pcwalton is the voice of authority here, but to add to that, the following (verbose) example compiles and works as expected:

  fn make_string() -> ~str {
      return ~"foo";
  }

  fn main() {
     let string: ~str = make_string();

     io::println(string);
  } // deallocated here

My bad folks :)

It's true. Returning a `~` pointer transfers ownership (so your caller will be responsible for cleaning it up).

~ is similar to std::unique_ptr in C++. It is always owned in one place, but that ownership can be transferred at will.