So-called absolute-return funds portfolios that purport to deliver gains in any market environment are hot. But many aren't living up to their billing.

Through May, funds with "absolute return" in their names saw net inflows of roughly $5 billion, up from $2.7 billion last year and $322 million in 2008, according to Morningstar Inc.

Absolute-return funds don't seek to track the stock market. Instead, they use a variety of sophisticated strategies, and dabble in a host of asset classes, to eke out gains even when the stock market is swooning.

.At the moment, "there's a large, untapped market of retail investors out there looking to alternative investment strategies after losing a lot of money in traditional [stock or bond] funds," says Nadia Papagiannis, alternative investments strategist at Morningstar.

Matthew Tuttle, a financial adviser in White Plains, N.Y., says he's considering putting more of his clients' money in the funds. "This is not a buy-and-hold type of market," he says. "Any type of growth that we'd be reaching for right now would be on a protected basis."

Investing in a mutual fund is generally easier than setting up a portfolio from scratch, given the complexity of the investments and the breadth of asset classes involved.

But be warned: Returns vary widely among the 21 funds with the words "absolute return" in their names. On average, they gained 0.17% during the first six months of 2010, according to Morningstar, compared with a loss of 6.65% in the Standard & Poor's 500-stock index.

Some funds performed much worse, however. The Aston/New Century Absolute Return exchange-traded fund was down 9.51% through June, while the Nakoma Absolute Return Fund posted losses over the past six-month, one-year and three-year periods.

Fund firms say that while managers are aiming for absolute returns, the ultimate goal is to reduce risk. "The term 'absolute return' may be a bit of a misnomer in the industry," says Theodore Enders, portfolio strategist at Goldman Sachs Asset Management, which runs the Goldman Sachs Absolute Return Tracker Fund. "We don't believe it's possible for any strategy to produce positive returns in all market environments. But absolute-return strategies are very effective at reducing risk."

Funds employ a variety of investment strategies, some of which might not appeal to safety-minded investors. The Eaton Vance Global Macro Absolute Return Fund, with about $5 billion in assets, has been investing in the debt and currencies of emerging markets including Egypt, Lebanon, India, Poland and Sri Lanka, says co-manager Mike Cirami.

While the Putnam Absolute Return 100 Fund which aims to deliver an annualized gain of one percentage point over Treasury bills has been mainly invested in cash, it also holds potentially volatile interest-only mortgage derivatives to boost returns, says Morningstar analyst Jonathan Rahbar.

Jeff Knight, Putnam's head of global asset allocation, says that while derivatives have the capacity to be volatile, the fund limits risk by focusing on short-duration and high-quality securities. The fund's "barbell" approach to investing also helps. By holding a hefty portion of assets in low-risk, low-return assets like cash, the fund is able to venture into higher-returning, slightly more volatile holdings to boost returns.

Another concern: fees, which can take a big bite out of absolute-return funds' results. Average fees for long-short funds which include many absolute-return funds are 2.06%, compared with 1.11% and 1.01% for large-blend and moderate-allocation funds, respectively, according to Morningstar.

And most absolute-return funds are only a few years old, and are untested over the long term a classic red flag for investors.

For these reasons, Mr. Tuttle, the financial adviser, says that while he uses absolute-return funds for some conservative clients, "you just have to be careful that absolute return doesn't turn into no return."