The complexity of absolute return funds means they are not suitable investments for the man in the street, according to Robin Geffen, founder and chief executive at Neptune Investment Management.
Mr Geffen was speaking at the AJ Bell Investival conference in London. His comments should be seen in the context of his being fund manager on the £490m Neptune Balanced fund, which is a multi-asset product which competes with absolute return funds.
He said such funds were created and run by "very very clever" people but the underlying investments in many of them were "very complex", to the point where most investors would not understand them.
He compared absolute return funds to with-profits funds, a type of product in which he has personally invested in the past and which he described as his worst-ever investment due to its complexity and relatively poor returns.
Mr Geffen said the funds focus on reducing volatility, but "while many investors want to be in lower risk products, volatility is not the same as risk. And it is from volatility that positive returns can be achieved."
His comments come as FTAdviser's sister publication Asset Allocator revealed the Standard Life Global Asset Return Strategy (Gars) has shed a further £1.1bn in assets over the month of October.
The largest funds in the IA Absolute Return sector, Gars with £15bn and Invesco’s £12bn Global Targeted Returns fund, have both underperformed relative to the index, which has returned a net loss of just more than 1 per cent over the past year.
Mr Geffen said the market has a tendency to create complex products generated by investment banks which needed to justify higher fees, and those products were then bought by Absolute Return funds.
His view was echoed by Abraham Okusanya, principal of consultancy firm Finalytiq, which researches the fund management and advice industries. He said such funds were difficult even for investment industry professionals to understand.
He said: "The investment industry loves complexity, driven by the twisted belief that complexity should earn a higher fee.
"But complexity breeds risk. Complexity makes it harder for investment teams to explain their own strategy. It makes it harder for advisers to conduct adequate due diligence on a product. And the investor is worse for it. It’s the classic lose-lose-lose."
Mr Geffen said the performance of certain volatility managed products during the market downturn in March, when two such products which aimed to manage volatility fell in value by more than 90 per cent in a few hours and had to be closed, showed they were not necessarily effective when markets are actually volatile.
The Financial Conduct Authority, which regulates the language used by fund firms to describe products and the potential level of return, said they were happy with the phrase "in all market conditions".
But it added it should always be followed by a warning the capital invested in the fund was at risk, the investment period over which the authorised fund aims to achieve the positive return, and that there was no guarantee that the investment objective will be achieved over that specific or any time.