• »

Generating absolute returns is all about insurance and minimizing risk. In doing so, investors may sacrifice a bit of upside, but they will in all probability miss out on any significant downside, thus the attraction.

At the start of this year with all heck breaking loose, the only rational approach for investors was to mitigate risk. Only a crazy person would look at the landscape and throw caution to the wind by following a long-only approach to the market.

Sure, in hindsight, selling stocks short or hedging a portfolio looks like a bad idea, but that’s not necessarily true. Even though stocks have generally increased in value this year, there is a segment of the market that has lagged.

More importantly, with stocks down significantly during the first two months of the year, an actively-managed absolute return portfolio, whereby stocks sold short at the beginning of the year and then later covered, would help boost returns.

NEXT – Why Hedging Our Bets Has Worked