What is Absolute Return?
Absolute Return in its basic definition is the return that an asset achieves over a certain period of time. This measure looks at the appreciation or depreciation (expressed as a percentage). For example, a $50 stock drifts to $100 is a 100% absolute return. If that same stock drifts back from $100 to $50, its absolute return is -50%.
Absolute Return as an investment objective is one that does not try to beat an arbitrary benchmark index but instead seeks to generate real profits over a complete market cycle regardless of market conditions. Absolute return an objective of positive returns on investment over a full market cycle period of rising and falling trends irrespective of the direction of a stock, commodity, or bond markets.
Absolute return as a strategy: absolute return is sometimes used to define an investment strategy. An absolute return strategy is a plan, method, or series of tactical movements aiming to compound capital positively and to avoid big losses to capital in difficult market conditions. Whereas Relative Return strategies typically measure their success in terms of whether they track or outperform a market benchmark or index, alternative investment strategies aim to achieve positive returns irrespective of whether the prices of stocks, bonds, or commodities rise or fall over the market cycle. NOTE: a full market cycle is years, not days, weeks, or months.
Whether you think of absolute return as an objective or a strategy, it is a skill-based rather than market-based. That is, the absolute return manager creates his or her results through tactical decision-making as opposed to taking what the market is giving. One can employ a wide range of approaches toward an absolute return objective, from price based trend following to fundamental analysis. At Shell Capital, we believe price based methods are more robust and lead to a higher probability of a positive expectation. Through our historical precedence, testing, and experience, we find that any fundamental type method that is based on something other than price has the capability to stray far enough from price to put the odds against absolute returns. That is, a manager buying what he believes is undervalued and selling short what he believes is overvalued can go very wrong if he is. But price cannot deviate from itself. Price is the judge and the jury.
For information about the application of absolute returns visit Shell Capital Management, LLC
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