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What is an Absolute Return?

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  • Written By: Mary McMahon
  • Edited By: O. Wallace
  • Last Modified Date: 21 September 2016
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In finance, an absolute return is the amount of money an investment returns over a given period of time, expressed as a percentage of the total investment. The term “absolute” is used to differentiate an absolute return from a relative return. In a relative return, a benchmark is used to determine the rate of return, with the rate of return being compared against something external.

In an ideal world, absolute return will reflect appreciation of an asset, indicating that an investment is making money. However, it can also refer to depreciation, in which an asset loses value. The absolute return can be plotted over a variety of timelines to see how the investment performs in both the short and long term. Many investments have a better rate of absolute return over an extended period of time, as this gives the investment the chance to ride out market volatility.

This term is also used in reference to absolute return funds. An absolute return fund promises to deliver a return no matter what the market conditions are like, with some even pledging a specific rate of return. While this might sound suspiciously similar to some fraudulent schemes which have been used to swindle investors, such funds are actually legitimate, to varying degrees. An absolute fund is administered in a way which plays the field, with the goal of generating funds by diversifying assets and investment techniques so that at least some of the fund is profitable even when the market is poor.

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People interested in investing in an absolute return fund should do their due diligence. Such finds may express their rate of return as an absolute or a relative. For example, the fund might claim that it will generate a five percent rate of return over three years, or that the fund will exceed the return on a specific benchmark by two percent. It's important to determine how the fund is calculating predicted rates of return, as this will influence the reliability of the claims being made by the fund managers.

It is also a good idea to research the administrators behind the fund and the history of the fund's performance. This information is all readily available on the public record. Financial advisors may also have recommendations about which funds are good buys. As always, it is a good idea to diversify investments, so even if a fund appears to be a sound investment, it is not wise to sink all of one's available investment capital into a single fund.

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