Most investors are familiar with the concept of relative return, which is simply the performance of an investment in comparison to another investment. Absolute return, on the other hand, measures the actual monetary gain or loss of an investment over a period of time. In other words, absolute return tells you how much money you made or lost on an investment, without any reference point.
While relative return is a good way to measure the performance of an investment in relation to others, absolute return is the only way to gauge whether you actually made or lost money. For this reason, absolute return is often seen as a more accurate measure of an investment’s true performance.
Investors typically focus on achieving positive absolute returns, meaning they seek to make money on their investments. However, it is possible to lose money even if your investment outperforms the market. For example, if you invest in a stock that goes up 10% but the overall market gains 20%, then you have lost money in absolute terms even though you generated a positive relative return.
Absolute return strategies seek to generate positive returns regardless of market conditions. This can be done through a variety of means, such as investing in assets that are not correlated with the broader market or using short selling and other hedging techniques.
While there is no guarantee of success, investors who focus on absolute return may be more likely to achieve consistent positive results over time. This is because they are not as reliant on the performance of the overall market and can still make money even when the market is down.