Trustnet Alpha Manager Iain Stewart, whose Newton Real Return fund is the second best performing fund in the sector in last five years, believes that some Absolute Return funds are unsuitably risky: "There is a real mixture of objectives within the Absolute Return sector. Some funds target cash margins, whilst others are far more ambitious. Some are very quantitative, whilst others are more intuitive. There are funds out there that are equity funds in everything but name."
"It seems some funds are maybe trying to be too clever, and not protecting sufficiently against downside risks.
"We focus on good quality assets with an insulating layer of protection. We would expect our volatility to be somewhere between equities and bonds. Though some short periods of negative returns are always possible, in the middle to long term we look to guarantee positive returns. Other funds do not necessarily do this."
The fund has had positive returns every year since 2005, and is a top quartile performer over one and five year periods.
Financial Express data shows the huge range of returns for the best and worst performing funds in the sector. Newton Real Return has total returns of 24 per cent in the last three years, while City Financial UK Equity Income has made losses of -11.1 per cent, with a significantly higher rate of risk.
Source: Financial Express Analytics
Senior consultant at Insynergy Investment Management Bambos Hambi agreed that certain funds have suffered from poor management.
"A lack of experience and skill is leading to this wide discrepancy in performance. Being such a new sector, a lot of investment houses are handling it for the first time, and handling it badly. I feel some of these younger companies are giving Absolute Return a bad name, which is a shame," said Hambi.
However, Lothar Mentel, chief investment officer (CIO) at Octopus, believes that the ultimate problem lies in the IMA definition of Absolute Return.
Mentel said that the IMA is pitting funds with contrasting objectives and styles against each other, which is misleading investors.
"Of course, the underlying objective of any Absolute Return fund is producing positive return, but every fund operates with a different level of risk."
Data from Financial Express data shows that the Octopus Absolute UK Equity fund has made returns of -14.37 per cent in the last year, underperforming the sector average by 18.67 per cent.
Performance of fund over 1-yr
Source: Financial Express Analytics
However, the fund is a top quartile performer since its launch in March 2008, outperforming the sector average by more than 45 per cent despite its poor performance in the last 12 months.
Performance of fund over 2-yrs
Source: Financial Express Analytics
Mentel believes the fund is receiving unfair press: "At the moment we are being disqualified just because of our one year performance."
"We think the IMA should categorise the differing levels of risk with a three bucket system. In that way, funds who would accept 10 per cent losses over a year can be separated by more conservative funds, which look to avoid negative returns every year."
Sam Instone, chief executive officer of AES Financial Services, sympathises with Octopus.
"Absolute Return indicates a positive return regardless of market conditions and we now know that this is not the case. Any definition that ensures a clear and not misleading perception of performance, in line with a client's expectations should be an improvement on the current situation."