Absolute Return Index

Relative returns measure investment success by comparing how their groups of funds perform in comparison to a stock index. Absolute return investors—we know them as hedge fund investors—measure success by how much their investments make or lose, regardless of traditional stock indexes.

Let’s compare the two types of investment to dating. Jacqueline is a relative investor. She is dating a semi-handsome man with a low-paying job and little desire to improve. Her man would rate low if evaluated on an absolute basis. Luckily for Jacqueline’s boyfriend, most of Jacqueline’s friends are dating men who have recently been incarcerated. In comparison, or relatively speaking, Jacqueline has got herself quite the hunk. If measured on an absolute scale, however, she hasn’t done so well.

The absolute return index combines absolute investing with relative investing. Absolute investors want to know how they’re doing against other absolute investors. The absolute return index, also called the Hedge Fund Absolute Return Index (HFRX), helps hedge fund investors measure the performance of their funds against a composite of other funds.