At Morningstar's annual conference earlier this year, the firm's research director Don Phillips asked Vanguard Group founder John Bogle what he thought of the rising popularity of absolute return funds.

"Absolutely not," Bogle groused.

Purists recoil viscerally at the term "absolute return," voicing suspicion that it subliminally imparts a message to investors that they can earn equity market-like returns with little or no risk. Those who want to limit their risk should limit their positions to assets like equities and commodities, as well as long-term and low-grade bonds, they argue.

Confronted with razor-thin yields on risk-free instruments like short-term Treasurys, many advisors and their retired clients find those arguments impractical. So it's not surprising that a smorgasbord of strategies using the absolute return name, strategies that have been employed in the pension and hedge fund worlds for several decades, are sprouting up in the advisor space. Two 50% freefalls in equity prices in the last decade have conditioned investors of all stripes to look hard at vehicles claiming to offer some form of downside protection.

Investment companies like AQR, Putnam Investments and Rydex SGI all have introduced variants of the strategy for advisors and their clients. Some advisors like Legend Financial's Lou Stanasolovich, Financial Advantage's J. Michael Martin and Levitt Capital's Robert Levitt, have created their own alternative strategies.

What, exactly, does absolute return mean? Putnam CEO Robert Reynolds defines it as an "all-weather" strategy that is "totally uncorrelated to relative return products." Large institutions and wealthy institutions, he adds, have been investing 25% to 50% of their assets in such styles.

Reynolds believes these funds could capture 20% of all mutual fund assets, as aging baby boomers enter retirement. "You don't have to go to all bonds in retirement, which raises the risk of longevity, or outliving your money," he adds.

Implicit in the absolute return mantra is capital preservation, but that doesn't mean managers believe positive-or uncorrelated
returns-are certain. In the stress-filled second half of 2008, many absolute return hedge funds saw their betas climb from their 0.2 targets to the 0.8 area. This included market-neutral funds, a subset of the absolute return universe, which aim for a zero beta. Few of these vehicles wound up in positive territory last year, though most limited their losses to less than 20%.

What the 2008 experience exposed was the pitfalls of the investment management industry's obsession with relative returns. Suddenly, beating the S&P 500 Index by 10% wasn't worth trumpeting.

AQR's CEO Cliff Asness describes absolute return as an attempt "to generate positive average return that is uncorrelated with the major traditional markets. It's not that you make money all the time. That type of investment never exists."

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