Trend Trading Research

Relative return is a measure of an investment relative to a benchmark.

For example a UK based equity fund may measure it’s return relative to the FTSE 100 or FTSE All Share index. When the relative return is positive, the investment has outperformed the benchmark, conversely when the relative return is negative the investment has underperformed the benchmark.

Although the relative return is widely used to market various investment funds, investors need to exercise care, as fund may well outperform the benchmark but still loose them money. For example in a falling market the index may fall by 20%, if the investment falls by just 10% it will have outperformed the market and provided a positive relative return of 10% despite loosing 10% of the capital invested (thus the absolute return would be -10%).

An investor hoping to achieve a positive absolute return, no matter what the market conditions would need to use an absolute return strategy or invest in a fund that does so.

The absolute return, or more simply the return is the measure of the profit or loss of an investment expressed as a percentage. the term absolute is used to differentiate the measure from the relative return.

An absolute return strategy aims to produce a positive return on an investment regardless of the underlying market conditions.

Most hedge funds employ absolute return strategies. There are also a number of absolute return funds using absolute return strategies.

An Exchange-Traded Fund (ETF) is an investment fund that is traded on a stock exchange. The ETF holds assets such as stocks, commodities, or bonds and trades at the net asset value of the underlying assets. Most ETF’s track an index, i.e. the FTSE 100. ETF’s achieve this by holding either the contents of the index or a representative sample of the index in their portfolio, in an attempt to replicate the performance of the index. Some ETF’s track commodity indexes, these are sometimes referred to as Exchange-Traded Commodities (ETCs). Likewise some invest solely in bonds and are known as bond ETFs.

ETFs are liquid investments allowing investors to be able to easily sell their shares during normal market hours. The dividends collected from the ETF’s portfolio (in the case of stock based ETFs) are usually distributed to the investors at regular intervals and ETF management fees are usually deducted from the dividends.

ETFs can be traded through most stock brokers for roughly the same cost as trading directly in the underlying assets.