'Very few funds with at least one year's track record achieved their performance targets over Libor - in part because of inflated Libor caused by the financial crisis,' says S&P Fund Services lead analyst Kate Hollis.

However, she pointed out that Threadneedle Absolute Return and Target Return and Robeco Flex-O-Rente all achieved their targets in 2008 while many other funds achieved positive returns.

The global tactical asset allocation (GTAA) funds rated by S&P Fund Services were the least successful, largely because most were long equities.

'Most funds have been positive in the first quarter of 2009, although still struggling to beat inflated Libor returns,' says Hollis.

Several of the UK equity long/short funds had been caught out by the rapid sector rotation in the market. GTAA funds also continued to have difficulties as many have longer-term positions and were not helped by the swings in risk appetite.

The absolute return sector continued to develop in the 12 months to 31 March 2009. An increasing number of new fund launches were clones or near-clones of longer-running hedge funds in Ucits III wrappers - a trend S&P Fund Services expects to see continuing in the coming months.

S&P Fund Services has raised the N ratings for many of the funds in the absolute return sector. N ratings (N1 to N9) reflect S&P Fund Services' view of a fund's potential capital stability. Based on the annualised weekly downside deviation since inception, they rise as the stability of the fund's capital falls.

Last year, many funds had larger drawdowns than before, partly because market volatility rose so much and this is now reflected in higher N ratings.