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When absolute return is right

Disclaimer: The views and opinions expressed in the vapa Swiss independent wealth management blog posts featured on this page are solely my own and do not necessarily represent the views of any institutions or organisations I may be associated with. These posts are intended to share personal insights and perspectives and should not be interpreted as official statements or positions of any affiliated entities.

Stress is a constant companion in the fast-paced relationship management world, and burnout is an all-too-frequent occurrence. The relentless pressure to perform and deliver results is ever-present, with expectations of sustained success from higher-ups. It’s hardly surprising that many relationship managers find it challenging to detach from their work, leaving them struggling to strike a harmonious balance between their professional and personal lives.

So, what investment strategy provides peace of mind in these turbulent times? Enter the “absolute return” approach. While you might be familiar with the term, have you honestly considered its fundamental principles, benefits, and applicability? It’s high time for a closer look.

Understanding Portfolio Strategies: Relative vs. Absolute Returns

If you’re a portfolio manager, your primary focus is likely on achieving “relative returns” rather than “absolute returns.” This entails striving to outperform a benchmark index or a specific market segment. You actively oversee a portfolio of assets that mirrors your chosen benchmark, aiming to surpass it through strategic adjustments, such as altering asset weights and employing various active management techniques.

Conversely, an “absolute return strategy” is designed to generate positive returns regardless of prevailing market conditions. This involves diversifying investments across various asset classes, including equities, fixed-income securities, commodities, currencies, and derivatives. The ultimate aim is to achieve favourable returns over a specified period, irrespective of whether the broader market is up or down.

Another key distinction lies in their risk management approaches. In an absolute return strategy, the primary focus is on minimizing downside risk. It prioritizes capital preservation and aims for consistent performance across various market environments. Conversely, the relative return approach manages risk differently. It strives to outperform a benchmark or specific market segment while adhering to predefined risk parameters.

To summarise, both strategies entail active management and risk mitigation, but they diverge significantly in their ultimate objectives and methodologies for attaining those goals. Explore the “absolute return” approach to enhance your financial portfolio’s resilience and potential for success.

Source: LinkedIn (partially)

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Illustration of a scale with "Absolute Return" on one side and "Relative Return" on the other, symbolizing the choice between the two investment strategies.

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