abs return

What Is Absolute Return?

Absolute return refers to an investment approach focused on steadily increasing account net value, rather than aiming to “beat the index.” The goal is to achieve positive returns across various market conditions—including rising, falling, or sideways trends.

In the crypto market, this strategy is typically implemented using multiple tools: hedging to reduce directional price risk, earning interest from stablecoins and lending, seeking low-correlation arbitrage opportunities through funding rates and basis trades, and managing volatility and drawdowns with strict risk controls.

Why Is Absolute Return Important in Crypto Markets?

Absolute return is crucial in crypto markets due to the high volatility and rapid changes in asset prices. Simply “predicting the right direction” is rarely sustainable. By focusing on stable and repeatable sources of yield, investors can smooth out their net value throughout different market cycles.

Additionally, there are a wide range of trading instruments available—such as perpetual contracts, lending protocols, and structured products—which enable effective hedging and arbitrage. The stablecoin ecosystem also provides a low-volatility base asset. These factors make absolute return strategies particularly practical in crypto.

Common Absolute Return Strategies

Absolute return strategies generally fall into three categories: hedging, spread/arbitrage, and product-based approaches.

• Hedging: This involves taking offsetting positions to neutralize price volatility, such as combining spot purchases with short positions in derivatives. Think of “hedging” as pulling a rope from both ends to maintain balance, keeping net exposure stable.
• Spread/Arbitrage: This exploits price or fee differences between markets or instruments, such as funding rates, spot-futures basis, or interest rate differentials across platforms. Funding rates are periodic payments between long and short positions in perpetual contracts; basis is the difference between futures and spot prices.
• Product-Based: This involves earning relatively fixed or range-bound returns from platform-offered products like conservative structured notes, fixed-term investments, or quantitative strategies—usually with built-in risk controls and yield caps.

How Does Absolute Return Hedge Using Spot and Derivatives?

Absolute return can be achieved by constructing a near-neutral (non-directional) portfolio using spot plus derivatives. Perpetual contracts are derivatives with no expiry, designed to keep prices close to spot via funding rates.

Step 1: Choose the asset and position size. Buy spot (e.g., using USDT or other stablecoins) for your target asset as the base holding.

Step 2: Open a hedge position by shorting an equal notional amount in perpetual contracts. The short offsets the spot’s price movement, making the overall portfolio less sensitive to market direction.

Step 3: Monitor fees and yield sources. Net returns mainly come from funding rates, market-maker spreads, or product interest—while directional price impact is reduced. Continuously track funding rate changes.

Step 4: Implement risk controls. Set margin ratios, liquidation alerts, and adjust positions as needed; reduce exposure or exit temporarily during high volatility to avoid margin risk.

Key risks include negative funding rates (increasing costs), imperfect hedging during extreme moves, accumulated fees/slippage, and execution delays.

Can Absolute Return Be Generated Through Funding Rates and Basis?

Absolute return can be generated through funding rates and basis trades, but requires strict management of directionality, leverage, and costs.

• Funding Rate: When funding rates are positive and stable (longs pay shorts), holding spot while shorting perpetual contracts can yield net income; the opposite direction requires careful cost assessment. Funding rates shift frequently with market sentiment, so long-term stability cannot be assumed.

• Basis: When futures prices trade above spot (positive basis) and remain stable, a “cash-and-carry” strategy—longing spot and shorting futures/perpetuals—may generate yield. If the basis converges, profit is realized; if it widens or reverses, losses may occur. Basis is driven by supply-demand dynamics and market sentiment; sustainability is not guaranteed.

Key operational steps:

Step 1: Calculate expected annualized returns based on historical ranges for funding rates/basis, factoring in fees and borrowing costs.

Step 2: Control leverage by maintaining adequate margin and risk buffers to avoid forced liquidation from short-term volatility.

Step 3: Actively review strategy; if funding rates or basis deviate from historical ranges, reduce exposure or take profits/cut losses promptly.

How to Achieve Stable Absolute Return in DeFi?

In DeFi, absolute return can be earned from stablecoin lending, providing liquidity as an LP, or participating in structured vaults. However, it’s important to understand “impermanent loss”—the potential loss faced by LPs when the value of two tokens in a pool diverges.

Safer approaches often begin with stablecoins:

• Stablecoin Lending: Lend USDT or other stablecoins to earn interest; main risks include rate fluctuations, collateral liquidation, and protocol security.
• Stablecoin Pool LP: Provide liquidity to pools consisting of two or single stablecoins—fees are relatively steady but pay attention to pool depth and protocol risks.
• Structured Vaults: Use strategy-based vaults for range-bound returns; verify transparency, smart contract audits, and custody mechanisms.

Risk warning: DeFi involves risks such as smart contract vulnerabilities, oracle failures, stablecoin de-pegging, and sudden liquidity drops. Diversify platforms and strategies; set withdrawal limits and controls.

What Tools for Absolute Return Are Available on Gate?

On centralized platforms like Gate, investors can utilize multiple tools for absolute return strategies:

• Earn Products: Includes fixed-term and flexible savings and strategy portfolios—ideal for interest-bearing returns using stablecoins. Always review product terms and redemption options.
• Structured Products: Offer range-bound yields or principal-protected options with capped returns; suited for users with clear risk preferences.
• Quantitative Strategies: Options like grid trading or TWAP (time-weighted average price), often combined with hedging to reduce directional exposure. Consider trading fees and slippage when setting parameters.
• Derivative Tools: Access to perpetual contracts and margin management enables neutral strategies when combined with spot holdings—always set risk limits and liquidation alerts.

Before using any product or strategy, read risk disclosures and fee details; start with small test allocations before scaling up.

How to Assess Risk and Drawdown in Absolute Return?

Evaluating absolute return means looking beyond just yield—you must consider volatility and drawdown as well. Drawdown measures how much net value falls from its peak and indicates potential losses during adverse periods.

Key dimensions to self-assess:

• Volatility: Is the net value curve smooth or subject to sharp swings?
• Maximum Drawdown: What was the deepest historical drop?
• Yield Sources: Are returns from fees, interest, spreads or directional bets—and are these sources sustainable?
• Costs & Liquidity: Factor in trading fees, borrowing costs, slippage, withdrawal speed.
• Extreme Scenarios: Can the strategy withstand violent market moves, liquidity crunches, or sudden funding rate reversals?

What’s the Difference Between Absolute and Relative Return?

Absolute return focuses solely on growing net value without comparison to benchmarks; relative return aims to “outperform an index,” meaning even if your net value declines, you’re doing “better” if you lose less than the benchmark.

In crypto markets, if you prioritize stable equity curves and drawdown control, absolute return better suits your needs; if your goal is “beating the market,” relative return is preferable. They’re not mutually exclusive—many portfolios balance both at different times.

Key Points & Next Steps for Absolute Return

The essence of absolute return is minimizing directional exposure using hedging and arbitrage techniques, building repeatable yield streams around stablecoins and diverse instruments, and enforcing strict risk controls to limit drawdowns. Given crypto’s abundance of tools and high volatility, a systematic approach is essential: start small with trial runs, clarify fee/risk boundaries, then scale up gradually.

Next steps start simple—use stablecoins as your base asset, experiment with low-leverage “spot + derivative” hedges or conservative Earn products, track risk/drawdown history; once you’re comfortable with funding rates, basis trades, and liquidity dynamics, explore more advanced arbitrage or structured strategies. At every stage, prioritize safety and robust risk management.

FAQ

Are Absolute Return Strategies Risky? Can I Lose Money?

Absolute return seeks positive yield but isn’t risk-free. Main risks include hedging breakdowns (especially during extreme volatility), liquidity issues (difficulty closing positions), and operational mistakes (misuse of leverage). Start small to test strategies, set stop-loss levels, avoid excessive leverage, and routinely check that your hedge positions remain effective.

Can Beginners Use Absolute Return Strategies?

Yes—but proceed gradually. Beginners should start with simple tactics like currency hedges (holding spot plus shorts) or funding rate arbitrage; avoid complex multi-leg hedges initially. Gate offers demo trading features so you can practice with virtual funds before risking real capital—focus on learning risk management first.

What Is the Typical Annual Yield for Absolute Return Strategies?

Stable absolute return strategies usually offer annualized yields between 8%–20%, depending on market conditions and strategy type. Funding rate arbitrage tends to be steadier but lower (5%–15% annualized), while hedging-based strategies may earn higher returns during volatility but require stronger risk controls. Prioritize risk-adjusted returns over chasing high headline yields.

How Do Absolute Return Strategies Differ from Fixed-Term Savings Products?

Fixed-term savings are passive products offering preset yields (e.g., 3% per annum); absolute return strategies are actively managed approaches leveraging hedging/arbitrage for yield generation. Absolute return requires more hands-on management and risk control but offers greater upside potential; fixed savings have lower barriers but fixed returns. For those with time/expertise, absolute return better suits crypto’s volatile nature.

How Much Capital Do I Need to Start Absolute Return Strategies?

On Gate, you can begin absolute return strategies from around $100 (e.g., funding rate arbitrage). However, starting with $1,000+ is recommended—it covers trading fees/slippage/risk buffer and allows more effective strategy testing. Larger capital makes it easier to access deeper liquidity and improve hedge efficiency.