Absolute Return Index Details

Investors use hedge funds to trade in the stock market. Hedge fund managers generate income and profits for their investors. The Absolute Return Index compares hedge funds' performance when traded as a group in the stock market. You can determine if a particular hedge fund investment was successful or a failure with the Absolute Return Index. Because of the nature of hedge funds and the fact that they can still profit in different ways, funds' success can vary depending on each client and portfolio.

With the help of the Absolute Return Index, you can easily measure if a particular hedge fund is bucking the market without having to deal with the intricate details of each trade. Other markets, including mutual funds, stocks, and bonds, have unique metrics to compare and determine their profits.

As an investment vehicle, absolute return funds seek positive returns using different investment management techniques than traditional mutual funds. The total investment return strategy includes short selling, futures, options, derivatives, arbitrage, leverage, and the use of non-traditional assets. Absolute profits are separate from any other performance measures, so only losses or losses on investments are considered.

Real-Life Example of Absolute Return Index

Some hedge funds have benchmark or performance criteria that they try to meet to be considered successful. Other funds have a set ratio that they aim to achieve. For example, for a fund that invests heavily in real estate, a 20% return over 12 months might be considered very successful. However, the same return rate would be less desirable for a fund that invests in foreign currencies.

The Vanguard 500 Index Fund Investors Equity ETF (VFNX) earned an absolute return of 150.15% for a 10-year period, which ended December 31, 2017. The absolute return is different from the relative return, which is -2.92%, as the absolute return of the S&P 500 Index was 153.07% during the same period.

With the many intricacies of hedge funds, investors need to consider other additional risks. These risks include the need for funds being unavailable for a long time, large amounts of capital placed in a single investment with little diversification, and the use of borrowed funds. All of these can increase your risk but may also increase your reward.

Significance of Absolute Return Index

The absolute return index provides flexible and dynamic risk management for an investment portfolio. Since an absolute return fund exists solely to generate positive returns and has a diverse structure, the overall investment risk extends to acquiring various assets in the portfolio. It ensures low volatility in overall profits for investors.

Absolute return funds are actively adjusted according to stock market movements. This means that it establishes a negative correlation with the absolute return fund when the stock market is down or has negative movement. Likewise, when the stock market rises or shows good movement, it correlates with the absolute return fund.