Finally, Knight tried to position the fund to capitalize on the inevitable rebound in stocks. Although the 700 fund's equity allocation reached 18% in late March and has no explicit cap on stocks, Knight saw no reason to go a lot higher.

What's significant is that pure absolute return investors couldn't care less if they didn't keep up with the roaring bull market of the last six months. "We are 4% above our return targets," Knight observed in late October. "With a 12% equity allocation, we could hit our [2009] targets even if there was a 25% correction in stocks [in the fourth quarter]."

Few firms are as explicit as Putnam in terms of stating their target returns. Knight says there is nothing to stop the 700 fund from investing as much as 50% or 60% of its assets in equities; he just sees no reason to reach for return in the current environment.
It's hard to understate the willingness of absolute return practitioners to untie themselves from the relative performance trap.
"True diversification can't just be different flavors of equities," declares David Wright, manager of the Sierra Core Retirement Fund.

Wright, whose fund fell 3.3% in 2008, maintains every investment must satisfy one of two goals: Either it must protect shareholders when storm clouds hit, or it must help the fund deliver 8% to 10% annually. That's not always easy.

Correlations are converging. Commodities used to have almost zero correlation to the S&P 500; now it's close to 0.7.
This exacerbates the challenge facing advisors. "It's going to be hard to put together a traditional asset allocation pie-chart strategy that does better than 5% or 6%," Wright contends.

Wright's Sierra fund uses computer programs to monitor and update its stop losses daily. Other advisors in the absolute return space, like Legend's Stanasolovich and Don Schreiber in Red Bank, N.J., also employ them.

When investments have gains, absolute return managers want to protect them and don't mind booking a small profit, or a large one. Financial Advantage's Martin has clients invested in medical software manufacturer Cerner, which has soared from the $30-a-share range to more than $80 this year, so he's lightened up on it.

The proliferation of absolute return vehicles for advisors is striking a chord. In addition to AQR's $150 million in assets in less than nine months, Putnam's four strategies captured a total of $700 million so far this year.

Still, a handful of advisors are taking it upon themselves to devise their variants on the strategy. Few are more ambitious than Robert Levitt, chief investment officer of Levitt Capital Management in Boca Raton, Fla. Several years ago, he concluded that the best investment opportunities were abroad and moved to the French Riviera, which he uses as a base to scour the globe for the $450 million in client assets he manages.

We caught up with Levitt in Kuala Lumpur, Malaysia, where he was on a research trip as he pursues a thematic, global absolute return strategy. These themes include growing affluence in the developing world, an aging population, growing agricultural needs, technology and urbanization. Levitt's return goals are somewhat more ambitious, as he targets a three-year average return in the low teens.