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.
A hedge fund is not a specific form of investment; it is an investment structured as a pool and set up as either as limited partnership or limited liability company (LLC). A hedge fund manager raises funds by working with outside investors. The manager uses the funds to invest based on a declared strategy involving only the purchase of long equities, such as common stock.
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- A VaR Black–Litterman model for the construction of absolute return fund-of-funds – www.tandfonline.com [PDF]
- Absolute return portfolios – www.sciencedirect.com [PDF]
- Polish absolute return funds and stock funds. Short and long term performance comparison – content.sciendo.com [PDF]
- Modelling the absolute returns of different stock indices: exploring the forecastability of an alternative measure of risk – onlinelibrary.wiley.com [PDF]
- Some properties of absolute return: An alternative measure of risk – www.jstor.org [PDF]
- Risk Control Through Dynamic Core-SatellitePortfolios of ETFs: Applications to Absolute Return Funds and Tactical Asset Allocation – jai.pm-research.com [PDF]
- Do Absolute-Return Mutual Funds Have Absolute Returns? – joi.pm-research.com [PDF]