A relative return is the return that an asset achieves over a period of time compared to a benchmark. The relative return is the difference between the absolute return achieved by the asset and the return achieved by the benchmark.
Relative Return Objective. Relative returns can also refer to an investor’s objective. These investors measure their success in terms of whether they track or outperform a market benchmark or index.
Relative Return as a Strategy. As a strategy, relative returns are typically market-based returns as opposed to skill-based returns. Since a relative return strategy seeks to closely track, but perhaps outperform, and index, it may not stay too far from its benchmark which is referred to as tracking error. Most investment managers and mutual funds are relative return strategies. These managers typically remain fully invested in the market at all times since their objective is to beat the benchmark while also mostly tracking it. That is, if their benchmark is the S&P 500 Index and that index has declined -56%, a fund manager whose losses was -50% would have met his objective.
Shell Capital Management’s investment program has an absolute return objective and the firm uses various price-based strategies to toward that end. At Shell Capital, we aren’t concerned with relative returns and don’t believe beating an arbitrary benchmark is relevant to ones objectives. That is especially true when we speak of the stock indexes that from 2000 – 2010 made zero return yet had losses greater than 50% twice. We believe strategies focused on beating benchmarks are a fad within the evolution of investment management and believe the new paradigm is absolute returns. Further, we believe many investors who say their objective was to “beat the market” may either have violent tendencies and the need to “beat something” or maybe they were poor at sports so this is another attempt for them to prove something. However, “the market” isn’t a benchmark, it’s a collection people with the desire to buy and sell. If you really want to outperform an index over a full market cycle, as we have materially, we suggest that you focus on real returns, not relative.