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Absolute Return

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Absolute return measures the actual percentage return of an asset over a specific period of time. Absolute return also refers to an investment strategy that attempts to achieve positive performance under varying market conditions by engaging in long and short positions. Absolute return differs from relative return in that an absolute return strategy may employ hedged long or short positions.

Traditionally, an absolute return strategy was only found in certain boutique investment management firms or hedge funds that catered to very wealthy accredited investors. However, recently absolute return mutual funds have been created that allow unaccredited investors to participate in the strategy. Absolute return funds are sometimes referred to as 130/30 funds. Generally, a portfolio manager will invest 100% of the portfolio in long positions. Then he will sell short positions in stocks he believes to be overpriced. The short positions raise another 30% of cash that then is invested in more long positions. The resulting portfolio contains 130% long positions and 30% short positions. The absolute return strategy can amplify returns but also has the effect of amplifying the portfolio risk. Due to the leverage employed and the short positions assumed, the risk involved in an absolute return fund can exceed that of a long-only fund.



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