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For investment firms that have launched absolute return funds over the past three years, the development stage came at the worst -possible time. At the end of a rampant bull market it can be difficult to convince investors that steady and stable performance is the order of the day. Instead, they faced an uphill battle of justifying performance fees and explaining a different reality to relative returns.

And yet these funds have slowly started gaining traction, bolstered by good performance, proving long-only managers were capable of short selling, albeit synthetically.

It was almost a year ago that the Investment Management Association acknowledged the new crop of funds, launching the Absolute Return sector to incorporate all those funds that operate with the aim of delivering a positive return in any market conditions. This swept up a lot of the ‘total’ and ‘target’ return products that had previously littered other sectors, making performance comparisons difficult.

Of course the past year has truly tested the mettle of the managers of these funds. It has been impossible to insulate performance fully from volatility, especially with restrictions on short selling in financials. For absolute return funds, which only have the capacity to short synthetically, this meant they were forbidden to take on new positions, although they could maintain their existing short positions.

The result has been a mixed bag of performance, with some funds seemingly failing in their claims, eagerly espoused by marketing teams, that they could maintain returns even during the bad times.

However, market behaviour has been erratic and the true test will be how these funds hold up over a full market cycle.

*** Click here to read Investment Adviser's full Absolute Returns supplement, in association with Cazenove, Threadneedle and Legal & General.