Absolute Return

What is Absolute Return?

Definition: Absolute Return is defined as a measure of the increase that security or an income source generates over time when measured against an alternative security or income source of the same maturity and price.

A simple way to think about absolute return is to think of it to measure how much better the asset is expected (or likely) to do than an alternative investment. 

The principle of absolute return applies when buying stocks and bonds or other investments with money deposited in an account. An investor can use absolute return funds to reinvest in the market when prices are falling to have buying power even in bad economic times. When absolute return funds do well, they are often followed by equally safe investment vehicles such as CD assets and many more insurance products.

The absolute return has four parts: results, time to results, resources used, and investment needed. These four elements are correlated with each other, and they also work together to form absolute returns. The crucial thing is finding a way to aggregate all four together and then use this aggregate to calculate a single number for all assets.

Absolute return is used in the industry to measure the expected returns an asset could achieve, giving a cash return, for example, versus an expected long-term capital gain that buys long-term assets as an investment. The latter is often referred to as the ‘net present value’ or NPV (Nominal Perversible Value).

How Absolute Return Works?

An absolute return fund is a portfolio whose performance is not affected by changing market conditions. Fundamentally, an absolute return fund offers investors a way to invest without fear that their strategy or investment strategy itself will be affected by market conditions.

It allows you to find the level of risk tolerance that works best for you without being particularly concerned about whether the market is going up or down.

The fund seeks out assets that pay extremely high rates of return; it means that while the overall asset value may move up and down, the gains from any particular asset in the portfolio will not be affected by changes in market conditions.

Absolute return is a technique that helps investors to find the best funds for their investment. The absolute return technique can help you find out the long-term investment opportunities in any market.

It gives investors visibility into the incentives of the funds they invest in and helps them evaluate the performance of different mutual funds across various asset classes and different investment styles. This allows investors to make better-informed decisions and select funds even when they may not have all information about a company or industry.

Relative and Absolute Returns

A relative return approach to fund investing is an actively managed strategy in which the manager uses capital from the investment to provide income to shareholders over time. This may involve buying debt securities or privately held stocks and loans or purchasing stocks in the open market.

Usually, the returns generated by such investments are based on profit expectations and investor desire for increasing returns. It can be a long-term investment, or it can be a short-term speculative transaction designed to capitalize on changes in market conditions.

Relative returns are commonly used as tools to value equity investments in mutual funds, private equity funds, and venture capital funds. Funds whose activities are directed toward a specific industry or sector are known as general sector funds.

At the same time, those that are broadly focused on an economy or market can be called narrow sector funds. Funds that invest in a broad range of investments may generally produce consistent returns across time and various market environments. If the funds in your portfolio are managed by a third party, such as a broker or bank, then the relative return approach will be applied to the underlying assets and market prices.

Operating as an open-end investment vehicle, it seeks capital appreciation by investing in specified asset classes over a designated period to achieve a return greater than either the index on which the fund is based or the market return for such assets over the same period.

Absolute returns are generated by applying scientifically proven investment concepts and mathematical formulas to select stocks of any company regardless of industry, individual stocks, bonds, currencies, indices, or global markets. The resulting portfolio is then rebalanced monthly and maturity selected to minimize risk while providing ongoing income.

At any time during financial markets, it is possible to liquidate positions through open-market purchases of ETFs, mutual funds, or other securities which provide exposure to selected assets.

The basic idea behind an absolute return fund is simple: invest in something with the expectation that its value will go up over time, even if the market for that asset goes down. In other words, you’re buying into something with a GIC (guaranteed income) attached.

To achieve this goal, investors buy stocks, bonds, commodities, real estate, alternative assets, cryptocurrencies, and other assets that produce tangible assets with an expected value rise over time.

The primary objective of relative and absolute returns is to generate expected returns for a particular security or investment portfolio that minimize risk and maximize reward over time. The goal isn’t to beat the market, necessarily, but to perform better than the market would have historically delivered.

Example of Absolute Return

For example, if you own the average stock with a 1% annual fee and achieve an absolute return of 10% over 20 years, that would be good relative to the market; however, if that stock had delivered an 8% annual return over the same period but at a 10-year horizon instead of 13%, then that would have been much better.