The Myth of the Absolute-Return Investor

Abstract:     
The notion of absolute return investing is spreading like wildfire. Many people believe that superior returns can be achieved by managers with strong views and little regard for benchmarks. This article attempts to define absolute-return investing and figure out whether it exists. The conclusion is that all investment returns consist of a beta part (representing the correlation of the active portfolio with one or more market benchmarks or normal portfolios) and an active alpha part. Thus, all investing is relative-return investing in which active returns are earned relative to an appropriate benchmark or mix of benchmarks.

Keywords: Portfolio Management, Hedge Fund Strategies, Alternative Investments, Hedge Fund Strategies, Investment Theory, Portfolio Theory

Accepted Paper Series