is a measure of the gain or loss on an investment portfolio expressed as a percentage of invested capital. The adjective absolute is used to stress the distinction with therelative returnmeasures often used by long-onlystock fundsthat are not allowed to take part inshort selling.
Thehedge fundbusiness is defined by absolute returns. Unlike traditional asset managers, who try to track and outperform a benchmark (a reference index such as theDow JonesandS&P 500), hedge fund managers employ different strategies in order to produce a positive return regardless of the direction and the fluctuations of capital markets.2This is one reason why hedge funds are referred to asalternative investmentvehicles (seehedge fundsfor more details).
Absolute return managers tend to be characterised by their use of short selling,leverageand high turnover in their portfolios.34
Although absolute return funds are sometimes considered not to have a benchmark, there is a common one: the funds should do better than short-dated government bonds (e.g.T-billsin the United States). For example, if such cash instruments yield 15%, at the same time a certain fund returns 5%, that would be considered not very good. In the case where the cash rate is close to zero, such as the early 2010s decade, this makes little difference.
Some absolute-return managers are very active with their portfolios, buying and selling shares more frequently than normal investors, because they focus on short-term investment opportunities lasting less than 90 days. Turnover is the rate at which managers rebalance their portfolios, and among other things it depends on the hedge funds size: in 2008 hedge funds with less than 15M USD in AUM (assets under management) had a 46.9% turnover per month whilst funds with over 250M USD in AUM had only 9.8%.6
Absolute return Financial theory Moneyterms: investment definitions and explanations. Moneyterms. Retriev ed on 2013-10-23.
Robert A. Jaeger, All about Hedge Funds, Mc Graw Hill, pp.34.
Jrôme Teïletche, Les Hedge Funds, collection rpres, pp.1113.
Robert A. Jaeger, All about Hedge Funds, Mc Graw Hill, pp.133145 and 184185.
Research Reports Hedge Fund Reports eVestment. . Retrieved on 2013-10-23.
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This page was last edited on 1 February 2019, at 10:22