An absolute return is a type of return that an investment or asset achieves over a certain period. It’s typically used in the context of hedge funds or other similar investment vehicles that don’t necessarily follow a traditional market index. Instead of comparing the return to another measure or benchmark, the absolute return just looks at the return by itself. For example, if an investment went from $100 to $110, the absolute return would be 10%.
1. How is absolute return different from relative return?
Absolute return refers to the total return an investment generates, not considering the performance of any other measure or market. On the other hand, relative return is a comparison of the absolute return and the performance of a specific market index or another benchmark over the same period.
2. Why should investors consider absolute returns?
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Absolute returns can provide clearer insights about an investment’s performance without relying on any comparison. This can give investors a better sense of an investment’s standalone performance, which can be beneficial when managing risk.
3. Who uses absolute return strategies?
Hedge funds mostly utilize absolute return strategies, but individual investors can also employ them to aim for positive returns regardless of market conditions.
4. What role does absolute return play in a hedge fund?
In a hedge fund, the concept of absolute return is crucial because these funds aim to generate high returns in all market conditions. They don’t follow a specific index, so they focus on generating positive absolute returns rather than outperforming a benchmark.
5. What is considered a good absolute return?
A good absolute return can vary based on the type of investment and the investor’s individual goals. But in general, if an investment is consistently generating positive returns over time, that could be considered a good absolute return.