Absolute return investing strategy refers to an investment approach that aims to achieve positive returns regardless of market conditions, rather than trying to outperform a benchmark. This strategy focuses more on capital preservation and positive risk-adjusted returns. The key advantage is providing diversification benefits and reducing volatility exposure for a portfolio. This article provides an in-depth look at absolute return strategy including its characteristics, implementation methods and suitable investors.
Absolute return strategy aims for positive returns in all market environments
The core philosophy of absolute return strategy is capital preservation and positive returns. Unlike traditional long-only strategies, it utilizes both long and short positions to profit while protecting against downside risk. The goal is to achieve a reasonable rate of return over time, such as 5-10% annually, regardless of which direction markets are heading.
Various approaches used for implementing absolute return strategies
Typical absolute return strategies include equity long-short, fixed income arbitrage, global macro, managed futures, and multi-strategy funds. These aim to exploit inefficiencies and pricing anomalies in markets to generate returns not highly correlated with traditional assets. Instruments like derivatives and leverage may be applied to enhance exposures.
Institutional investors and high net worth individuals ideal target group
Absolute return strategies best suit institutional investors with medium-to-high risk tolerance given use of leverage and derivatives. Such investors focus more on long-term capital appreciation than short-term price fluctuations. They have ability to commit capital for extended periods in less liquid investments to earn premium over safer options.
In summary, absolute return strategy is suitable for investors seeking steady returns uncorrelated to market cycles, willing to take on additional complexity and illiquidity in the portfolio.