Absolute Return Explained
In the twinkling world of investments, where every asset swings like a pendulum of opportunities, absolute return stands out by measuring the raw success (or failure) of investments, sans the market backdrop. Absolute return quantifies the raw profit or loss an asset or fund accumulates over time, represented as a neat percentage.
Key Takeaways
- Independence from Benchmarks: Absolute returns dance to their own tune, unhindered by how the rest of the market performs.
- Both Positive and Negative: Whether your stock is a rising star or a sinking ship, absolute return captures the performance in full, blissfully ignoring the market maelstrom.
- A Benchmark-Free Zone: By not comparing to other investments or benchmarks, it provides a purist view of an investment’s performance.
How Absolute Return Operates
Think of absolute return as the hermit of the investment world. It doesn’t care what others are doing. It’s concerned solely with how much it has gathered or lost in its little pot, whether through standard avenues like stocks or through exotic ventures like short selling or using leverage.
Historical Insight and Fund Strategies
Coined by the shrewd Alfred Winslow Jones in 1949, absolute return funds have sprinted up the popularity charts. They are not your run-of-the-mill mutual funds but are crafted to secure positive returns using a variety of unconventional strategies, pushing the boundaries of traditional fund management.
Absolute Vs. Relative Returns: The Duel
While absolute returns look at an investment in isolation, relative returns are the neighborhood gossips, always comparing how others are doing. This contrast is crucial: while relative return might tell you an investment is doing poorly compared to the market (oh, the scandal!), the absolute return might reveal it’s actually doing quite well on its own.
Hedge Funds and Their Kin
In the elite clubs where hedge funds mingle, strategies blending risk and opportunity aim for absolute returns. These funds, accessible primarily to the suave and sophisticated investor, often take routes less traveled by traditional investments, exploring territories like real estate or patents.
Practical Example
Imagine you had put your faith (and funds) in the Vanguard 500 Index ETF (VOO) from 2007 to 2017. The stoic absolute return would tell you that your investment grew by a handsome 150.15%, ignoring how the S&P 500 fared, which saw an absolute 153.07% rise. But, don your relative return lenses, and you’d see a -2.92% return compared to the benchmark, showing that even heroes falter sometimes.
Related Terms
- Relative Return: Evaluates performance against a benchmark or a peer group.
- Hedge Fund: A pooled investment vehicle that uses different strategies to earn absolute return.
- Leverage: Utilizing borrowed money to amplify investment returns, which can magnify gains or losses.
Further Reading
Looking to expand your financial lexicon or become a savvy investor?
- “The Little Book of Common Sense Investing” by John C. Bogle
- “A Random Walk Down Wall Street” by Burton G. Malkiel
- “The Alchemy of Finance” by George Soros
So, as you tread the investment paths, laden with numbers and forecasts, remember that absolute return is your uncomplicated, no-frills companion, quietly calculating your true financial gain or pain.
