Absolute return investing aims to achieve consistent positive returns regardless of market conditions. Unlike traditional investing which tracks market performance, absolute return focuses on risk management and capital preservation. Investors seek steady growth rather than beating benchmarks. Key strategies include diversification across assets and geographies, flexible asset allocation, hedging, and minimizing volatility. The goal is to generate returns in both up and down markets. Challenges include high fees, complexity, lack of transparency and liquidity. However, adding absolute return to a portfolio may enhance overall returns and reduce risk. With proper due diligence, absolute return investing offers investors an alternative path to grow wealth over the long-term.
Absolute return aims for positive gains independent of market direction
The main goal of absolute return investing is to achieve positive returns consistently over time regardless of whether markets are rising or falling. This contrasts with traditional investing approaches that are dependent on market conditions and benchmarks. Absolute return managers employ strategies to limit losses during downturns while capturing reasonable upside. By focusing on risk-adjusted returns, they look to smooth out volatility and compound gains steadily. However, achieving positive returns is not guaranteed and absolute return strategies may still incur losses occasionally, especially during periods of extreme market stress.
Diversification across assets and geographies increases consistency
A key technique in absolute return investing is diversification across asset classes, sectors, and geographies. By spreading risk rather than concentrating it, asset correlation is reduced and portfolio volatility is dampened. Investing globally also allows exploiting opportunities worldwide while minimizing susceptibility to any single market. Allocating capital among various assets including stocks, bonds, currencies, commodities, and real assets like real estate widens the opportunity set and total return sources. A stable absolute return portfolio typically holds 20-30 securities across different categories, and rebalances based on changing conditions and valuations.
Flexibility in asset allocation adjusts to evolving market regimes
Absolute return managers actively adjust their asset allocation instead of remaining static. As investment cycles evolve, they tactically shift exposures to asset classes and markets poised to outperform. This flexibility allows adapting seamlessly to changing investment regimes driven by macro conditions, business cycles, and relative valuations. For example, increasing equity holdings after major sell-offs when stocks become attractive, or rotating into bonds during periods of rising volatility. Absolute return funds have wider latitude in their investment guidelines compared to traditional managers, empowering them to swiftly capitalize on new opportunities.
Leveraging diversified hedges manages risks while generating gains
Hedging is extensively used in absolute return investing to mitigate risks. As markets fluctuate, uncorrelated assets act as natural portfolio hedges. Strategic use of options, futures, short positions, and other derivatives also helps control drawdowns during equities selloffs. At the same time, diversified hedges can themselves become return sources. For instance, gains from bond holdings may offset stock losses in a recession. Dynamic hedge calibrations that balance risk management with return generation are key for steady absolute gains.
Focus on minimizing volatility and drawdowns smoothens returns
Absolute return managers prioritize minimizing portfolio volatility and drawdowns through defensive strategies. Preserving capital takes precedence over maximizing returns. Various techniques like stop-losses, profit-taking, maintaining cash buffers, and tactical risk-reducing shifts lower market sensitivity. Greater emphasis on downside protection results in more consistent return streams, though some upside may be sacrificed. This distinguishes absolute return from relative return approaches focused on beating benchmarks regardless of volatility incurred.
Absolute return investing aims to deliver consistent positive gains over time regardless of market conditions. Key strategies include globally diversifying across assets, dynamically allocating capital, leveraging hedges, and proactively managing risks. While achieving steady returns is challenging, adding an absolute return component can potentially enhance portfolio outcomes for suitable investors. However, proper due diligence is vital given the complexity, lower liquidity, and higher costs of absolute return funds.