Sometimes, it is a big challenge for investors to know whether the market is performing well and the fund manager is doing a good job. This article would give some leads to absolute and relative return. It is a vital knowledge where investors could define their returns.There are two categories of returns: absolute and relative return. Both are different in term and implementation. But although they are different, they are related to each other.
First of all, absolute return is an asset or portfolio returned over a particular period. It is quite different from relative returns. Relative returns follow other benchmarks such as index and S&P 500. Another name for relative return is alpha. In order to see absolute return, it is to compare investment to other similar investments.
When you have found the comparable benchmark to measure the return, you can decide whether the investment is doing well. This way also allows you to check whether the investment is doing poorly or accordingly. Fund managers use absolute return measurement to diversify the asset class, economic cycles, and geography. They would take a closer look at the correlation between the different components of the portfolio.
Mostly, fund managers would use absolute return for short selling, futures, options, arbitrage, leverage, derivatives, and unconventional assets. Sometimes, absolute return managers have a short time horizon. It means that they do not rely on long-lasting market trends only. Majorly, they will analyze the short-term price swing.
Meanwhile, relative return measures actively managed funds that have a greater return potential in the market. This is one of the ways to gauge a fund manager’s performance. Fund managers use this measure to lean on market trends to achieve the returns.
