Absolute funds have other disadvantages: Because most trade so often, any gains tend to trigger higher capital gains rates. Fees can also be higher than usual. According to Bloomberg data, the expense ratios for absolute return funds can vary from less than 1% to almost 3%, though Morningstar's Papagiannis predicts expense ratios will decline with time.
Some advisors maintain absolute return funds aren't worth the effort it takes to evaluate them and fit them into a portfolio plan. Robert Schmansky, founder of Clear Financial Advisors, says that if investors' goal is to reduce volatility in a portfolio, they should stick with proven investments like bonds. For example, Treasuries can be bought and structured in a way that they provide a guaranteed income stream much like an annuity, he notes-a technique called "laddering," in which investors buy bonds with varying maturities that correspond to when they will need cash flow. "After the fees and costs of these [absolute return] funds," says Schmansky, "there are better options out there that have more of a track record."