Best of the Week
Most Popular
1. Next Financial Crisis Is Already Here! John Lewis 99% Profits CRASH - Retail Sector Collapse - Nadeem_Walayat
2.Why Is Apple Giving This Tiny Stock A $900 Million Opportunity? - James Burgess
3.Gold Price Trend Analysis - - Nadeem_Walayatt
4.The Beginning of the End of the Dollar - Richard_Mills
5.Stock Market Trend Forecast Update - - Nadeem_Walayat
6.Hindenburg Omen & Consumer Confidence: More Signs of Stock Market Trouble in 2019 - Troy_Bombardia
7.Precious Metals Sector: It’s 2013 All Over Again - P_Radomski_CFA
8.Central Banks Have Gone Rogue, Putting Us All at Risk - Ellen_Brown
9.Gold Stocks Forced Capitulation - Zeal_LLC
10.The Post Bubble Market Contraction Thesis Receives Validation - Plunger
Last 7 days
Next Tory Leader, Prime Minister Forecast and Betting Market Odds - 18th Nov 18
The Fed's Misleading Money Supply Measures - 17th Nov 18
Stock Market Outlook: Why the Economy is Bullish for Stocks Going into 2019 - 17th Nov 18
NO DEAL HARD BrExit Tory Chaos, Theresa May Leadership Challenge - 17th Nov 18
Gold vs Several Key Investments - 17th Nov 18
GDX Gold Mining Stocks Q3 18 Fundamentals - 17th Nov 18
Is Gold Under or Overpriced? - 17th Nov 18
Active Managers are Bearish on Stocks. A Bullish Contrarian Sign - 16th Nov 18
Will The Fed Sacrifice Retirement Portfolio Values For The "Common Good"? - 16th Nov 18
BrExit War - Tory Party About to Replace Theresa May for NO DEAL BrExit - 16th Nov 18
Aspire Global Makes Significant Financial Strides - 16th Nov 18
Gold Oil and Commodities …Back to the Future ? - 16th Nov 18
Will Oil Price Crash Lead to “Contagion” for the U.S. Stock Market? - 15th Nov 18
How NOT to Be Among the MANY Stock Investors Fooled by This Market Myth - 15th Nov 18
Tory BrExit Chaos Cripples UK Economy, Wrecks Housing Market Confidence - 15th Nov 18
Stocks Could End 2018 With A Dramatic Rally - 15th Nov 18
What Could Be the Last Nail in This Stock Bull Markets Coffin - 15th Nov 18
Defensive Stock Sectors Outperforming, Just Like During the Dot-com Bubble - 15th Nov 18
Buying Your First Home? Here’s How to Save Money - 15th Nov 18
US Economy Ten Points or Ten Miles to ‘Bridge Out’? - 14th Nov 18
US Stocks: Whither from Here? - 14th Nov 18
Know exactly when to Enter&Exit trades using this... - 14th Nov 18
Understanding the Benefits of Keeping a Trading Journal - 14th Nov 18
S&P 500 Below 2,800 Again, New Downtrend or Just Correction? - 13th Nov 18
Warning: Precious Metals’ Gold and Silver Prices are about to Collapse! - 13th Nov 18
Why the End of the Longest Crude Oil Bull Market Since 2008? - 13th Nov 18
Stock Market Counter-trend Rally Reaches .618 Retracement - 13th Nov 18
How to Create the Best Website Content and Generate Organic Traffic - 13th Nov 18
Why the Stock Market Will Pullback, Rally, and Roll Into a Bear Market - 13th Nov 18
Stock Markets Around the World are Crashing. What Not to Worry About? - 12th Nov 18
Cyclical Commodities Continue to Weaken, Gold Moves in Relation - 12th Nov 18
Olympus Tough TG-5 Camera Stuck or Dead Pixels, Rubbish Video Auto Focus - 12th Nov 18
5 Things That Precede Gold Price Major Bottoms - 12th Nov 18
Big US Stocks Q3 Fundamentals - 12th Nov 18
How "Free Money" Helped Create Sizzling Housing Market & REIT Gains - 12th Nov 18
One Direction More Likely for Bitcoin Price - 12th Nov 18
The Place of HSE Software in Today's Business - 12th Nov 18
Gold Asks: Are US Bonds Overvalued? - 11th Nov 18
Why the Stock Market Will Pullback Before Heading Higher - 11th Nov 18
GDX - Will you Buy This Hated Stock with Me? - 11th Nov 18
Christmas and Halloween LED Dynamic Projector Light Review - 11th Nov 18
Wall Street Veteran: Why I Don’t Lend to Family and Friends - 10th Nov 18
Stocks Breaking Higher, but Resistance Ahead - 10th Nov 18
Stock Market Was Supposed to “Crash Like 1987” - 10th Nov 18
SPX : The Incredibull Stock Market Plays On - 9th Nov 18
USD/CAD – The Moment of Truth Is Coming - 9th Nov 18
Is the Stock Market’s Rally “All Good To Go”? - 8th Nov 18
End in Sight for 'Unloved' Silver - 8th Nov 18
Outlook for Gold & Silver Precious Metals Sector is 'Positive' - 8th Nov 18
A Great Day for Metals as Platinum Price Breaks Out - 8th Nov 18
Future US Interest Rates, Financial Markets, and the FED - 8th Nov 18
Buying an Approved Used Land Rover From a Dealer - What You Need to Know! - 8th Nov 18

Market Oracle FREE Newsletter

Free Online Trading Session

Stocks Portfolio Relative Returns vs. Absolute Returns

Portfolio / Investing 2010 Jan 13, 2010 - 09:25 AM GMT

By: Money_and_Markets

Portfolio

Best Financial Markets Analysis ArticleMonty Agarwal writes: The term “relative returns” refers to returns as compared to a benchmark index. Most money managers, such as mutual funds, will aim to produce returns that beat a benchmark, e.g. the S&P 500 or the Nasdaq 100.


For example, suppose that the S&P 500 is down 25 percent in a year and the money manager produces returns that are down 20 percent. He can boast a superior performance and claim, rightly so, that he has beaten the benchmark index. But the financial reality is that you “cannot eat relative returns.”

If your portfolio is down 20 percent, it’s not going to make you feel any better knowing that you beat some benchmark index by 5 percent. So what good are relative returns? Yet in the U.S. alone the mutual fund industry manages upwards of $10 trillion, and most mutual fund managers do not even beat their benchmark index!

This brings me to the world of absolute returns …

As the name suggests, “absolute returns” refers to the returns of an asset class or strategy, without comparing it to any benchmark. Absolute return managers aim to produce positive, “eatable” returns year after year no matter what happens to the S&P 500 or any other index.

For the most part, individual investors are unaware of the strategies hedge fund managers use.
For the most part, individual investors are unaware of the strategies hedge fund managers use.

The specialized money managers that aim to produce these positive absolute returns are classified as hedge fund managers. However, given the draconian SEC regulations, most of the hedge fund industry and thereby the absolute return strategies, are not available to most individual investors. Consequently, not much is known about how these strategies go about producing positive absolute returns.

So in today’s Money and Markets column, I’ll provide you with some basic ingredients that hedge fund managers use to go after these returns.

Non-Reliance on Market Trends

Most relative return managers will rely on long-lasting market trends to make their returns. They’ll perform global as well as close-up economic analysis on companies to determine the direction of a particular stock or commodity for the next year or longer. And then they’ll take a position in it.

Conversely, absolute return managers have a very short time horizon. Most of these managers will not rely on long-lasting market trends. Rather they’ll look to trade the short-term price swings, both from the long as well as the short side.

Well Diversified Portfolio

Absolute return managers will create a portfolio that is diversified across asset classes, geography and economic cycles. They’ll pay special attention to the correlation between the various components in the portfolio to ensure that the portfolio will not be subject to wild swings based on any one particular market event.

Such a diversified portfolio could hold, for instance Nasdaq 100 stocks, gold, oil and cotton, which tend to hedge a down price move in one component with an up price movement in the others.

Solid Risk Management

Probably the cornerstone of any successful absolute return strategy is a robust risk management methodology. Absolute return strategies will set up risk management methodologies that address portfolio construction, stop losses, profit preservation as well as capital preservation.

Such risk management systems are dynamic in nature and tend to learn from and adapt to the evolving market conditions to stay on top of the recent trends and volatility shifts in the marketplace.

Well-Tested System Supported By Years of Results

And finally, a robust absolute return methodology would be backed by years, at least 10 to 15 years, of back-tested results. These back-tested results would try to ascertain the soundness of the trade picking system as well as the durability of the risk management systems across various market cycles, trends and shocks.

Biggest and Savviest Absolute Return Players

Here is a list of some of the top hedge fund managers in the world and the amount of money they manage (AUM). Most of these managers have produced absolute returns in excess of 15 percent a year for the past 10-15 years.

Single manager funds as of March 5, 2008

AUM Table

Can You Get into Absolute Return Strategies?

Mutual funds are trying to implement absolute return strategies so they can compete with hedge funds.
Mutual funds are trying to implement absolute return strategies so they can compete with hedge funds.

The simple answer is, you can’t. As I had mentioned earlier, given the current SEC regulations, hedge fund absolute return strategies can’t even be marketed to the general public … let alone sold. That’s because investors have to meet very stringent income and net worth criteria.

We are, however, starting to see the mutual fund industry realize the importance of absolute returns and the competition provided by the hedge fund industry. And they’re trying to come up with absolute return type strategies. But they are still a far cry from a real absolute return strategy as described above.

In my opinion, the SEC should relax the requirements for individual investors who what to invest in hedge fund strategies. But I fear that will take years before it comes to fruition.

Best regards,

Monty

P.S. Monty Agarwal is the author of The Future of Hedge Fund Investing. To read more about the book and order a copy, please visit http://www.macmllc.com/Future_Hedge_Fund_Investing.html.

This investment news is brought to you by Money and Markets . Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com


© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules