Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Why Most Investors LOST Money by Investing in ARK FUNDS - 27th Jan 22
The “play-to-earn” trend taking the crypto world by storm - 27th Jan 22
Quantum AI Stocks Investing Priority - 26th Jan 22
Is Everyone Going To Be Right About This Stocks Bear Market?- 26th Jan 22
Stock Market Glass Half Empty or Half Full? - 26th Jan 22
Stock Market Quoted As Saying 'The Reports Of My Demise Are Greatly Exaggerated' - 26th Jan 22
The Synthetic Dividend Option To Generate Profits - 26th Jan 22
The Beginner's Guide to Credit Repair - 26th Jan 22
AI Tech Stocks State Going into the CRASH and Capitalising on the Metaverse - 25th Jan 22
Stock Market Relief Rally, Maybe? - 25th Jan 22
Why Gold’s Latest Rally Is Nothing to Get Excited About - 25th Jan 22
Gold Slides and Rebounds in 2022 - 25th Jan 22
Gold; a stellar picture - 25th Jan 22
CATHY WOOD ARK GARBAGE ARK Funds Heading for 90% STOCK CRASH! - 22nd Jan 22
Gold Is the Belle of the Ball. Will Its Dance Turn Bearish? - 22nd Jan 22
Best Neighborhoods to Buy Real Estate in San Diego - 22nd Jan 22
Stock Market January PANIC AI Tech Stocks Buying Opp - Trend Forecast 2022 - 21st Jan 21
How to Get Rich in the MetaVerse - 20th Jan 21
Should you Buy Payment Disruptor Stocks in 2022? - 20th Jan 21
2022 the Year of Smart devices, Electric Vehicles, and AI Startups - 20th Jan 21
Oil Markets More Animated by Geopolitics, Supply, and Demand - 20th Jan 21
WARNING - AI STOCK MARKET CRASH / BEAR SWITCH TRIGGERED! - 19th Jan 22
Fake It Till You Make It: Will Silver’s Motto Work on Gold? - 19th Jan 22
Crude Oil Smashing Stocks - 19th Jan 22
US Stagflation: The Global Risk of 2022 - 19th Jan 22
Stock Market Trend Forecast Early 2022 - Tech Growth Value Stocks Rotation - 18th Jan 22
Stock Market Sentiment Speaks: Are We Setting Up For A 'Mini-Crash'? - 18th Jan 22
Mobile Sports Betting is on a rise: Here’s why - 18th Jan 22
Exponential AI Stocks Mega-trend - 17th Jan 22
THE NEXT BITCOIN - 17th Jan 22
Gold Price Predictions for 2022 - 17th Jan 22
How Do Debt Relief Services Work To Reduce The Amount You Owe? - 17th Jan 22
RIVIAN IPO Illustrates We are in the Mother of all Stock Market Bubbles - 16th Jan 22
All Market Eyes on Copper - 16th Jan 22
The US Dollar Had a Slip-Up, but Gold Turned a Blind Eye to It - 16th Jan 22
A Stock Market Top for the Ages - 16th Jan 22
FREETRADE - Stock Investing Platform, the Good, Bad and Ugly Review, Free Shares, Cancelled Orders - 15th Jan 22
WD 14tb My Book External Drive Unboxing, Testing and Benchmark Performance Amazon Buy Review - 15th Jan 22
Toyland Ferris Wheel Birthday Fun at Gulliver's Rother Valley UK Theme Park 2022 - 15th Jan 22
What You Should Know About a TailoredPay High Risk Merchant Account - 15th Jan 22

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Stocks Portfolio Relative Returns vs. Absolute Returns

Portfolio / Investing 2010 Jan 13, 2010 - 09:25 AM GMT

By: Money_and_Markets

Portfolio

Best Financial Markets Analysis ArticleMonty Agarwal writes: The term “relative returns” refers to returns as compared to a benchmark index. Most money managers, such as mutual funds, will aim to produce returns that beat a benchmark, e.g. the S&P 500 or the Nasdaq 100.


For example, suppose that the S&P 500 is down 25 percent in a year and the money manager produces returns that are down 20 percent. He can boast a superior performance and claim, rightly so, that he has beaten the benchmark index. But the financial reality is that you “cannot eat relative returns.”

If your portfolio is down 20 percent, it’s not going to make you feel any better knowing that you beat some benchmark index by 5 percent. So what good are relative returns? Yet in the U.S. alone the mutual fund industry manages upwards of $10 trillion, and most mutual fund managers do not even beat their benchmark index!

This brings me to the world of absolute returns …

As the name suggests, “absolute returns” refers to the returns of an asset class or strategy, without comparing it to any benchmark. Absolute return managers aim to produce positive, “eatable” returns year after year no matter what happens to the S&P 500 or any other index.

For the most part, individual investors are unaware of the strategies hedge fund managers use.
For the most part, individual investors are unaware of the strategies hedge fund managers use.

The specialized money managers that aim to produce these positive absolute returns are classified as hedge fund managers. However, given the draconian SEC regulations, most of the hedge fund industry and thereby the absolute return strategies, are not available to most individual investors. Consequently, not much is known about how these strategies go about producing positive absolute returns.

So in today’s Money and Markets column, I’ll provide you with some basic ingredients that hedge fund managers use to go after these returns.

Non-Reliance on Market Trends

Most relative return managers will rely on long-lasting market trends to make their returns. They’ll perform global as well as close-up economic analysis on companies to determine the direction of a particular stock or commodity for the next year or longer. And then they’ll take a position in it.

Conversely, absolute return managers have a very short time horizon. Most of these managers will not rely on long-lasting market trends. Rather they’ll look to trade the short-term price swings, both from the long as well as the short side.

Well Diversified Portfolio

Absolute return managers will create a portfolio that is diversified across asset classes, geography and economic cycles. They’ll pay special attention to the correlation between the various components in the portfolio to ensure that the portfolio will not be subject to wild swings based on any one particular market event.

Such a diversified portfolio could hold, for instance Nasdaq 100 stocks, gold, oil and cotton, which tend to hedge a down price move in one component with an up price movement in the others.

Solid Risk Management

Probably the cornerstone of any successful absolute return strategy is a robust risk management methodology. Absolute return strategies will set up risk management methodologies that address portfolio construction, stop losses, profit preservation as well as capital preservation.

Such risk management systems are dynamic in nature and tend to learn from and adapt to the evolving market conditions to stay on top of the recent trends and volatility shifts in the marketplace.

Well-Tested System Supported By Years of Results

And finally, a robust absolute return methodology would be backed by years, at least 10 to 15 years, of back-tested results. These back-tested results would try to ascertain the soundness of the trade picking system as well as the durability of the risk management systems across various market cycles, trends and shocks.

Biggest and Savviest Absolute Return Players

Here is a list of some of the top hedge fund managers in the world and the amount of money they manage (AUM). Most of these managers have produced absolute returns in excess of 15 percent a year for the past 10-15 years.

Single manager funds as of March 5, 2008

AUM Table

Can You Get into Absolute Return Strategies?

Mutual funds are trying to implement absolute return strategies so they can compete with hedge funds.
Mutual funds are trying to implement absolute return strategies so they can compete with hedge funds.

The simple answer is, you can’t. As I had mentioned earlier, given the current SEC regulations, hedge fund absolute return strategies can’t even be marketed to the general public … let alone sold. That’s because investors have to meet very stringent income and net worth criteria.

We are, however, starting to see the mutual fund industry realize the importance of absolute returns and the competition provided by the hedge fund industry. And they’re trying to come up with absolute return type strategies. But they are still a far cry from a real absolute return strategy as described above.

In my opinion, the SEC should relax the requirements for individual investors who what to invest in hedge fund strategies. But I fear that will take years before it comes to fruition.

Best regards,

Monty

P.S. Monty Agarwal is the author of The Future of Hedge Fund Investing. To read more about the book and order a copy, please visit http://www.macmllc.com/Future_Hedge_Fund_Investing.html.

This investment news is brought to you by Money and Markets . Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in