What is Absolute Return in Trading?
Absolute Return is a method in trading that focuses on making positive returns over a set period, regardless of how the wider market is behaving. In other words, the absolute return is concerned with making a profit, whether the markets are going up or down.
The Purpose of Absolute Return
The main goal of an absolute return strategy is to minimize risk and provide steady returns, regardless of the direction the market moves. This means, instead of comparing investment performance to a benchmark like an index or other market indicators, an absolute return strategy aims to generate a positive return over time, effectively trying to decouple the investment's performance from that of the broader market.
Understanding Absolute Return in Context with Trading
In trading, investors use various strategies to achieve an absolute return. These strategies may involve using specific types of financial instruments or sophisticated trading methods such as short selling or using derivatives. The primary focus here, however, remains on achieving a net profit, rather than beating a comparative benchmark.
Advantages and Disadvantages of Absolute Return
When done right, absolute return strategies can provide positive returns and reduce volatility, leading to more predictable and stable performance. They can be a great way for traders to diversify their portfolio and hedge against market downturns. However, they also come with some disadvantages. For example, achieving an absolute return can require significant skill and risk control. There is also no guarantee that an absolute return strategy will always yield a profit, especially in a highly volatile market.
Final Thoughts
Absolute return is a valuable strategy for investors who want to protect their profits, regardless of market conditions. While it comes with its challenges, understanding how it works can help traders make informed decisions and potentially improve their overall trading performance.
