Absolute Return Definition
The term “Absolute Return” refers to the gain or loss that an investment or a portfolio has over a certain period of time, regardless of the market conditions. It is expressed in percentage terms and is often used in the context of hedge funds or funds that aim to achieve a positive return, irrespective of the overall market performance.
Absolute Return Key Points
- Absolute return measures the actual gains or losses of an investment over a specified period.
- It is independent of market conditions and benchmarks.
- Absolute return strategies aim to produce positive returns regardless of the direction of financial markets.
- These strategies are typically used by hedge funds and are less common in mutual funds and ETFs.
What is Absolute Return?
Absolute return is a measure of an investment’s performance, expressed as a percentage that a fund or portfolio has returned over a specified period. Unlike relative return, which compares the performance of an investment to a market index or other benchmark, absolute return measures the actual gains or losses, regardless of market conditions.
Why is Absolute Return Important?
Absolute return is important because it provides a clear measure of an investment’s performance without the influence of market trends or conditions. This allows investors to assess the effectiveness of an investment strategy or the skill of a fund manager, independent of the market’s performance. Absolute return strategies are often used by hedge funds, which aim to deliver positive returns in all market conditions.
Who Uses Absolute Return?
Absolute return is used by investors, fund managers, and financial analysts. It is particularly popular among hedge funds, which aim to deliver positive returns regardless of market conditions. Mutual funds and ETFs also use absolute return strategies, but less frequently.
When is Absolute Return Used?
Absolute return is used to measure the performance of an investment or a portfolio over a specified period. This could be over a quarter, a year, or any other period. It is typically used when assessing the performance of hedge funds, which aim to deliver positive returns in all market conditions.
How is Absolute Return Calculated?
Absolute return is calculated by subtracting the initial value of the investment from its final value, then dividing the result by the initial value, and multiplying by 100 to get a percentage. For example, if an investment was worth $100 at the start of the year and is worth $110 at the end of the year, the absolute return would be 10%.
