Following a nod to the topic in its Retail Conduct Risk Outlook 2012, published in March, the regulator said it was looking at the potential risks involved for investors buying into absolute return funds and expected to announce findings in the autumn.
"Asset managers continue to develop products that appear to offer better performance under volatile market conditions and potential to deliver investors’ demand for higher returns, capital protection and diversification. Absolute return funds are examples of these products," the FSA said in the Retail Conduct Risk Outlook.
In 2011 net retail sales of absolute return funds were under £1bn, compared to £2.3bn in 2010, but funds under management in the products were up 27% at £20.9bn year-on-year in 2011.
The FSA said this came on the back of the promotion of these products as hedges against weakening markets, despite the fact more than half of them lost money in 2011.
According to the IMA the number of absolute return funds expanded from 17 in 2008 to 78 in 2011, which means the sector has become increasingly prevalent in the market.
"Consumers could suffer significant unexpected financial loss if they are sold funds that fail to perform because some have made positive returns and some have not," said an FSA spokesperson.
The IMA is currently conducting a review of the absolute return sector to decide if it would be better for investors to split it into more accurately described sub-sectors.
The conclusions of the review are expected some time before the end of the year.
