Only three out of the 51 funds in the UK investment Management Association Absolute Return sector are suitable for investors, according to research by IFA firm Informed Choice.

Two-thirds of such funds, which target real returns regardless of market conditions, received less than half of the maximum possible in a consistency and cost test carried out by the firm.

“So far this year we have seen regular bouts of stock market volatility as fears over the eurozone sovereign debt crisis continue," said Martin Bamford, managing director of Informed Choice. "Absolute return funds should have been able to profit from these trading conditions, yet they fail to deliver consistent risk-adjusted returns."

Bamford told this publication that the firm's methodology considers ten different factors around consistency, risk-adjusted returns and cost. Each factor has a maximum possible score of 10 and the maximum score is therefore 100. The fund judged the minimum threshold for a fund to be deemed suitable to be 80.

“Investors need to think very carefully before including absolute return funds in their portfolios," Bamford said. "Failure to perform and high costs make them a less appealing option than a well constructed and regularly reviewed portfolio of suitable funds."

The three most suitable funds in the absolute return category were Henderson Credit Alpha (92), Insight Absolute Insight (81) and Newton Real Return (80), the study's authors said.