What is Absolute Return?
Absolute return refers to the return that an asset achieves over a certain period, expressed as a percentage, measuring the performance of an asset (such as a stock or mutual fund) over a given period.
Key Points
- Absolute return refers to the return an asset achieves over a certain period.
- Absolute return indicates the performance as either positive or negative and can be considered irrespective of other market activities.
- Unlike relative return, absolute return does not compare the performance against other possible investments or benchmarks.
Relative and Absolute Returns
Absolute return differs from relative return as it focuses on the return of a specific asset without comparing it to any other measure or benchmark. Generally, mutual funds aim to achieve returns that outperform similar funds, fund categories, and the broader market, a management style known as the relative return approach.
As an investment tool, absolute return funds seek positive returns by employing investment management techniques different from traditional mutual funds. Absolute return investment strategies include short selling, futures, options, derivatives, arbitrage, leverage, and unconventional assets. Absolute return is reviewed separately from any other performance metrics, thus considering only the gain or loss of the investment.
History of Absolute Return Funds
Alfred Winslow Jones established the first absolute return fund in New York in 1949. In recent years, the investment approach of absolute return funds has become one of the fastest-growing investment products globally, commonly referred to as hedge funds.
A hedge fund is not a specific form of investment but a portfolio of investments set up as a limited partnership or limited liability company (LLC). Hedge funds may focus on specific sectors such as real estate or patents and can also engage in private equity activities. While anyone can invest in hedge funds, participants are traditionally accredited and experienced investors.
Examples of Absolute Return
As a historical example, the Vanguard 500 Index ETF (VOO) had an absolute return of 150.15% over the 10-year period ending December 31, 2017, which differs from its 10-year annualized return of 8.37% over the same period. Additionally, the absolute return rate of the S&P 500 Index over the same period was 153.07%, making the absolute return rate distinct from the relative return rate (-2.92%).
