Understanding Absolute Return and How It Works

Absolute return is a performance metric that measures the total return of an investment, regardless of market conditions. This means that absolute return is not just about beating the market, but about achieving a specific rate of return regardless of whether the market is up or down.

Absolute return is often used by hedge funds and other alternative investment managers, who may have different investment strategies and goals than traditional mutual funds. For example, a hedge fund may aim to generate a 10% absolute return per year, regardless of whether the market is rising or falling.

The key point about absolute return is that it's not a relative measure, like beating the S&P 500. Instead, it's an absolute measure, focused on achieving a specific rate of return. This can be a more appealing goal for investors who are risk-averse or who want to diversify their portfolios.

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Absolute return is a straightforward concept that measures the actual return earned by an investment over a period of time.

It's calculated without considering any relative benchmark or other measure of performance, making it a simple way to compare returns from an investment.

The result can be positive or negative for any period, giving you a clear picture of how your investment performed.

Absolute return is also known as Total Return, which clearly indicates that it's a comprehensive measure of an investment's performance.

It doesn't take into account any market-related factors, making it a reliable way to assess an investment's performance.

This means you can focus on the actual return earned by your investment, without worrying about how it compares to a particular market index or benchmark.

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Absolute return funds work by deploying strategies to generate positive returns. They use tools like derivative trades, short-selling, and arbitrage trades to achieve this goal.

These funds don't compare their returns to a benchmark, which can lead to negative biases towards funds with a significant asset base compared to those with a small asset base. This means that a fund with a large asset base may appear to be performing better than a smaller fund, even if the smaller fund is actually generating better returns.

Absolute return funds often use a long-short strategy, where assets are borrowed, sold at a higher price, and then bought back at a lower price. This can help the fund maintain profits even if markets are dropping.

Some examples of absolute return funds include John Hancock Global Absolute Return Strategies (JHAIX) and GMO Benchmark-Free Allocation (GBMFX). These funds are designed to provide positive returns, regardless of market conditions.

Here's a comparison of absolute return funds and traditional funds:

The value of assets in absolute return funds, as well as any income generated from them, varies across time.

The formula to compute Absolute return is straightforward. It's expressed in percentage form and can be positive or negative depending on the returns.

Absolute return funds use a variety of investment strategies, including long-short strategies, to generate returns. This means they may borrow assets, sell them, and then buy them back at a lower price to make a profit.

Some examples of absolute return funds are John Hancock Global Absolute Return Strategies (JHAIX) and GMO Benchmark-Free Allocation (GBMFX). These funds don't assess performance against benchmark indices, unlike traditional funds.

The formula for Absolute return is simple. However, the actual calculation is not explicitly stated in the provided article section facts.

Absolute return funds are a type of investment strategy that focuses on generating positive returns, regardless of market conditions.

They work by deploying a wide range of investment strategies, including derivative trades, short-selling, and arbitrage trades, as mentioned in Example 1.

These funds often use a long-short strategy, where assets are borrowed, sold at a higher price, and then bought back at a lower price, as seen in Example 3.

This approach allows absolute return funds to maintain profits for investors even when markets are dropping.

However, return is never 100% guaranteed, as noted in Example 3.

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Absolute return funds also often invest in a variety of assets, including futures contracts, currencies, and other securities, as mentioned in Example 3.

In contrast, traditional funds typically invest in stocks and bonds, as seen in the table below:

This difference in approach can result in absolute return funds providing more flexibility and potential for growth, but also comes with higher risks and volatility, as seen in Example 4.

The absolute return is a straightforward concept to grasp, making it accessible to users of all levels of financial expertise.

One of the key advantages of absolute return is that it's easy to calculate and understand, eliminating any confusion that might come with more complex financial metrics.

Here are some of the benefits of absolute return:

Absolute return funds offer a range of investment strategies that can include national and international equities and fixed-income securities.

Investors can also use futures contracts and derivatives, leverage, short selling, arbitrage, and other techniques to achieve their goals.

These funds can invest in unconventional assets like commodities, loan notes, or real estate, which can provide diversification.

Investing in absolute return funds can be a good option for those seeking slow yet steady annual growth with reduced exposure to volatility.

Absolute return funds aim to generate positive returns at all costs, which often involves hosting a diversified portfolio with different investment options generating returns in different ways for different periods of time.

A diversified portfolio can help spread risk, making it less likely that the fund's performance will be heavily influenced by any one particular investment.

This strategy is centered around the idea that different investments will perform well in different market conditions, providing a more stable overall return.

By investing in a range of assets, absolute return funds can take advantage of opportunities in different markets, reducing their reliance on any one sector or asset class.

This approach can help investors achieve their financial goals, such as saving for a property purchase, by providing a steady and predictable income stream.

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Some investment strategies involve frequent buying and selling, with absolute-return managers rebalancing their portfolios more often than others. This is because they focus on short-term investment opportunities.

Turnover is a key metric in measuring a fund's activity, and it can vary significantly depending on the fund's size. Hedge funds with less than $15M in assets under management have a much higher turnover rate than larger funds.

In 2008, hedge funds with less than $15M in AUM had a monthly turnover rate of 46.9%, whereas funds with over $250M in AUM had a turnover rate of just 9.8%. This significant difference highlights the impact of fund size on investment strategy.

Let's take a look at some examples of how absolute return can be calculated.

The absolute return of 33% was computed by ABC Limited for their investment in Apple Inc. stock, taking into account the selling price, dividend received, and cost price.

Here's a breakdown of the key dates and figures for the investment:

In contrast, the Vanguard 500 Index ETF (VOO) delivered an absolute return of 150.15% over a 10-year period ending Dec. 31, 2017.