"That particular strategy is all on the S&P 500," Godfrey says, "So we sell options, we sell a call and sell a put out of the money, and basically the funds earn the premium income that you earn from selling those and then we sort of risk-manage the strategy. It buys back a call and a put further out of the money, and so you basically cap your loss on that position and you basically hope the options expire worthless and you keep the premium income. Over time, we sort of do that on a small piece of the portfolio every few days, but we stagger the dates and so the strategy basically resets itself to market levels."

The firm also has a market neutral strategy. But why are these better than investing in Treasurys? "A few very important components to any absolute return strategy is that one, you don't have a stated benchmark. ... In addition to the market-based benchmark, it's important that you have the ability to short. If you're able to isolate exposures by investing long in one asset class and short in another, that really gives you more flexibility and sets you up for a better chance of success."

Putnam Investments in Boston formally christened its absolute return array for advisors and retail investors in early 2009 after enjoying some success with the strategy in the institutional space. To Jeffrey Knight, the head of global asset allocation at Putnam, the need was apparent because there seemed to be no middle ground risk level between the safety of cash and the high standard deviations of other assets.

"We thought the world was changing," Knight says. "Tethering yourself tightly to the market was a recipe for low returns and high variability." He says that the problem with comparing these funds to benchmarks is that people are measuring alpha, not risk.

"Morningstar has no expertise in this area, and I'm not surprised they can't make any sense of it," says Knight. "The whole point of this approach is that it doesn't fit squarely alongside an existing roster of investments."

Knight says these funds require a different battery of metrics to observe-ones that focus on the confluence of risk and reward. "We need to develop statistics that allow for reasonable inference about whether you're doing any good. First it would have to be the Sharpe ratio," he says. "It does come down to comparing your performance to cash, but the goal of the absolute return investor it seems to me is to deliver positive return over cash as efficiently as possible. So we want to compare the excess return to cash to the volatility taken to generate that excess return."

Putnam's four funds, the 100, 300, 500 and 700, take slightly different approaches. The first two ply their trade only in fixed income while the 500 and 700 funds can invest in global equities in addition to mortgage backed securities, junk bonds, commodities, REITs and credit replication indexes. "We have to think about the portfolio holistically, so it's not just the characteristics of an individual holding but also the way that individual holdings will interact with other parts of the strategy," Knight says.

What about the criticism that everybody would strive for 700 basis point returns, which makes the Putnam categories look like marketing schemes? Knight says that the focus should be on the risk the investors are taking, not returns.

"The returns obviously are not guaranteed; they're targeted returns," he says. "So there is a spectrum across which the risks go hand in hand with the targeted return. The reason why we picked 100, 300, 500 and 700 is because those are the excess returns that in long history corresponded to the neighborhoods of risk appetite."

Godfrey and Knight both say the entire category should be judged on the risk side of the equation first. "You can get into increasingly elegant versions of downside risk metrics," says Knight, but he thinks the important ones to look at are "those that focus on how often and how severely do you lose my money, and the third is comparing upside capture to downside capture."