What is ‘Absolute Return’
Absolute return is the return that an asset achieves over a certain period of time. This measure looks at the appreciation or depreciation, expressed as a percentage, that an asset, such as a stock or a mutual fund, achieves over a given period of time. Absolute return differs from relative return because it is concerned with the return of a particular asset and does not compare it to any other measure or benchmark.
Explaining ‘Absolute Return’
The absolute return refers to the amount of funds that an investment has earned. Also referred to as the total return, the absolute return measures the gain or loss experienced by an asset or portfolio independent of any benchmark or other standard. Returns can be positive or negative and may be considered uncorrelated to other market activities.
Relative and Absolute Returns
In general, a mutual fund seeks to produce returns that are better that its peers, its fund category and the market as a whole. This type of fund management is referred to as a relative return approach to fund investing. The success of the asset is often based on a comparison to the chosen benchmark, industry standard or overall market performance.
History of Absolute Return Fund
Alfred Winslow Jones is credited with forming the first absolute return fund in New York in 1949. In recent years, this so-called absolute return approach to fund investing has become one of the fastest-growing investment products in the world and is more commonly referred to as a hedge fund.
The Benefits of Absolute Return Investing
There are many different ways to pursue absolute returns, some common approaches include hedging, shorting, and arbitrage. Absolute return strategies can be used in both bull and bear markets, which makes them an attractive option for investors who are looking to protect their portfolios from volatility. Additionally, absolute return investments often have low correlations to other asset classes, which means they can help to diversify a portfolio. For all of these reasons, absolute return investing can be an effective way to generate consistent profits.
How to Achieve Absolute Returns
Many investors are looking for ways to achieve absolute returns, regardless of market conditions. While there are a number of strategies that can be employed to achieve this goal, one of the most effective is investing in quality companies that have strong fundamentals and a history of delivering consistent results.
In general, these companies are less volatile than the overall market and tend to outperform in both bull and bear markets. While there may be periods of underperformance, over the long run they offer the potential to generate superior returns. For investors who are looking to achieve absolute returns, investing in quality companies is a proven strategy that can deliver consistent results.
Types of Investments that Offer Absolute Returns
Many investors seek out opportunities that will offer absolute returns, meaning that their investment will not lose value no matter what the market conditions are. Some of the most popular types of investments that offer absolute returns include cash and cash equivalents, government bonds, and certain types of annuities. Cash and cash equivalents, such as savings accounts and money market funds, are considered to be the safest type of investment because they are not subject to fluctuations in the stock market.
Government bonds are also a relatively safe investment, as they are backed by the full faith and credit of the issuing government. However, government bonds typically offer lower returns than other types of investments. Annuities can also offer absolute returns, although they tend to be more complex than other types of investments. For example, fixed annuities guarantee a fixed rate of return, while variable annuities offer a return that is based on the performance of underlying investment vehicles.
Risks and Rewards Associated with Absolute Return Investing
Investing in absolute return vehicles comes with both risks and rewards. On the one hand, these investments tend to be less volatile than traditional stocks and bonds, which means they can offer a more stable source of income. However, absolute return investments also tend to have lower returns, which means they may not keep pace with inflation over the long term. Additionally, absolute return investments typically have higher fees than traditional investments, which can eat into your profits.
Despite the risks, many investors still find that absolute return investing offers a valuable way to diversify their portfolios and protect their capital. When used wisely, these investments can help you reach your financial goals without exposing yourself to too much risk. If you’re thinking about investing in absolute return vehicles, be sure to do your research and work with a trusted financial advisor to ensure that they are right for you.