We apply a return-based classification approach on a sample of absolute return funds registered for sale in Europe. The classification process results in eight groups with specific risk and return profiles. Each group can be characterized by two dimensions of an underlying investment style: asset allocation and trading strategy. While the returns of one group are largely determined by the asset allocation, the returns of the seven other groups are driven by different trading strategies. Our estimated classification explains 20 per cent of the in-sample and 13 per cent of the out-of-sample cross-sectional return variation, which is superior to existing approaches.