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Absolute Return Strategy

A strategy to generate consistent positive returns regardless of market conditions.

Absolute Return Strategy

Absolute return investing aims to produce a positive return over time, regardless of the prevailing market conditions. Even when markets are falling, an absolute return fund still has the potential to make money. Producing consistent positive returns is the key objective for an absolute return fund.

All investment funds aim to beat the long-term returns from cash. However, unlike a traditional long-only equity fund where investors accept the risk that equity markets can fall dramatically from time to time, an absolute return – by not being tied to any particular equity benchmark – aims to produce more consistent positive returns over a given investment horizon. Investment gains can never be guaranteed but, by using a range of techniques not available to traditional investment portfolios, absolute return funds have the capability to generate smoother returns throughout the market cycle.

Characteristics of Absolute Return Strategies

  • Utilize sophisticated investment manager skills and systems to generate active returns.
  • Allow managers to take opportunities in a wide range of market environments (e.g., short-selling, derivatives).
  • More complex than traditional 60/40 portfolios.
  • Manager remuneration is aligned with fund performance.
  • Sometimes compromise liquidity for the potential of higher risk-adjusted returns.

Examples of Absolute Return Strategies

  • Long-short equity strategies: Combine ‘long’ and ‘short’ positions, including long-bias equity, paired trades, market neutral equity, and short-bias equity.
  • Relative value strategies: Exploit pricing anomalies between securities by taking a ‘long’ position in undervalued securities and a ‘short’ position in overvalued ones.
  • Event-driven strategies: Assess company-specific events such as mergers, bankruptcies, and restructurings to determine long and short positions.
  • Global macro strategies: Analyze global economies and financial markets, often using qualitative judgment or quantitative models.
  • Managed futures funds: Use algorithmic and technical models to identify trends in futures and other highly liquid securities.
  • Multi-strategy funds: Combine multiple absolute return strategies to deliver consistent returns with low volatility.
  • Funds of hedge funds (FOHF): Invest in 30 to 70 different alternative strategies, each managed by different fund managers.