Relative return is a measure of the return of an investment compared to a benchmark or a market index. It shows how much an investment has gained or lost relative to its benchmark. This metric is used in evaluating the performance of managed funds, particularly in active management, where the goal is often to outperform a specific benchmark.
A positive relative return indicates that the investment has outperformed its benchmark, while a negative relative return suggests underperformance. This measure helps investors assess the effectiveness of a fund manager or the investment strategy in generating excess returns over the market or the chosen benchmark.
While relative return is a valuable tool for comparing performance, it's important to consider it in the context of risk, fees and investment objectives. Investors should also be aware that benchmarks vary and the choice of benchmark significantly impacts the relative return. Therefore, understanding the benchmark and its alignment with the investment strategy is key when using relative return for decision-making.
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