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Dan Mannix, head of sales, said investors should resist the urge to take their money out of absolute return funds if they start losing money. Waves of hedge fund redemptions have already impacted hedge fund gains and industry returns in general, he said.

"There is no strategy that works faultlessly. The problem comes when investors expect absolute return funds not to make a monthly loss.

"An absolute return fund should provide significant downside protection, but that does not necessarily mean it will never lose money. You can't make returns over the risk-free rate without taking risk."

He took the example of static multi-asset funds, which make money under normal conditions because they contain a strictly diversified range of asset classes.

"That's fine as long as the asset classes don't have a high degree of correlation," he said. "What you've found is that asset classes have all lost money at the same time."

He said the same principle applied to funds of hedge funds.

"Too many of the underlying holdings have had high correlation in losing months, and so the fund of hedge funds themselves have lost money."

Mannix added some absolute return funds had made a positive return during the market chaos, including RWC Partners' Strategic Reserve fund, which gained 4.3 per cent between the beginning of 2007 and 13 October 2008.

He said the fund takes on risk only when the manager feels investors are rewarded for it. Otherwise, he said, it will hold it all in cash.

"One has to be aware of the counterparty exposure, but we can have 100 per cent in highly rated assets."

Recently, the fund has been extremely cautious, holding 78.6 per cent in AAA-rated short-maturity bonds, 11.8 per cent in convertible bonds and 3.5 per cent in equities. It also retained its short position in sterling, which it has held since the third quarter of 2007.

"Since the financial crisis started unravelling in the summer, we felt it was prudent to go into total capital-preservation mode," Mannix said.

He said convertibles looked particularly attractive, as they contained options to buy equities in their issuers. Current market prices treated these options as if they were worthless, he said.

"To have none of the optionality priced in is extraordinary."

On a relative return basis, he said, convertibles had also looked attractive over 2008. RWC's long-only Global Convertibles bond fund lost 11.8 per cent in euros over 2008 to the end of September, while the MSCI World index lost 23.7 per cent.