Show pageOld revisionsBacklinksBack to top This page is read only. You can view the source, but not change it. Ask your administrator if you think this is wrong. ====== Absolute Return ====== Absolute Return is the measure of how much an investment has gained or lost, expressed as a percentage of the initial capital. Think of it as the cold, hard, and honest number on your account statement. If you invest €10,000 and a year later you have €11,000, your absolute return is +10%. If you have €9,500, your absolute return is -5%. It's a straightforward measure of performance that stands on its own, completely independent of how any market [[benchmark]] or other investment performed. This concept is the bedrock of many investment strategies, particularly in the [[hedge fund]] world, where the primary goal is to generate positive returns regardless of whether the overall market is soaring, sinking, or treading water. It contrasts sharply with [[relative return]], which measures performance //against// a benchmark. For a value investor, absolute return is what truly matters—it represents the actual growth of your wealth. ===== The "Absolute" Truth: What It Really Means ===== Understanding absolute return is about shifting your mindset from "keeping up with the Joneses" to focusing on your own financial house. It’s the difference between being graded on a curve and being judged on your own merits. ==== Absolute vs. Relative Return: A Tale of Two Report Cards ==== Imagine a fund manager who proudly reports a return of -5% for the year. You might think that's a failure, but they quickly add, "The market was down -15%!" In this case, their //relative// return is a stellar +10% (their -5% return "beat" the market's -15% return). They'll get a bonus. However, your //absolute// return is still a loss of 5%. Your account is smaller. This is a critical distinction. Most traditional [[mutual fund]] managers are judged by their relative performance against a [[market index]] like the [[S&P 500]]. Their goal is to outperform that index, even if it means losing less money than the market. An absolute return focus, however, aims for a positive return, period. A 2% gain in a year when the market falls 20% is considered a major success. This philosophy is deeply aligned with the first rule of investing championed by [[Warren Buffett]]: "Never lose money." The focus is on capital preservation first and growth second. ===== How Do Investors Chase Absolute Returns? ===== Achieving positive returns in any market condition often requires a more flexible and sophisticated toolkit than the average investor might use. ==== The Hedge Fund Toolkit ==== Strategies designed to generate absolute returns often employ methods to profit in both rising and falling markets. These can include: * **[[Long Position|Going Long]] and [[Short Selling|Going Short]]:** While most investors buy stocks hoping they'll rise (a [[long position]]), absolute return strategies often involve [[short selling]]—betting that a stock's price will fall. This allows a manager to make money even in a bear market. * **[[Derivatives]]:** Using instruments like options and futures to hedge against potential losses or make very specific bets on market movements without having to buy the underlying assets directly. * **[[Arbitrage]]:** Exploiting tiny price differences of the same asset in different markets to lock in a low-risk profit. * **Leverage:** Borrowing capital to amplify the potential returns (and risks) of a particular investment. ==== The Value Investor's Perspective ==== You don't need a fancy hedge fund to be an absolute return investor. In fact, value investors are the original absolute return seekers. Their goal isn't to zig when the market zags on a daily basis, but to compound their capital at a satisfactory rate over many years, regardless of short-term market mania. A value investor achieves this not through complex derivatives, but through a simple, powerful principle: buying a wonderful business for less than its estimated [[intrinsic value]]. The gap between the price paid and the actual value—the [[Margin of Safety]]—is their primary defense against negative absolute returns. Their return comes from the underlying business's success and the eventual closing of that price-value gap, not from trying to outguess a benchmark. ===== Key Takeaways for the Everyday Investor ===== - **Focus on Your Own Goals:** Your retirement plan doesn't care if you "beat the market." It cares if you have enough //absolute// money to live on. Frame your investment goals in absolute terms (e.g., "I need to achieve an average annual return of 7% to reach my goal"). - **Read Past the Headlines:** When you review a fund's performance, look past the claims of "outperformance." The first number you should look for is the absolute return. Did it make money or lose money? That's the bottom line. - **Risk is Permanent Loss, Not Volatility:** The market will always be volatile. For a long-term investor, the real risk isn't a temporary dip in prices ([[beta]]), but a permanent loss of capital. Focusing on absolute returns helps you prioritize strategies that protect your principal. - **Measure What Matters:** Calculate your own portfolio's absolute return each year. It's the most honest measure of your progress. The formula is simple: **(End Value - Beginning Value + Withdrawals - Contributions) / Beginning Value**. This is your personal scorecard, and it's the only one that truly counts.