Absolute vs Relative Return

Re: Absolute v Relative Return Funds

Postby LenaHuat » Fri Sep 05, 2008 11:58 pm

Ha, Ha, LaP, ya, a third part abt "absolute return funds being stabiliser in bear markets". Maybe 2morrow nite.
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Re: Absolute v Relative Return Funds

Postby mojo_ » Sat Sep 06, 2008 12:47 am

la papillion wrote:Hi lena, I like your piece by piece picking of the article :) More?

haha you remind me of Oliver Twist :D

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Re: Absolute v Relative Return Funds

Postby LenaHuat » Mon Sep 08, 2008 4:34 pm

It is typically in bear markets that debate on the merits of relative and absolute return funds is revived. While in a bull market, investors are happy to measure their returns against a benchmark, in a bear market, beating the benchmark is cold comfort; what investors hanker after is a positive return at a minimum. Absolute return funds, however, entail a vastly different set of risks and expectations compared with relative return vehicles.


As I'm not very excited abt investments in funds, I would like to turn this discussion into how each of us evaluate the performances of our portfolios : relative or absolute returns. I hve read several blogs whose owners use 'relative' returns (like almost all mutual funds) rather than 'absolute' returns (like most hedge funds).

I wonder if a 'absolute' investor' tends to underperform in a bull run based on the rationale that there is a tendency not to push oneself too hard beyond say, 20% return.

Likewise, will an 'absolute' investor overperform in a bear run ?
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Re: Absolute v Relative Return Funds

Postby millionairemind » Mon Sep 08, 2008 4:41 pm

Hi Lena,

I presume you lump traders/investors together in this respect.

I always believe in absolute return cos' that is the only way compounding will work. If one is up 30% in bull mkt but down 30% in bear mkt, one is actually net -ve.

We should all be shooting for +ve returns that beat the index by a good margin on bull markets and at least preserve what we have in a bear market (that is, without any losses). It is not easy, but with enough discipline, I think it can be done.

Just my small little 2 cts.. :P

Cheers,
mm
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Mutual Funds

Postby LenaHuat » Mon Sep 08, 2008 5:01 pm

Hi MM

Ha, ha, I expect U to be first off the blocks :lol: Thanks a million for your speedy response.

I've always used absolute returns too but I'm still wondering why some investors (excluding traders) bother with 'relative' returns. It gives me no pleasure if at the end of a investment period my portfolio value has shrunk. Might as well leave the $$ in the bank. Hence, my mantra has always been "do whatever it takes (sell or buy)" to make it grow, albeit a small small marginal growth in a bear year will ensure that it wasn't pointless for my $$ to leave the bank :lol: .
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Re: Mutual Funds

Postby chaibu » Mon Sep 08, 2008 8:34 pm

LenaHuat wrote:Hi MM

Hence, my mantra has always been "do whatever it takes (sell or buy)" to make it grow, albeit a small small marginal growth in a bear year will ensure that it wasn't pointless for my $$ to leave the bank :lol: .

This from an otiose housewife? I just wonder
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Re: Absolute vs Relative Return Funds

Postby la papillion » Tue Sep 09, 2008 12:41 am

Very interesting take on absolute and relative returns. Makes a lot of sense - we don't compare how much debt we have, so why should we be happy if we earn more than the index (usually the benchmark) when the index itself is giving -ve returns.
An investment operation is one which, upon thorough analysis promises safety of principal and an adequate return - Benjamin Graham
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Re: Absolute vs Relative Return Funds

Postby kennynah » Tue Sep 09, 2008 12:50 am

true....lose less (relative terms to index) is not winning...only absolute gains then consider win...
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Re: Absolute vs Relative Return

Postby Cheng » Sun Jan 03, 2010 12:49 pm

One of the lessons that I've learnt in 2009 is account size does matter.

Eg. Percentage returns in 2009:
Investor A: $20k account (50% return)
Investor B: $1 Million account (10% return)

Absolute returns:
A: $10k
B: $100k

A may be superior in % performance, but in reality the absolute return is not significant enough. One who earns 2K a month will be able to earn 10k in 5 months. A job is almost risk free unless unemployed. The effort put in between a job and an investment operation is debatable, which we shall not discuss here. The commission that A pays might also take up a meaningful % chunk of his account depending on how wide is the diversification.

B has an easier life. He need not stress about generating huge % returns because 10% return on his account per year is significant, assuming $8.3K per month for an individual is enough. Let me borrow this quote from a friend who sums it up better than me,

Most people don't talk about it but the larger the size of your account, the higher the probability of success. It provides you with "a margin for error" if your investment turns against you. With a small-sized account, you are often compelled to take risk unsuitable for your account size.



Money in a bigger account compounds faster. Even if you lose 20%, you still have $800k to live with. With a $20k account, how many lots of DBS or UOB can you buy? One is often restricted to stick to mid or small cap stocks.

Strategies used between A and B may also be different. A may want to seek maximum returns possible during the shortest time, but B might be looking to preserve capital instead.

As an investor I believe that we always take opportunity cost and other risk factors into account. If the returns from your job is higher than from your investments, why go for meagre returns on a small account? Save up for a bigger account, use money that you do not need in the near future and do not risk money in something you do not understand.

Happy investing all! Cheers! :D

Ohh...forgot to add in. The best investment that one would ever make in a lifetime might just be yourself. I think Warren Buffett mentioned before haha... :)

Cheng :D
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