Personal Finance & Money Asked by Mickeoew on April 21, 2021
I heard somebody describe a hedge fund as a "total return fund", as opposed to a standard mutual fund.
I don’t understand what "total return" is supposed to mean in this context. I understand that hedge funds use leverage, derivatives, short-selling, and a lot of other fancy stuff to beat the market.
But I still don’t understand what they meant by calling it a "total return fund". What does total return mean in this context? And why is a regular mutual fund not a "total return"-fund?
I understand a total return fund / absolute return fund to be one that doesn’t measure itself against a benchmark. It doesn’t aim to, say, ‘beat the S&P performance’. Instead, it just aims to increase your investment.
In a downturn, a relative-return fund might beat its index and still lose you money. Of course, a total return can lose you money as well - they’re just not supposed to dress it up as ‘we did better than XYZ index’.
In practice, total return funds I’ve seen tend to work various angles - long, short, equities, bonds, etc. They aim to make a profit regardless of the market condition (albeit not always successfully).
Absolute return is simply whatever an asset or portfolio returned over a certain period. Relative return, on the other hand, is the difference between the absolute return and the performance of the market (or other similar investments), which is gauged by a benchmark, or index, such as the S&P 500. Relative return is also called alpha. - Investopedia
Correct answer by Lawrence on April 21, 2021
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