Absolute Return: a New Strategy for a New World

As the U.S. recession enters its 17th month, stocks and bonds continue to offer little solace for weary investors – forcing them to consider alternative options.

Stocks fell a staggering 37% in 2008, and no asset class or region was immune.

In light of these circumstances, outperforming one’s benchmark – which used to be the hallmark of good performance for a traditional mutual fund – doesn’t mean much.

As a result, many investors are turning to an investment strategy that has long been used by institutional investors, but is relatively new to the retail market: the absolute return strategy, which seeks to produce positive absolute returns regardless of the direction of the markets.

Absolute return strategies can have different objectives. Many seek an absolute return target (such as 10% per year) or a range (such as 5% to 15% per year). Others seek a return above the rate of inflation or a cash rate, such as U.S. Treasuries.1

In seeking to achieve these goals, absolute return strategies typically invest in short-term cash. They can stay fully invested in cash, which may be helpful in a year like 2008. Or, as opportunities arise, they can take positions in securities spanning many asset classes – from stocks and bonds to alternatives. Unlike many traditional mutual funds, they may invest not just “long” (which means buying stocks) but also “short” (which means selling borrowed stock, then buying the stock back later when their price has, ideally, fallen).

Many such strategies are available.

Your financial advisor, who is familiar with your individual circumstances and goals, can help you determine if an investment product that uses an absolute return strategy is right for you.

  1. These examples are hypothetical and are not meant to represent the performance of any particular product.