Can Absolute Return Funds Hit Their Targets?

NEW YORK (TheStreet) -- Absolute return funds aim to deliver competitive results in good times and bad. But many of the funds suffered painful declines in 2011, a year when the S&P 500 gained 2.1%. Among the losers was American Independence Absolute Return Bull Bear Bond(AABBX) , which dropped 9.3%, according to Morningstar. Funds that lost more than 3% included Absolute Opportunities(AOFOX) and Quaker Akros Absolute Return (AARFX) .

Should you stay away from the funds because of one bad year? Some analysts think so. They argue that absolute return funds are only worthwhile if the managers can deliver consistently positive results. But portfolio managers counter that 2011 was an unusual year when volatile markets whipsawed all kinds of strategies. The managers say that they can produce competitive results over a market cycle of three to five years.

Plenty of investors have been siding with the fund managers. Although most absolute return funds have been operating for less than two years, the group already has $11 billion in assets. For shareholders, the funds appear to be vehicles that can cope with difficult markets.

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Absolute return investments follow a variety of strategies, but they are all fundamentally different from conventional mutual funds. Conventional funds aim to outdo a benchmark such as the S&P 500. Managers consider themselves successful if they lose less than the benchmark in downturns. In contrast, absolute return funds claim that they avoid tracking benchmarks. The funds can sell short or use other techniques so that shareholders don't necessarily lose money when markets sink.