Asness continues to explain that absolute return is designed "to make you money on average and [act as] a very good diversifier." It's not risk-free, but it does reduce portfolio risk by "moving independently of the overall market."

Although the absolute return concept came out of the hedge fund world, advisors might be surprised that many of these vehicles set their performance bars relatively low and don't try to shoot the lights out. Single-digit return targets are common, and some funds claim they try to beat short-term Treasurys by a modest 100 or 300 basis points.

More than a few of these strategies emerged out of academic research. AQR's Diversified Arbitrage Fund is managed by Mark Mitchell and Todd Pulvino, two finance professors who have taught at the University of Chicago, Harvard Business School and Northwestern. They spent years in the 1990s building a merger and acquisition database that tracked every public deal going back to 1963, and they included deals that failed to be consummated. After completing the database in 2001, they hooked up with AQR to pursue merger arbitrage strategies in a joint venture called CNH. They also started building a convertible bond database.

Unlike The Merger Fund, which focuses largely on investing in public mergers, AQR's Diversified Arbitrage Fund has the flexibility to go into other arenas besides M&A and convertible bonds. It can invest in SPACs (or Special Purpose Acquisition Companies), and also can arbitrage closed-end funds when their prices swing to a premium or discount to their net asset values. From time to time, it even engages in dual class stock arbitrage.

This flexibility allows the fund to move money around during when, say the M&A business or convertible bond business comes to a standstill, as both markets did late 2008. Since the fund was launched on January 15, it has garnered over $150 million in assets and returned 8% as of October 31. Its goal is to be 100% hedged to systematic equity and credit risk, which makes it both a market-neutral and an absolute return fund. It hedges both "equity and credit market risk out of the portfolio, since our investors are looking for uncorrelated returns," an AQR official says.

The fund has achieved a Sharpe ratio of 2.1, which appeals to advisors. Harold Evensky, CEO of Evensky & Katz in Coral Gables, Fla., says he has started using the fund because of its risk-adjusted return numbers and the fact that "it doesn't seem to be correlated to anything else we can find."

Since the financial crisis erupted into a full-blown meltdown in the summer of 2008, the correlation landscape changed radically, with liquidity serving as the driving external force from which most financial asset prices are taking their cues. Many classes of "debt traded like equities," notes Jeff Knight, who heads up two absolute return strategies at Putnam Investments and serves as chief investment officer for global asset allocation. Everything was trading together and the markets became all "one big call option on the liquidity cycle. This year it continued but it all went the other way."

Knight runs Putnam's 700 and 500 absolute return funds, which respectively attempt to give investors returns of 7% and 5% above inflation over a three-year period. Faced with compelling investment opportunities almost everywhere at the start of 2009, Knight tried to find the safest way to beat inflation by 7%.

That led to three opportunities early in the year, starting with the broken credit markets. "Any non-Treasury bond was very cheap and oversold, but many were creditworthy," Knight recalls. Suspecting the bond market would have to show signs of healing before the equity markets could mount a recovery, he targeted fixed-income securities first.

Knight also anticipated that the record level of volatility pervasive in the equity market in late 2008 and early 2009 was unsustainable. Betting that the roller coaster would ultimately slow down, Putnam's 700 absolute return fund sold a lot of call and put options "because implied volatility was too high."