Understanding Absolute Return: A Comprehensive Guide

Most funds use holding period returns as their basis of comparison yet there are times when absolute return is a necessary tool for comparison. Absolute return is the return that is measured from inception to current date. It is the total return experienced by the fund, after subtracting any fees and taxes. Although holding period return is used most often in comparing funds, absolute return does have its advantage when it comes to mere simplicity.

Advantages

Let's assume a fifteen year old fund has an average annual rate of return equal to 7%. This fund can be compared to other funds with similar inception years, on an annual basis. However, when comparing funds with different inception dates the mode of comparison should resort to absolute returns to find out how well the fund has grown over its lifetime,. An average return can be misleading with young funds. 

Calculation

The absolute return is calculated by taking the sum total capital minus fees, taxes and any other liabilities. Then, you divide that number by the beginning capital sum, plus any fees and taxes. This quotient will result to the absolute return. This calculation is primarily used for rudimentary comparison for young funds.