Security selection
Buy assets below conservative estimates of value, potentially combined with short positions or hedges.
Strategy guide
Absolute Return Investing: Objectives, Strategy Types, and Evaluation
Absolute return is best understood as a portfolio objective: seek a positive result over a defined horizon while controlling the risk of material loss. It is not a promise of uninterrupted gains. This guide turns the objective into a practical research framework.
Evidence firstRange, not point estimateRisk before return
01
Define the mandate
Start with a hurdle and a risk budget
A useful mandate states the time horizon and the hurdle: cash plus a spread, inflation plus a spread, or a return tied to a future liability. “Make money” is not specific enough to govern a portfolio. The hurdle should be evaluated over a period that matches the underlying investments rather than over an arbitrary month or quarter.
The mandate also needs a risk budget. Maximum acceptable drawdown, leverage, concentration, liquidity, and counterparty exposure should be visible before capital is committed. These constraints make the objective measurable and limit the temptation to change the strategy after losses.
02
Know the engine
Separate strategy labels from economic return drivers
Relative value
Compare related instruments and seek return from a spread that may converge, while managing financing and basis risk.
Directional and macro
Express views on rates, currencies, commodities, volatility, or trends across markets and time horizons.
Event-driven
Underwrite mergers, restructurings, spinoffs, liquidations, or other events with defined but uncertain outcomes.
Risk transfer
Earn a premium for providing liquidity, insurance-like protection, or capital when others prefer certainty.
Multi-asset allocation
Shift risk among asset classes while maintaining explicit limits and a clear reason for each exposure.
03
Evaluate the path
Use a scorecard broader than average return
| Measure | Question it answers | Common limitation |
|---|---|---|
| Rolling return | How consistently did the strategy meet its objective? | Can be dominated by one unusual period. |
| Maximum drawdown | What was the deepest peak-to-trough loss? | Depends on history and valuation frequency. |
| Time under water | How long did recovery take? | Past recovery may not repeat. |
| Downside deviation | How variable were harmful returns? | Threshold choice affects the result. |
| Correlation | Did the strategy move differently from other assets? | Relationships can change in stress. |
| Liquidity and leverage | Could the strategy survive a shock without forced selling? | Disclosures may be incomplete or stale. |
04
Due diligence
Ask what has to be true—and what can break
Return
- What economic risk or skill creates the expected return?
- Which conditions are favorable and unfavorable?
- How much of the history is live rather than hypothetical?
Structure
- What leverage, derivatives, financing, and counterparties are used?
- How are hard-to-price assets valued?
- Can terms change after capital is committed?
Investor fit
- Do redemption terms match cash needs?
- Are total fees proportionate to the expected benefit?
- Can the investor tolerate lagging a traditional benchmark?
Research next
Build the objective into a written process
Use an investment policy statement, rebalancing rules, and a downside dashboard to keep the mandate stable when markets are not.