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It is undeniable the principle behind absolute returns and total return funds is very attractive during these troubled times. While for some relative returns funds coming into the first quartile of the sector or beating the benchmark still means turning in a loss, the raison d'tre for absolute return products is to preserve the capital investors have made on the upside and provide a steady return.

For many of the funds launched over the past two or three years, it has been difficult to shine as equities had been going up strongly until the beginning of last summer. By their nature these products are never going to turn in a dazzling performance during a bull run, but nevertheless many have been unfairly maligned for failing to deliver.

Now, however, it is do or die as these funds are put under the test of trying to deliver in spite of worsening market volatility.

The interesting point is, as these funds come under the spotlight, it is throwing up confusion as to just what constitutes an "absolute", "total" or "target" return fund. In some instances the terms are used interchangeably. In others clear distinctions are drawn between them, although there is no consensus on the final definition. In short, different providers mean different things by "absolute return".

In essence, absolute return is mainly used for funds in the retail arena which utilise Ucits III in order to create "short" positions through using a basket of derivatives. Meanwhile total and target returns tend to use multi-asset approaches to try and smooth out returns and set a target of beating Libor by a certain percentage.

The unifying factor between absolute, total and target returns is they are not tied to a benchmark and they do not pay attention to the relative returns of their peers. It is this point more than any other which is attracting cautious investors to them.

Swip Absolute Return UK Equity

Scottish Widows Investment Partnership has a stable of three absolute return vehicles, a bond fund, a macro fund and a UK equity fund. The latter, run by manager Robert Waugh, was launched in May 2006 with the aim of achieving cash plus 4 per cent, with cash being the three-month Libor rate.

The strategy underpinning the fund is to keep to a best ideas structure, with a concentrated portfolio of 25-35 holdings. With stocks constantly jostling to be included in the fund, the manager relies upon both quantitative and qualitative research to sift down to the most interesting ideas. The aim is to achieve steady positive returns regardless of the market conditions, and to also create a portfolio with a low level of correlation to the rest of the UK market.

The manager also has the capability to reduce exposure to sectors he is not convinced of by using derivatives to synthetically short positions. The fund currently has short future exposure of -9.5 as a percentage of NAV, and -1.2 short option exposure. Mr Waugh has recently reduced his short position in financials, increasing overall net exposure.

Although the fund did well in 2006, with a return of 9.4 per cent, compared with 3.11 per cent for the index, it failed to achieve its target of positive returns in times of market volatility, with a loss of 6.67 per cent over 2007, compared with the index return of 6.16 per cent.

However, Mr Waugh reduced net exposure to the FTSE All-Share index to approximately 50 per cent in the run up to January, anticipating a weak start to the year. This proved to be a good call, with the All-Share falling 8.7 per cent in January and the fund only falling 2.7 per cent.

However, with investors opting for absolute return vehicles as a way of protecting capital, a loss is still a loss. Although the manager asks for the performance to be judged over a longer time period, taking in a complete market cycle, it has so far been unsuccessful in producing the steady, index-beating results in the face of market volatility.

CF Ruffer Total Return

Ruffer has a range of both absolute returns and total returns funds. The biggest and most-established on the absolute return side is the CF Ruffer Equity and General fund.

On the total return side, the £283.7m CF Ruffer Total Return fund, which is marketed as providing "positive absolute returns with low volatility", has turned in a convincing performance, and is ranked fourth in the IMA Cautious Managed sector over one year and first over three months. More importantly, over 2007, which was characterised by high levels of volatility in the markets, it achieved a positive return of 5.6 per cent, delivering on its promise to investors.

However, looking at its historical performance, although it returned an impressive 18.4 per cent over the year to 31 December 2005, it dropped by 2.7 per cent over the year to 31 December 2006. Nevertheless, on a discrete annual basis, it has markedly outperformed more often than it has fallen short of its target, providing a convincing track record.

Managers Steve Russell and David Ballance use a multi-asset approach, including equities, bonds and currency plays, to produce steady positive returns and provide investors with capital preservation regardless of the economic climate. The philosophy underpinning the fund is to invest in both "greed" and "fear" at any given time so as not to be overly cautious or bullish.

Over the past few months the main driver of performance has been the fear part of the portfolio, with a significant proportion invested in "safe haven" currencies, as well as gold stocks and gold bullion. Indeed, 10 per cent of the fund has been invested in this theme, offsetting the heightened volatility in equities.

Credit Suisse Target Return

Managed by the London fixed income team, headed up by Dilip Rasgotra and John de Garis, the £24.48m Credit Suisse Target Return fund has the stated aim of achieving positive returns above Libor irrespective of the market conditions. To achieve this, there is no restriction on the credit rating of investments or the issuers. The fund also has the capability to invest in money market instruments and derivatives, including credit default swaps.

In spite of the freedom given to the management team, performance has been substantially below expected levels, with a fall of 3.6 per cent over the past six months, a 1.9 per cent drop over the past year to the end of February. It returned 6.9 per cent over three years, but this still dramatically undercut the 25.3 per cent returned by the benchmark.

The team has been moving the fund towards a more cautious position since the end of 2007, reducing exposure to the riskier high-yield end of its investment universe. They have also reduced their position in emerging market debt and instead increased its long duration position in government futures.

The managers remain positive performance is going to improve as the impact of the Fed's rate cuts begin to filter through and the economy is bolstered. However, it remains to be seen whether it will manage to meet its targets over a full market cycle.

Laura Mossman is features editor at Investment Adviser