Relative Return

A relative return is the return that an asset achieves over a period of time compared to a benchmark. The relative return is the difference between the absolute return achieved by the asset and the return achieved by the benchmark.

Relative Return as an objective: Relative returns can also refer to an investor’s objective. These investors measure their success in terms of whether they track or outperform a market benchmark or index.

Relative Return as a strategy: As a strategy, relative returns are typically market-based returns as opposed to skill-based returns. Since a relative return strategy seeks to closely track, but perhaps outperform, and index, it may not stray too far from its benchmark which is referred to as tracking error. Most investment managers and mutual funds are relative return strategies. These managers typically remain fully invested in the market at all times since their objective is to beat the benchmark while also mostly tracking it. That is, if their benchmark is the S&P 500 Index and that index has declined -56%, a fund manager whose losses was -50% would have met his objective.

Many studies such as S&P Indices Versus Active (SPIVA®) find that relative return managers under-perform their benchmarks and indexes.


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4 responses

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