Absolute Return

Definition

Absolute return is the percentage change in an investment’s value over a specified period, measured without reference to any benchmark. It captures the gain or loss an asset or portfolio experiences in absolute terms.

Key takeaways

• Absolute return measures an investment’s standalone performance (positive or negative).
• It does not compare performance to a benchmark or peer group.
• Absolute-return strategies aim to produce positive returns regardless of market direction, often using non‑traditional techniques.
• Cumulative absolute return differs from annualized return (CAGR).

How absolute return is calculated

• Cumulative (absolute) return:
  (Ending Value − Beginning Value) / Beginning Value × 100
  Example: $100 → $250 gives (250 − 100) / 100 = 150% absolute return.
• Annualized return (CAGR), to compare performance across periods:
  (Ending / Beginning)^(1 / years) − 1

Absolute return vs. relative return

• Relative return measures performance compared with a benchmark (e.g., S&P 500) or peer group; managers using a relative-return approach aim to outperform that benchmark.
• Absolute-return approaches evaluate only the investment’s own gains or losses. A fund can produce a positive absolute return yet underperform its benchmark (and vice versa).
• Example: If an ETF has a cumulative absolute return of 150.15% over 10 years and its benchmark returned 153.07%, the ETF underperformed by 2.92 percentage points (150.15% − 153.07% = −2.92%).

Absolute-return strategies and tools

Managers pursuing absolute returns may use techniques not commonly used by traditional long-only mutual funds, including:
* Short selling
* Futures, options and other derivatives
* Arbitrage strategies
* Leverage
* Investments in unconventional or private assets

History and context

The first modern absolute‑return fund is generally attributed to Alfred Winslow Jones in 1949. The absolute‑return approach evolved into what is commonly known today as hedge funds—pooled investment vehicles that pursue a wide range of strategies designed to generate positive returns irrespective of market direction.

Hedge funds: structure and investors

• Typically organized as limited partnerships or limited liability companies.
• Managed by professional managers who deploy declared strategies.
• Often target accredited or institutional investors due to complexity, risk profile, and regulatory or liquidity constraints.
• Fee structures and risk exposures vary widely.

Considerations for investors

• Absolute‑return focus does not guarantee positive returns; strategies can be complex and carry higher risks and fees.
• Evaluate strategy, manager track record, liquidity, fees, and risk management when considering absolute‑return products.
• Use both absolute and relative measures to assess performance depending on investment goals (capital preservation, benchmark outperformance, risk tolerance).