rising, and by shortening or by selling borrowed positions in falling markets.
If they carry out these strategies correctly, they may be able to generate positive profits even in markets that are falling apart. It is also important that funds be diversified and strategically allocated to reduce risk.
