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What is an absolute return strategy?

An absolute return strategy aims to deliver positive real returns on an investment irrespective of whether markets are rising falling or flat.

You may think that’s the objective of most investment management; yet the measures on which most are based are relative, not absolute; performance being measured relative to a benchmark, an index, or even the competition. Using relative returns as a measure, investment managers can ‘win’ not by achieving real gains but simply by losing less money than their peers, or the index. This is a refuge denied to an absolute return manager. Here, ‘absolute’ means exactly that: a result you can quantify on your own terms rather than a result that merely beats others. As has been noted: ‘you can’t eat relative returns.’

To achieve real returns in the face of changing market conditions requires the use of sophisticated investment techniques. However, the benefits of an absolute return strategy for the investor can be very simple indeed: a clear picture of the actual value added by their investment manager; a clear picture of the actual result achieved according to their own, not the industry’s, objectives; and access to proven investment tools and techniques to minimise downside on the way.

Things to discuss with your adviser

As mentioned, absolute return strategies may invest in sophisticated investment techniques such as short selling, futures, derivatives and options. To understand more about these, please contact your adviser.

Absolute return strategies can be riskier than certain other styles of investment so please ask your adviser whether they conform to your risk profile.

To understand more about some technical words mentioned in the article, please refer to our glossary