Absolute return

Definition

Absolute return refers to the performance of an investment or portfolio relative to its initial value, without considering any benchmark. 

What is absolute return?

‘Absolute return’ focuses solely on the gains or losses generated by the investment over a specific period, whereas ‘absolute return investing’ aims to achieve positive returns regardless of market conditions. This approach seeks to generate profits consistently, regardless of whether the overall market is rising or falling. 

To calculate the absolute return, the following formula can be used:

Absolute return (%) = ( (Final value – Initial value) / Initial value) x 100

Absolute return strategies often prioritise capital protection and risk management, seeking to limit downside volatility and protect against significant losses. By focusing on absolute returns, investors aim to achieve steady and predictable growth over time, rather than attempting to outperform a specific benchmark.

Absolute return strategies are commonly used by hedge funds, private wealth managers, and institutional investors seeking to diversify their portfolios and reduce overall portfolio risk. However, absolute return strategies can vary widely in terms of risk profile, investment approach, and performance outcomes, making them suitable for investors with different risk tolerances and investment objectives.

Example of absolute return

Let’s say an investor invested £10,000 in a stock at the beginning of the year. At the end of the year, the investment is now worth £12,000.

To calculate the absolute return:

Absolute Return (%) = ( (12,000 – 10,000) / 10,000) x 100 = 20%

So, the absolute return on the investment over the year is 20%. This means the investment grew by 20% over the specified period, regardless of any benchmarks.