Absolute return (Ofer Abarbanel online library)

The absolute return or simply return is a measure of the gain or loss on an investment portfolio expressed as a percentage of invested capital. The adjective “absolute” is used to stress the distinction with the relative return measures often used by long-only stock funds[1] that are not allowed to take part in short selling.

The hedge fund business is defined by absolute returns. Unlike traditional asset managers, who try to track and outperform a benchmark (a reference index such as the Dow Jones and S&P 500), hedge fund managers employ different strategies in order to produce a positive return regardless of the direction and the fluctuations of capital markets.[2] This is one reason why hedge funds are referred to as alternative investment vehicles (see hedge funds for more details).

Absolute return managers tend to be characterised by their use of short selling, leverage and high turnover in their portfolios. [3][4]

Benchmark

Although absolute return funds are sometimes considered not to have a benchmark, there is a common one: the funds should do better than short-dated government bonds (e.g. T-bills in the United States). For example, if such “cash” instruments yield 15%, and the fund returns 5% in that same time period, the fund would be under performing the benchmark. In the case where the cash rate is close to zero, such as the early 2010s decade, this makes little difference.

High turnover

Some absolute-return managers are very active with their portfolios, buying and selling shares more frequently than normal investors, because they focus on short-term investment opportunities lasting less than 90 days. Turnover is the rate at which managers rebalance their portfolios, and among other things it depends on the hedge fund’s size: in 2008 hedge funds with less than 15M USD in AUM (assets under management) had a 46.9% turnover per month whilst funds with over 250M USD in AUM had only 9.8%.[6]

References

  1. ^ Absolute return – Financial theory – Moneyterms: investment definitions and explanations. Moneyterms. Retriev ed on 2013-10-23.
  2. ^ Robert A. Jaeger, “All about Hedge Funds”, Mc Graw Hill, pp.3–4.
  3. ^ Jérôme Teïletche, “Les Hedge Funds”, collection répères, pp.11–13.
  4. ^ Robert A. Jaeger, “All about Hedge Funds”, Mc Graw Hill, pp.133–145 and 184–185.
  5. ^ Adrian Blundell-Wignall. “Restoring confidence in financial systems” (PDF). Oecd.org. Retrieved 30 August 2019. The Financial Crisis and the Requirements of Reform
  6. ^ Research Reports – Hedge Fund Reports – eVestment Archived 2011-10-01 at the Wayback Machine. Hedgefund.net. Retrieved on 2013-10-23.

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