Absolute returns or sometimes just simply called a return, is a way to determine how much an investment portfolio has lost or gained over a given amount of time.  It is typically expressed as a percentage of how much capital was initially invested in the fund.  It is often used as a way to measure stocks or mutual funds.  Absolute returns are different than a relative return as it deals with the return of a specific asset where as a relative return deals with comparing the amount returned to a benchmark.

The purpose of this approach is to ensure that a positive return is achieved no matter what the state of the financial market is. It does not even matter if the market is trending up or down.  This is usually done by investing the assets of the portfolio in cash, bonds, shares, or start a hedge fund and then taking long and short hedge positions in collection of securities.  When these are combined, they are likely to have some exposure to market returns, as a mutual fund typically aims to get returns better than the returns of its peers or the market in its entirety.  Managing in this way is referred to as a relative return.

With the markets in the current state they are in, investing money into an absolute returns fund can seem like a win-win situation.  Even when markets are bad, this kind of fund seeks to maintain an investor’s assets, whereas a more traditional fund will have a harder time maintaining wealth when the market is in bad shape.  This is accomplished by utilizing a number of strategies.  In addition to investing in a wide variety of assets, another method is to use derivatives. Derivatives are a product that specifically allows investors to gamble on the future price of a stock.  There is limited risk involved as investing in derivatives let an investor make money whether or not the price of the stock is rising or falling.

Used in an effective manner, all of these tools can let an absolute return fund earn more money for an investor in a down market than just straight equity or bonds can.  The downside, although an investor can still make money with  with prime brokers whether the market is up or down, the absolute fund can be rather delayed in making money when compared to the more traditional funds when the market is rising.