What Does Absolute Return Mean?
The return that can be achieved by an asset over a particular period of time is known as absolute return. This measure checks the appreciation or depreciation in terms of percentage of an asset over a certain period. There is a difference between the absolute return and the relative return as the absolute return is in related with the return of the particular assets and does not make comparison of the returns provided by other class of assets.
The amount of funds that has been earned from the investment is termed as absolute return. In simple words absolute return defines the gains or loss incurred by the investors for investing in a particular class experts of assets which is independent from any benchmark or other standard. An absolute return can be positive or negative and such returns is not related with other activities of the market.
How Do You Calculate Absolute Return?
It is very easy to calculate absolute return it is only required to assess two values to make an estimation of the return on investment. From this value it can be possible to find the current value of investment and the initial investment, the formula for the calculation of the absolute return it is required to deduct the initial investment amount from the current value of investment and then divide that amount by initial investment multiplied with 100. This can be explained with an example. Suppose Mr x invested 150000.00in a mutual fund. The current value of the mutual fund is 250000.00 then the absolute return for Mr x will be
(250000-150000)/150000*100 = 66.66% this means that by investing in that fund Mr x will get an absolute return of 66.66%. however, the time period of investment has not been considered in this calculation.
Examples Of Absolute Return Strategies
The aim of the absolute return is to provide a positive return over a specific period of time irrespective of the condition of the market prevailing during that period. The absolute return strategy has the potential to provide positive return even if the market is in a down ward trend. Providing positive return through right financing on a continuous basis is one of the basic objectives of the absolute return strategy. It is the aim of the investment funds to provide a return which should be higher than the long-term return from liquid assets. However, the absolute return strategy unlike the traditional long term equity fund make investment in different funds and does not rely solely on the return provided by equity market, and thus it eliminates the risk that is associated with the highly volatile equity market which often collapse due to change in economic and global changes.
As the absolute return strategy does not ties only with equity investment it can aims to provide more consistent return over a specific investment horizon. The gains on investment cannot be guaranteed, but by using new types of investment strategies and not by following conventional methods of investment it can be possible to generate more consistent return from the market and the absolute return strategies by selecting a diversified strategies can assist the investors to get consistent return from the invested amount. Some of the absolute return strategies are stated below;
1. Long Short Equity Strategies
This strategy includes the combination of long and short positions and are very liquid is nature for instance long bias equity, fund of paired trades market neutral equity and short bias equity.
2. Relative Value Strategies
The strategy that finds to exploit apparent valuation anomalies among specific securities in general the managers will take a long-term position in the particular security which seems to be undervalued and the short-term position in the security which seems to be overvalued. This can be explained with the example of the equity neutral market and fixed interest relative value strategies.
3. Event Driven Strategies
Under this strategy the managers used to assess how a particular company reacts to the happening of a particular corporate action like a merger, acquisition bankruptcy and restructuring. On the basis of the situation the fund managers under this strategy used to take long position of one company and short position on the securities of another company thus by doing this it minimises the risk and increase the probability of return.
4. Global Macro Strategies
Under this strategy the managers make assessment of the changes in the global economic condition and the financial markets and based on such developments or changes in the financial market they used to make investment decisions. The strategy mainly uses the quantitative models.
5. Managed Future Funds
Algorithmic and technical models are used under this strategy and the main focus is given on the trends of futures and other securities that are highly liquid in nature.
Absolute Return vs Total Return: What's The Difference?
Absolute return is point to point return which means it considers the price movements from one point to another point the absolute returns can be used to calculate three months returns, six months return or 1 year return or more.
Total return is also similar to that of absolute return but the only difference between absolute return and total return is that total return considers dividend and for those reasons for the mutual funds the total returns are considered and not the absolute returns. it becomes more important to protect the organization from financial risks and losses.
Pros And Cons Of Absolute Return Funds
Pros of absolute return funds are stared below
- Absolute return funds are less volatile
- Absolute return funds can provide consistent positive returns
- Absolute return provides higher returns in comparison to other funds
- Absolute return provides more investment opportunities
- It can help to exploit the investment opportunities while constraining market beta
- The absolute return funds have a larger role to play in portfolios that have wider investment opportunities.
- It provides new sources of investment opportunities which are unique and have the potential to provide higher return with minimum risk.
The major cons of the absolute return funds is that at the time of increase of the value of the market in which the absolute return funds make investment over a specific time period the fund unlikely provide the same return as a relative return fund provides. So, it become useless for the investors to invest in the absolute return funds by incurring more expenses as the absolute return funds cannot provide higher return in comparison to the relative return funds. The absolute return funds can only provide a steady return on long term and not on short term.
