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Absolute return funds and market neutral funds are supposed to offer predictable returns regardless of what the stock market is doing. As we look at the U.S. equity market's 40% decline this year, the idea of a vehicle that offers a steady return becomes all the more appealing.

After such a massive drop for equities, it makes sense to revisit a couple of these funds I've written about before and see how they have fared and try to understand the hiccups along the way.

The Rydex Managed Futures Fund (RYMFX) - Get Free Reportis a rules-based product that goes long or short physical commodities such as energy (long or flat oil, never short), metals and agricultural commodities and also long or short financial futures like currencies and Treasuries. Long or short depends on the relative strength of each underlying commodity or financial product.

RYMFX has done very well since its inception. In 2008 the fund is up a little more than 10%. Although that result is outstanding, the fund did drop about 10% in the summer. This occurred as oil started to roll over. The fund rebalances monthly so there was a lag from the time that oil began to correct and when the long position could be closed out.

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Nakoma Absolute Return (NARFX) is more of an actively managed long-short equity mutual fund. In executing the strategy, fund managers blend a combination of bottom-up stock-picking and, to a lesser extent, top-down opinions like shorting a retailer because of overly ambitious expansion plans that tie in with higher gas prices, hurting discretionary spending. (This is an old example.)

NARFX hit a couple of bumps in the road in April. The fund was net short the energy sector and the price of crude went parabolic. Additionally, a couple of other ideas did not work out. The net result for the year is that NARFX is down 3.4%.

The result for both funds has been outstanding compared to one of the worst years ever for U.S. equities. But neither has been perfect. This goes toward setting reasonable expectations. In researching this fund segment, you may find funds whose strategy you naturally gravitate toward. Funds may make intuitive sense and seem like they can continue to succeed.

I believe in both funds and use them for clients, but still no product can be 100% successful 100% of the time. As these funds have had small problems before, they will have them again.

Another reasonable expectation to set should be what to expect the next time the stock market is up a lot. These funds strive for steady returns. The stock market provides volatile returns. Since 1950, the S&P 500 has had only four years where it was up between 8% and 12%. I would expect any absolute return or market neutral fund to lag badly during the occasional year where stocks are up 25% or more, something that has happened 11 times since 1950.

The most common criticism that comes up with these types of funds is how expensive they are. In nominal terms they are expensive. RYMFX has a 1.73% expense ratio and NARFX's is 1.99%. If that is too much for you, do not buy this type of product. But in a down 40% world, RYMFX is up a little and NARFX is down low single digits.

I believe in moderate exposure to the space as means of managing portfolio volatility over the course of an entire stock market cycle. I do not think it makes sense to add heavy exposure after a 40% decline. RYMFX and NARFX client or personal holdings