The absolute return or simply return is a measure of the gain or loss on an investment portfolio expressed as a percentage of invested capital.
The adjective "absolute" is used to stress the distinction with the relative return measures (often used by long-only stock funds) that are based on comparison to a benchmark.
[1] The hedge fund business is defined by absolute returns.
Unlike traditional asset managers, who try to track and outperform a benchmark (a reference index such as the Dow Jones and S&P 500), hedge fund managers employ different strategies in order to produce a positive return regardless of the direction and the fluctuations of capital markets.
Absolute return managers tend to be characterised by their use of short selling, leverage and high turnover in their portfolios.
In the case where the cash rate is close to zero, such as the early 2010s decade, this makes little difference.
Suppose that a manager thinks the share price of company A will go down.
If his prime broker asked a 2% interest rate for borrowing the shares then the net gain of the manager is
Therefore, even small market losses can be disastrous when there is a huge leverage.
Some absolute-return managers are very active with their portfolios, buying and selling shares more frequently than normal investors, because they focus on short-term investment opportunities lasting less than 90 days.
Turnover is the rate at which managers rebalance their portfolios, and among other things it depends on the hedge fund's size: in 2008 hedge funds with less than 15M USD in AUM (assets under management) had a 46.9% turnover per month whilst funds with over 250M USD in AUM had only 9.8%.