Indeed, of those funds that have been around five years, barely half have had positive performance in that time, according to the Lipper database of absolute return funds.

Don't Let Me Be Misunderstood
And yet, despite the doubts, the absolute return idea has defenders both inside and outside the fund industry. Michael Abelson, the senior vice president of investments at Genworth Financial Wealth Management in Pleasant Hills, Calif., is a proponent of the concept, which Genworth uses as one in a number of strategies, employing the help of various outside mutual funds.

"As we define these strategies," he says, "they tend to have less correlation to stocks and bonds."

Gene Goldman, head of research at Cetera Financial Group in Los Angeles, says that after the tech bust in 2003 he was approached at a conference by an advisor sick of churning markets, and sentiment was gathering even back then for a product like this one that hit risk head on. "We do believe you want to have an absolute return strategy within your recommended fund list," Goldman says-something besides long-only managers parochially sticking to certain asset classes.
Still, Goldman concedes that there's lots to dislike about the category. Part of the problem, he says, is that investors move into these products too late-usually after a crisis, when they are likely going to miss big returns in the traditional "relative return" funds. Rather than dollar-cost averaging into them, people are likely buying in a panic when the market swoons-zigging when the market is zagging-"especially if you look at post-2008. A lot of absolute return funds were created after the 2008 period," he says.

Besides that, he adds, many of them are vague and hard to analyze, since a lot of them use derivatives. "You're not sure about the experience of the underlying management teams. They also tend to trade a lot, so you've got capital gains potential." And despite their vaunted diversification promises, many of them are highly correlated to the stock market anyway, Goldman notes.

And none of that takes into consideration their high expense ratios. A brief glimpse across Morningstar's universe shows that the 36 funds carrying the absolute return name, with few happy exceptions, often charge expense ratios north of 1%. More than half charge north of 1.5%, and in extreme cases more than 2%. That eats into returns that are already pretty unambitious.

Fund Approaches
Given the variety of approaches, maybe it's not surprising that Eaton Vance, an early entrant into this category, has five funds and four wholly different absolute return styles itself. Says Brad Godfrey, a company vice president and institutional portfolio specialist, "We have a pretty substantial lineup, including one that has been run since 1997. It's definitely an important part of our business here."

Godfrey names two reasons such funds are important: one is all the volatility in the market since 2008, and rising correlations between other securities. The other is that the market's response to the financial crisis has been to bid up safe assets, so the yield from a 10-year Treasury is not attractive-only 1.5% or so. And with inflation at long-term averages of 2.5% to 3%, he says, "now all of a sudden you're looking at negative real yield-or yields adjusted for inflation-across the U.S. Treasury yield curve to 20 years." This isn't to mention the risk bonds face if interest rates rise, in which case "safe" Treasurys are liable to get creamed.

One of the company's approaches is a global macro strategy it pursues in two funds. Gene Goldman says his firm Cetera holds this fund and likes it. "This fund focuses more on a global macro perspective," Goldman says, "also looking at the political environment. I think this is a great way of increasing diversification within an equity portfolio, because most equity long-only managers tend to be very bottom up. [The Eaton Vance fund focuses] on earnings growth, they focus on revenue growth. We want a manager that's doing something opposite to what the bond managers are doing."

Eaton Vance also has a multi-strategy absolute return fund that makes tactical allocation choices, seeking to reduce risk exposure but also find alpha in a variety of securities. And there is a strategy that Godfrey calls an arbitrage approach to S&P 500 options.