Absolute returns defined
When we talk about investments, absolute returns are one of the most important things to consider. Absolute returns tell us how much a specific asset accumulated in a given time frame. These assets are various — they can be stocks, mutual funds, etc. And when we say absolute, it does not matter whether it is a positive or a negative value. It is expressed in percentage. Absolute returns should not be confused with relative returns. Relative returns refer to a particular asset’s return while comparing that to another benchmark. We will talk about this more below.
Let us date back to 1949
In 1949, Alfred Winslow created the first absolute return, and the rest is history. This approach has become one of the most recognized and widely used investment products in New York and the whole world. If you haven’t heard of the term, then you might acknowledge hedge funds. Absolute return and hedge fund are the same approaches.
Tell me more about absolute returns.
Other people also call absolute returns “total returns.” It measures the gain or loss that an asset or portfolio gains without any comparison from any different standard or benchmark. These returns do not have any regard for being positive or negative. They are also not related to any other market activity.
Differentiating relative returns and absolute returns
Their names can be pretty self-explanatory. In mathematics, we can encounter terms such as absolute value, where the figures are the only thing that matters in the equation, and the symbols do not really matter. Hence, the magnitude of the real number is the only essential fact. When it comes to the term relative, we talk about how something is related to another thing.
Let us explain further. Relative return is a fund management approach to fund investing. An asset’s success is measured when compared with a benchmark, standard, or the whole market. Let us take mutual funds as an example. A mutual fund is considered successful if it fared better than its competitors, fund category, or even the market as a whole.
Next, we have absolute returns. It comes with different investment strategies such as short selling, futures, arbitrage, options, leverage, or non-traditional assets. Absolute returns are investment vehicles aiming to generate positive returns with investment management techniques that are not similar to the usual mutual funds. Hence, they work independently, and the success is not measured on any other measure. The only focus is the gain or loss produced.
Finally, hedge funds
Hedge funds are investments with a pool structure. It can be a limited partnership or LLC (Limited Liability Company). People who manage these work with outsiders to generate funds. Then, these funds are used for investments with a declared strategy where long equities purchases like common stock are the only ones involved. Hedge funds are flexible. They can specialize in several areas such as real estate or private equities. Any person can invest in hedge funds. However, investors are usually accredited and loaded.