NEW YORK (TheStreet) -- Absolute return funds aim to deliver competitive results in good times and bad. But many of the funds suffered painful declines in 2011, a year when the S&P 500 gained 2.1%. Among the losers was American Independence Absolute Return Bull Bear Bond (AABBX), which dropped 9.3%, according to Morningstar. Funds that lost more than 3% included Absolute Opportunities (AOFOX) and Quaker Akros Absolute Return (AARFX).Should you stay away from the funds because of one bad year? Some analysts think so. They argue that absolute return funds are only worthwhile if the managers can deliver consistently positive results. But portfolio managers counter that 2011 was an unusual year when volatile markets whipsawed all kinds of strategies. The managers say that they can produce competitive results over a market cycle of three to five years.
"If a fund moves in the same direction as the market, then you should not call it an absolute return investment," says Terry Tian, a Morningstar analyst. Some analysts have gone so far as to argue that regulators should bar most funds from calling themselves absolute-return vehicles. Fund companies argue the absolute return funds are not misleading investors. In their disclosure documents, the funds clearly state they may sometimes lose money in downturns. The absolute return funds are worthy of the name because they do not always track the benchmarks. The fund companies contend that the SEC permits some latitude in naming funds. For example, funds can label themselves as growth portfolios -- even if the performance does not always justify the name.