Absolute return investments

An absolute return investment strategy seeks to make positive returns that are not correlated with any market by employing investment management techniques that differ from traditional long-only investments. Such techniques include short-selling, arbitrage, leverage etc. using derivatives, futures, options or other financial instruments.

While long-only investment strategies are judged by comparing their returns to an index or benchmark, absolute returns are examined separately from any other performance measures, so only gains or losses on the investment in question are considered.

At first glance the absolute return investments are attractive over long-only investments because they can make positive returns even in falling markets. This makes absolute return strategies perfect to use as a refuge in falling markets.

However that should not be their strongest point: what really differentiates absolute return strategies from other investment strategies is risk control. Being able to go long and short the markets these strategies can have very strict risk parameters. That reduces recommended holding time, makes them more liquid and less volatile and this features are more valuable than simply their ability to produce positive returns in falling markets or regardless of market direction.

For investors in long-only funds, the timing of going in and out of investments is their responsibility and they need to keep an eye on the markets they are invested in as their asset managers try to beat benchmarks that can be negative at time. That is not the case with absolute return investments as their returns are not correlated with any particular market. In this case investors just have to find the appropriate asset manager for them and let the investment run regardless of how markets evolve.

Andrei Muresan