What is an “absolute return” and why is it important?
The term indicates actual gain or loss without regard to market benchmarks or peer groups. In today’s competitive money management industry, most attention focuses on “relative returns.” Managers can be recognized for outperforming benchmarks or peer groups, even when their investors experience losses. Many hedge fund managers follow strategies designed to neutralize the impact of market cycles and trends. That allows them to concentrate only on actual return to investors, not the direction of financial markets and their benchmarks. An emphasis on absolute returns is important when investors want to increase portfolio diversification while decreasing vulnerability to cycles and trends.
