Absolute return investing is an important way to control risk but the concept needs to be carefully defined. It typically refers to an investment that allows the manager to go both long and short in order to reduce overall risk and potentially provide positive returns in both rising and falling markets. The chosen benchmark is often a cash return or inflation plus a set percentage.

The adoption of cash or inflation-related returns as ‘benchmarks’ for alternative investments is one of the biggest setbacks in history. Such measures are poor benchmarks because they do not reflect the risks in the fund under scrutiny. If a benchmark has a different risk profile from the absolute return fund an investor is comparing it to, how can he or she draw any conclusions about how much value is being added?