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 a Real Return?67 Views
finance- a la shmoop. what is a real return? like is there a fake return? you
know like the news? well kinda .real return refers to an [man frowns talking to camera]
investment return mapped against inflation. so let's say you invest in a
bond that pays five percent a year for ten years and then pays you back your
principal .boring but nice- you know like a good doctor visit. your nominal return
over that period was 5% but since inflation was 3% a year during that
period on average your real return was only 2% a year- meaning that the
performance of your investment only eked out a 2% net gain against the price of [equation]
milk gas and you know knocked off iPhones. so don't be a chump who thinks
that they're making more money than they really are, and you know keep on keeping
it real. [man sitting in chair, talks to camera]
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