Nearly all relative return mutual funds took losses and underperformned their benchmarks in 2011. Trang Ho of Investor's Business Dailly writes in "Most Mutual Funds Underperformed Benchmarks In 2011":

Most mutual fund managers underperformed the market, and many very badly. Morningstar data show less than a third (29%) of the 21,000 mutual funds it tracks beat their benchmarks.

I have a few things to add to this thought-provoking article. Active mutual funds that pursue a relative return objective attempt to beat a predefined benchmark index. An index is a quantitative systematic process, making them difficult to beat. An index doesn't wake up fearing missing out or losing money. The positions in an index typically get added or deleted once a year. An index stays fully invested and doesn't fear going broke when markets cascade down. A relative return objective attempts to outperform the index, either by gaining more than the index or maybe losing less. Relative return funds define risk as tracking error - they don't want to stray too far from their benchmark, so their risk/reward profile is similar. If they stray too far with their positions, they fear underperformance. For a relative return fund that benchmarks and index, it's OK to be down -50% if the index is. When we speak of mutual funds as active managers, then, it's important to draw that disctinction. 

Trang goes on to say:

The average U.S. stock fund lost 2.90% in 2011, while the S&P 500 stock index produced a total return of 1.52%, according to Lipper Inc. Of about 8,000 funds that Lipper tracks, 92% suffered losses... Foreign fund managers performed even worse, with an average 13.90% loss, owing to the European debt crisis. U.S. Treasury fund managers took the winner's stand with a 16.04% return, as investors flocked to government securities for safety.

I believe the trip they took along the way may have been important than the ending point in 2011. I made this point in Stock Index Performance for 2011 and the Full Market Cycle. For example, stock indexes declined as much as -20% or more July - September. It was a very quick and sharp cascade: enough to shake out many investors. Once they panic, it's hard for them to re-enter. It's best to actively manage risk in hopes to avoid such a scenario. Actively managing risk is to reduce exposure to the possibility of loss by selling early in the stage of falling prices or hedging. Most mutual fund managers have a relative return objective, not an absolute return objective aiming to limit downside loss. But, even a relative return manager may have attempted to reduce the downside. If they did, they may have experienced less drawdown along the way. Even though they "underperformed" relatively for the period, they may have provided a journey along the way an investor could deal with. In that case, the risk/reward isn't reflected in a presentation that only shows the end result. This is beyond the scope of Trang's article about calendar year mutual fund performance, so I thought I would discuss it here.

As I said in 2011 Hedge Fund and Commodity Trading Advisor Performance, one calendar year is a meaningless time frame unless you were trading your way to a new car, boat, home, etc. and December 31, 2011 was your deadline. And, -2.90% isn't a large unrecoverable losss, but what I believe is the far more important issue with relative return mutual funds is their performance over a full market cycle. She included a nice table with 5, 10, and 15 year results. Clearly, the last 5 years or more has been challenging for those pursuing capital gains from mutual funds. 

Source: Investor's Business Daily