In its definition of the sector, the Investment Management Association (IMA) states: "Typically funds in this sector would normally expect to deliver absolute (more than zero) returns on a 12-month basis."
However, our research shows that 46 per cent of Absolute Return funds have returned less than this over the last year, while the average fund has lost 0.04 per cent.
The worst offenders are the GLG EM Diversified Alternative fund and the £58m Polar Capital UK Absolute Return fund. According to data from FE Analytics, they have lost 18 and 14 per cent respectively over the last 12 months.
Performance of funds vs sector over 1-yr
Source: FE Analytics
Tim Cockerill, head of collectives research at Rowan Dartington, believes that the term Absolute Return suggests a fix-all solution to investment that is simply unrealistic.
"To try and achieve a positive return over every 12-month period is very, very difficult to achieve, no matter what your strategy," he said. "There needs to be some clarity from the IMA about what these funds are actually about."
The sector is currently under review following criticism from the industry. It is soon expected to be renamed or scrapped.
"The IMA sector names are there for retail investors and if you are outside the industry then the terms can be misleading and potentially alienating," continued Cockerill. "Understanding how a fund invests is the key thing and advisers meet fund managers, run lots of data and look very closely at funds to make sure they have a good handle on how they are likely to perform."
"The man in the street does not have that luxury; he only has the IMA sectors to go by. That is really concerning."
While there are far fewer Absolute Return funds with a three-year track record, they have largely delivered on their objective over this period. According to our data, the average fund returned 15.5 per cent during this time.
One of the standout performers in the sector is the £4.5bn Newton Real Return fund, managed by FE Alpha Manager Iain Stewart. Our data shows that the fund has returned 39 per cent over the last three years.
Performance of fund vs sector over 3-yrs
Source: FE Analytics
"Iain Stewart has been very consistent," added Cockerill. "The fund is essentially an equity and bond fund with a currency overlay but it has the volatility profile that I look for. It is one of the funds we are using at the moment for our clients."