Absolute Return Index - Explained
What is an Absolute Return Index?
Written by J. Mance Gordon
Updated at April 23rd, 2024
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What is an Absolute Return Index?
An absolute return index refers to an indicator (index) in the stock market that is designed to measure absolute returns on investments. It is a statistical measure of absolute returns accrued by investments over a period of time. This index is a composite index that comprises of five indexes. The absolute return index was basically designed for hedge funds, it is for the purpose of comparing the performance of hedge funds as they individually operate in the stock market. This means that an individual hedge fund is compared with other hedge funds in the market in terms of performance.
How does an Absolute Return Index Work?
Hedge funds are funds pooled from accredited investors and invested in various assets in the market. Usually, hedge fund managers devised strategies that help them generate earnings and returns for investors. The profits earned by a hedge fund of the losses incurred over a period of time in the stock market is the absolute return. The absolute return index on the other hand, compares the performance of one hedge fund to its peers in the stock market. The performance is measured in terms of profit and losses that can be attributed to the hedge funds. With the absolute return index, the successes and failures of investments of a particular hedge fund when compared to other hedge funds in the stock market.
Additional Metrics to Absolute Return Index
Absolute return index serve as the benchmark for the performance of many hedge funds, there are however other metrics used by hedge funds in relation to how they perform in the stock market. For instance, some hedge funds rely on certain performance standards while some have specific goals and targets they want to achieve. A hedge fund manager can set a return rate he is expecting from an investment based on the type of investment. A hedge fund that invests in real estate or bonds will not expect the same rate of return like a hedge fund invested a foreign investment. Other metrics that are important when measuring the performance of the fund include the capital available for investment, nature of investments and risks entailed, among others.