A recent report from the Investment Management Association (IMA) on improved ISA sales shows that UK investor confidence is back.

The past two years have seen investors putting their money into ISAs rather than cashing them in. The IMA figures show a second consecutive year of inflows, following five disastrous years in which a combined £5.3 billion of retail investor money exited ISAs.

The reversal in sentiment began last year, where inflows of £4 billion in the 2009/10 tax year followed outflows of £305 million in the 2008/09 tax year. The tax year just gone saw £3.7 billion invested, with the ISA season (1st March – 5th April) alone accounting for almost £1 billion of this total.

But where has this money been invested? Or where should it have been invested? There is no question that UK (and many mainstream global) equity markets were broadly resilient in the first quarter in the face of all kind of headwinds.

Fidelity’s Trevor Greetham recently spoke at the Morningstar investment conference stressing the importance of a diversified portfolio in an environment of lower correlations and higher volatility.

There are several signs that these fluctuations are becoming more pronounced – the most obvious being the sharp changes in commodity prices witnessed since the end of April.

But it is not just the commodity sector. The sizeable currency moves seen in the likes of the dollar and the euro prompted one market observer to tell Bloomberg that forex (foreign exchange) market volatility is at its highest ever levels.

Add to this the continued concerns over the shape of post QE2 (Quantitative Easing Part 2) markets, the return of thinner trading volumes over the summer, and even the growing suspicion that calmer markets make a correction more likely and there is an argument for a tricky few months ahead for equity markets.

Now I have (almost) never been one to be bearish and am a firm believer in equity markets for the medium to long-term investor. However, if the issues raised above do pan out then where should the more cautious (as most are nowadays) investor put their money to beat the pitiful rates offered by the banks and building societies?

Cautious managed fund of funds are a good, diversified option which use several asset classes. However, the rules allow up to 60 per cent in equities in this sector so, for most of us, this is hardly cautious.

If there was a sector that could rise above all the uncertainly, aiming to deliver positive returns no matter what the market conditions then “investment utopia” would surely be achieved. Does it exist? Surely, it sounds too good to be true?

Until relatively recently, investing was something of a one-way street. Fund managers could invest in things if they thought their prices were going to rise, or they could stay clear if they thought the price was going to fall. When most prices are rising, this is a perfectly adequate state of affairs – managers just have to select the investments that were likely to rise the most and avoid any that were likely to disappoint.

But, what about when asset prices are falling, or when markets are so volatile that it is difficult to tell which are likely to fall? Absolute return funds meet this challenge by taking advantage of recent regulatory developments that have widened the range of tools available to fund managers.

Some of these tools work in a way that allows the fund to make money when share or bond prices fall. Others are designed to deliver value when market uncertainty rises; others allow fund managers to express clear views on things like foreign exchange markets or expectations for interest rates. These developments enable authorised and regulated funds to hold a wide variety of investments including futures, options and other derivatives.