Dear Alpha Mail Subscriber:
"Absolute returns." No term has caused so much excitement, and yet so much confusion. As a result, the hedge fund industry has a veritable love/hate relationship with absolute returns. When returns are positive, the term suggests that the plus signs will remain forever. When returns are negative, "absolute return managers" eat crow.
But what is the time frame used to measure absolute returns? Must they be positive every month? Every year? How about every two years? According to many widely-watched indices, hedge funds surpassed their high-water mark this September with a barnburner of a return in the 3.5% range.
The fact is that a calendar year is a totally arbitrary timeframe that has more to do with the phases of the sun and moon than the needs of investors. Those who charge that hedge funds failed in their objective to produce absolute returns when they posted minus signs in 2008 might be interested to learn that the current trailing biannual returns of hedge funds are actually all positive (using HFRI data). Yes, hedge funds have never had a down-biennium. They have produced absolute returns every biennium since indices began.
If a trailing two-year window beginning September 30, 2010 sounds like an over-engineered example, consider the equally arbitrary nature of a trailing one-year window beginning, say, December 31, 2008 the one used by critics who lambasted the industry, for its negative 20% returns that year.
The bottom line is that the hedge fund industry's previous high-water mark was still damp when the rising tide of September 2010 elevated everyone's boat.
