Newsroom articles are published by leading news agencies.

Hargreaves Lansdown is not responsible for an articles content and its accuracy. We may not share the views of the author.

Tax, investments and pension rules can change over time so the information below may not be current. This article was correct at the time of publishing, however, it may no longer reflect our views on this topic.

No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

This summer the UK stock market faced a perfect storm of negative news. Firstly, uncertainty over the result of the UK general election knocked sentiment. This was swiftly followed by the re-emergence of the Greek debt crisis and no sooner was this out of the headlines than investors turned their attention to the slowing Chinese economy.

By the end of August the FTSE 100 had fallen below 5,900, from a peak of around 7,100 at the end of April. It has since rebounded and as I write sits at approximately 6,400, still 10% below Aprils peak. Over the year to date the market is down by approximately 3%, though when dividends are included investors are broadly level.

Given the extreme volatility it is not surprising to see investors seeking funds aiming provide a degree of relative shelter. There are generally two types of fund to consider:

No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

1. Absolute Return fundsgenerally aim but dont guarantee to make positive returns in any market conditions. The time period over which they aim to deliver positive returns tends to vary from fund to fund with 1, 3 or 5 years being common.

2. Total return or multi-asset fundsaim to smooth returns by capturing some gains when markets rise and sheltering capital when they fall. They dont aim for positive returns in all conditions and place less emphasis on protecting the downside. They commonly aim to deliver a good level of return over the long term with less volatility than the stock market.

Total return and multi-asset funds tend to achieve their objectives by investing across different asset classes. As well as holding shares, they might also hold bonds and cash. Some will also have exposure to other assets such as commodities and currencies, while also using derivatives. It is this diversification that helps to smooth returns.

Absolute return funds can also have exposure to different asset classes, but they tend to use derivatives and alternative investment techniques to a greater extent which adds risk. Many use shorting to a significant extent, for example. This means they aim to profit from falls in share prices and stock markets as well as rises. The short positions partially offset the traditional long investments and by varying the allocation to each the manager can have more or less exposure to the stock market. If their timing is right they can profit when markets fall as well as when they rise but get it wrong and they lose money.

Given these differences we tend to expect absolute return funds to offer lower volatility, but also lower returns over the long term when compared with total return or multi-asset funds. However, individual funds all have their own objectives and it is important to remember the value of any fund will fall in value as well as rise so you could get back less than you invest.

Given their characteristics these types of fund are often considered more cautious or defensive than traditional funds and are commonly held to balance a portfolio focused on traditional equity or bond funds. This also tends to make them popular when markets have experienced a tough spell this is when their performance often looks best and they start to fall onto investors radars.

This is human nature, but it is also somewhat counterintuitive. We tend to advocate topping up exposure to equity markets after a period of poor performance and taking profit after a strong run, even though this can feel uncomfortable at the time.

The theory is the same for absolute return and total return funds. Their characteristics mean an opportune time to top up exposure will be after a period of stock market strength (when the funds are likely to have underperformed) and reduce exposure when the stock market has been weak (and the funds should have performed well.

In 2008, for example, the darkest days of the financial crisis were up on us and stock markets were suffering. In this environment targeted absolute return funds held up relatively well. At this point rotating from these funds and into more equity-focused funds could have been sensible. The following year the stock market rebounded strongly, meaning the rotation to traditional equity-focused funds should have paid off and the process of rebalancing could be considered again.

Past performance is not a guide to future returns

Past performance is not a guide to future returns

Thinking about this in the context of recent market moves, the lead up to the stock market peak in April would have been the opportune time to increase exposure to funds in the Targeted Absolute Return sector. This could have provided some shelter from the summer volatility, with exposure to equity funds added back following the correction.

Of course, the reality is stock market moves are inherently difficult to predict and we wouldnt necessarily advocate wholesale changes to a portfolio based on short-term moves. However, this example serves to show that to be a successful investor it will often be necessary to go against your instincts and the mentality of the crowd.

Most investment portfolios will contain a mix of funds. The exact balance will depend on a combination of things, including an investors age, objectives and attitude to risk. A well-diversified portfolio is likely to contain some exposure to more defensive funds, with the important point being to regularly rebalance to ensure the portfolio continues to meet its objectives.

We tend to have a preference for total return and multi-asset funds over absolute return funds. The latter tend to be more complex and in many cases have not delivered on their objectives. They also tend to have relatively unappealing fees structures, including performance fees, which we believe can rarely be justified.

Total return and multi-asset funds are likely to be more volatile over shorter periods, but we believe that on the whole they offer better prospects for attractive long-term returns, and better value for money.

One such fund isPyrford Global Total Return, which has just been added to theWealth 150 listof our favourite funds across the major sectors. It is managed by Tony Cousins and his 12-strong team, who firstly aim to preserve the value of investors capital, and then deliver attractive long-term returns with lower volatility than the stock market.

To achieve these objectives investments are made in the shares of high-quality companies, government bonds and cash. Their central view is that shares will perform well over the long term, but at certain points they will look more or less attractive, so patience is key. When they feel others are being too greedy and share prices are too high they will be cautious, investing more in government bonds and cash. Ultimately, there will be times when more attractive opportunities are available usually after stock market falls, when others are at their most fearful and this could be the time to pounce.

This fund has previously only been available to institutional investors, but it will shortly be available to private investors via a new share class. This is available with a fixed 10 launch price until 3 November 2015, and Hargreaves Lansdown has secured a low ongoing fund charge of 0.59% (normally 0.81%) for our clients. This low charge is achieved through a mixture of a discounted fee and a rebate. You will get a rebate through an ISA or SIPP but the rebate may be taxable in the Vantage Fund & Share Account. The Vantage service charge of 0.45% per annum also applies.

No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.Editors choice: your weekly email

Sign up to receive the weeks top investment stories.

Our website offers information about investing and saving, but not personal advice. If youre not sure which investments are right for you, please request advice, for example from ourfinancial advisers. If you decide to invest, read ourimportant investment notesfirst and remember that investments can go up and down in value, so you could get back less than you put in.