"The sector is a mixed bag, so investors should mind where they look, but Absolute Return funds can provide good returns as part of a cautious portfolio," he says.
The manager uses Threadneedle's Absolute Return Bond, BlackRock's UK Absolute Alpha, and Standard Life Global Absolute Return Strategies funds as part of his portfolio.
In the past 12 months, only the Standard Life fund outperformed the IMA Absolute Return sector in the year to 2 June, returning 19.7 per cent compared to 4.8 per cent from the sector.
Over the past month, though, where volatility has been higher, all three gave more to investors than the sector.
Performance of funds over 1-mth
Source: Financial Express Analytics
The Greek debt crisis, Spain's downgrade, the UK election, and the BP oil spill have made for a rocky few months on the FTSE.
Performance of the FTSE All Share vs CBOE SPX Volatility Vix index
Source: Financial Express Analytics
The above chart shows the VIX index, which measures volatility, compared to the FTSE in the month to 2 June.
Tam McVie, investment director at Standard Life, says the Global Absolute Return Strategies fund does have a higher volatility than the Absolute Return sector – 5 per cent over one year, compared to 4 per cent – but that the diversification of the fund has helped it navigate the recent volatile short term markets.
"The standard deviation of our fund tends to be higher than long/short funds, but risk is actually lessened by the diversification of our strategies," he says.
"The events of the past couple of months demonstrate that there are still big macro issues to work through in the economy, and we are in for a choppy recovery. We have noted this for a long time, and by taking advantage of this, for example going short on the euro, we have been able to make money in volatile markets," he says.
Investment manager GAM has seen the most absolute return inflows so far this year, as well as being the leading provider of absolute return in Europe, by assets under management (AUM).
"People are excited about Absolute Returns, and this is an active manager's market. The more active you are [in volatile periods], the more scope there is for some interesting non-equity correlated returns. A fund manager who is unconstrained has the power to return when equities could go sideways – as they look set to do," Matthew Lamb, head of mutual funds (UK) at GAM, says.
The manager adds that the Absolute Return sector has the capacity to explode in size as more and more hedge funds move into UCITS III space.
Lamb points to the Gam Star Keynes Quantitative Strategies fund, an offshore mutual, as one which fares well in volatile markets.
"Long/short funds tend to have a lot of correlation to equities, so don’t do so well in volatile markets, whereas those with macro strategies, such as the Star Keynes fund, benefit because they are less correlated," he says.
This difference in approach is highlighted by IFAs and managers alike as something investors need to understand. For example, the Octopus Absolute UK Equity fund lost 9.1 per cent to investors at a risk of 14.9 per cent in the year to 31 May, compared to the sector’s 5.6 per cent return at 4 per cent risk. In the month to 2 June it did better than the L&G Diversified Absolute Return fund, which had a positive return over one year of 7.5 per cent. However, both funds underperformed the FTSE 100 and the FTSE All Share in the past month, the only two to do so.