Absolute Return

Absolute Returns

Absolute return investing is popular among institutional investors in financial products such as pension funds and endowments. The goal of absolute return investing is to generate positive returns in all market conditions, regardless of whether the overall market is going up or down. 

What is absolute return?

The return on an investment during a given period is the absolute return. It represents the overall increase or decrease in the asset’s value as a percentage. It evaluates the overall loss or profit from the investment and can be either positive or negative. The strategies utilised in absolute return investing is likewise aimed at achieving short-term gains because they are short-term oriented.

To calculate the absolute return, you subtract the initial investment amount from the final investment amount. This will give you the total return for the investment over the specified period.

Understanding absolute return

An absolute return is an actual return on investment without considering the effect of inflation or other economic factors. In other words, it is the “real” return on investment. For example, if you invest in a stock that goes up by 10% but inflation is 3%, then your absolute return is 7%.

There are several different absolute return strategies that investors can pursue. Some common approaches include long/short equity, global macro, managed futures, and hedge funds. Each of these strategies has its distinct risks and rewards.

Absolute return analysis may be used to choose the mutual fund for investors ready to take on risk in exchange for both short- and long-term profits. If investors choose the correct funds for a long-term perspective, they can expect high returns.

Overall, absolute return investing can greatly diversify your portfolio and generate consistent returns in all market conditions. However, it is important to understand the risks involved before investing.

How does absolute return work?

Absolute Return operates by putting methods in place to provide profitable results. However, as this return metric lacks a comparative benchmark to compare it to, it employs strategies including arbitrage, short selling, options, futures, leverage, derivatives, and unusual assets.

Only losses or profits on the investment are considered absolute return and are analysed apart from any additional performance indicator.

Additionally, it can only be quantified in terms of the percentage return produced, which creates biases in favor of funds with a large asset base over funds with a small asset base.

Absolute return is calculated using the initial investment amount and the investment’s current value. The difference between an investment’s current worth and its initial value is known as the investment’s initial value.

This return is typically calculated over terms of less than a year. All that is needed in the case of mutual fund investments are the initial value NAV and the ending value NAV (present NAV). When calculating these returns, the asset length within the fund is unimportant.

Benefits of absolute return

It offers returns earned in actual terms and is unaffected by comparing benchmarks and periods.

As it ignores intermittent changes, it aids in lowering overall volatility.

Absolute return funds may reduce a particular risk, such as changes in interest rates or market volatility. They have more freedom than traditional investments to develop portfolio positions and hedging strategies using several techniques, including derivatives.

Absolute return funds guarantee a profit despite market volatility.

They can adopt strategies not in line with the trend of the bond or stock markets since they are independent of traditional benchmarks.

For all users, it is simple to calculate and understand.

Example of absolute returns

For example, let’s use Mr. X as an investor who contributed 350 USD to a mutual fund. The investment is currently worth 450 USD. The formula above may be used to estimate Ms. Vani Kumar’s absolute return:

(450 USD –350 USD)

Absolute return is equal to —————————————— X 100

350 USD

The total return is 28.57%.

Mr. X received a return on her mutual fund investment of 28.57%. However, this return does not account for how long the investment was made. Mr. X would have received this payment in five or fifteen years. This is not apparent from point-to-point returns. Thus, mutual funds typically calculate annual returns for any period longer than a year.

Frequently Asked Questions