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.
Related or Semi-related Video
Finance: What is an Annualized Return?36 Views
Finance, a la shmoop. What is an annualized return? Alright people, well
when you invest a dollar you hope or even expect to get more than a dollar [ATM machine]
back, at some point. And let's say you invested that dollar in Terminators
Closet -a leading dealer in cybernetic body enhancements. And it went from $1 a
share to a dollar ten six months later. Alright, nice return.
You made 10% in just six months but in most investing discussions ,investment [spreadsheet shown]
returns are discussed in the form of annual returns, not monthly or daily or
biannual numbers, so you need to convert your six-month return into an annualized [angelic glow]
one, and you can do the process here of computing that number that is if you made
10% in six months well then in a year presumably you could notion that you'd
have made 20%. It's not that you would have guaranteedly made 20% it's just [spreadsheet shown]
the math saying that well if you had compounded at that rate then you'd have
made 20%, so what if she made 10% in a month? Well the stock went from a buck a
share Jan 1 to a buck ten a share by Feb 1 .Well if you impute so that you can [calendar shown]
compute that month's gain of 10% would carry a compound rate of a hundred
twenty percent. Right ? You're multiplying 12 months times 10 there, that'd be
annualizing it meaning, that at that rate you are more than doubling your money on [spreadsheet shown]
an annualized return basis. And that's more than enough dough to keep
terminators closet popping out those Wi-Fi enabled contact lenses faster than [woman watches TV]
people can wear them.
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