All You Need To Know About Absolute Return

Susan Kelly

Nov 30, 2023


The goal of absolute return investing is to generate positive returns over the long term regardless of whether the market is going up, down, or sideways and with lower volatility than stocks. This type of investing is referred to as "absolute return investing." This method of investing is referred to as absolute return investing. If you are a typical investor, you are probably scratching your head and wondering what exactly is so revolutionary about the claim that was just made. Making a profit should be the overarching objective of every fund, no doubt about it. Most funds do their performance evaluations these days compared to those of other funds, particularly since the introduction of performance benchmarks such as the S&P 500 Index.

No matter whether or not the fund generates a positive return, a fund is considered to have been successful if it can outperform the benchmark it was compared to. If the performance requirements for a fund's benchmark are not met, the fund is regarded as unsuccessful regardless of whether or not it achieves its goal. In addition, it is unusual for relative return funds to have concrete and unmovable goals in terms of absolute volatility. Instead, to evaluate their performance, they consider the volatility of the benchmark indexes they follow.

Benefits of Absolute Return:

Absolute return funds, on the other hand, take a completely different approach. When included in a diversified and well-balanced portfolio, absolute return funds have the potential to provide several benefits, including reduced volatility and a more consistent return on investment.

Lowering one's vulnerability to market declines by broadening one's investment portfolio and expanding one's options for multiple sources of potential income. Reduce the amount of overall jitteriness in the portfolio. Absolute return strategies can be compared to the safety net a security blanket provides for your investment portfolio. On the other hand, absolute return managers are constantly concerned about the possibility of suffering a loss in the financial markets and take measures to reduce this risk.

There is a wide variety of investment methodologies utilised by absolute return funds. Because they can invest in anything from stocks and bonds to currencies and derivatives to short positions, as well as anything else that will help them achieve their goal of a high rate of return with low volatility, these funds are referred to as "unconstrained" funds. This is because they are free to invest in anything.

Additional Benefits

Absolute return funds all have the same overarching objective: to produce a profit independent of the performance of traditional asset classes such as stocks and bonds. A statistical correlation measure is a tool that can be employed to characterise the relationship between two or more financial assets. If the correlation coefficient between two assets is equal to one, then the changes in the value of both assets will behave similarly and to the same extent. When the relationship between the returns on two assets is -1.0, it is said that the assets have a negative correlation. This is because the returns on the two assets are moving in opposite directions while maintaining the same magnitude level. –1.0 If there is zero correlation between the two assets, then there is no link between the returns of the two assets.

During bear markets, when traditional asset classes like stocks and bonds tend to become more correlated, the lack of correlation between these two types of investments can be advantageous for a portfolio. A wide variety of financial assets across the board experienced precipitous declines during the global market panic that occurred in 2008. Investing in stocks and bonds, a tried and true method for protecting one's finances against the possibility of loss, was ineffective. If you invest in absolute return strategies, you can reduce the risk of losing money and increase your chances of making money simultaneously.

Measuring success in absolute return investing:

In the absence of traditional benchmarks, determining the success of an absolute return fund is a task that is made more difficult. On average, these less risky strategies underperform their stock fund counterparts during strong equity bull markets is another thing investors find discouraging about these investments. To our good fortune, absolute return performance can be understood by combining two standard metrics.

The standard deviation of a financial asset or portfolio can be used to measure the asset's or portfolio's degree of volatility. The standard deviation of an absolute return fund ought to be at least fifty percent lower when evaluated compared to a broad stock market index. If all other aspects of the portfolio remain unchanged, the addition of an investment with low volatility will reduce the portfolio's overall volatility.

The Sharpe ratio quantifies the additional return earned for each additional standard deviation of risk. It gets its name from the person who developed it. Regarding the overall market, a higher Sharpe ratio indicates superior performance in terms of its risk-adjusted value. The primary goal of an investment vehicle known as an absolute return fund is to improve the risk-adjusted return of a portfolio by delivering a higher incremental return from an investment mix less prone to volatility. This is accomplished through the use of absolute return funds.


The standard performance expectation for a mutual fund is to achieve higher returns than those of other funds with a comparable investment strategy, funds that fall into the same category, and the overall market. A relative return strategy is the name given to this management method when it comes to investing money in funds. It is a common practice to evaluate the success of an asset by comparing it to some predetermined standard, normative data, or the market as a whole. This comparison is known as relative benchmarking.

Related Stories

Privacy Policy | Terms of Use

© 2024

Contact us at: [email protected]

Testimonials/success stories may be fictionalized / should not be viewed as expected results