A hedge fund that aims to generate a stable return regardless of market performance. In other words, it is designed to deliver positive returns in all market conditions, with low volatility. In essence, fund managers need to get rid of all market risk in order to isolate their funds from market fluctuations. If the market risk is neutralized, the fund performance would depend solely on the manager’s skill (i.e., alpha factor). This type of fund particularly addresses the needs of conservative investors who are typically concerned with risk reduction even if they would sacrifice some return (upside potential). Like fixed-income instruments, absolute-return funds generate fixed income, i.e., relatively steady but relatively low returns. A typical income target of these funds ranges between 8 and 10 percent (it is usually above the long-term rate of return on bonds and below the long-term rate of return on stocks).

Absolute return funds are also called pure-alpha funds or non-directional funds.