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UK investors prepare for choppy ride with more cash and alternatives

[LONDON] British fund managers anticipating market choppiness have boosted the amount of money kept in safe-haven cash and alternative investments such as hedge funds and private equity, a Reuters poll shows.

Reuters' monthly asset allocation survey of senior investment managers at 11 institutions found the average exposure to alternative assets in balanced global portfolios rose by 1 per centage point to 11.7 per cent.

Alternative investments such as hedge funds can benefit from volatile markets, in part because they are able to profit from falling prices through mechanisms not available to conventional funds, such as short selling. This can come at the cost of lower liquidity, which makes it hard to take your money out quickly from this type of investment.

Allocations to cash rose to 6.6 per cent from 6.2 per cent while allocations to bonds dropped a percentage point to 24.7 per cent. Exposure to stocks was little changed at 53 per cent.

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Investors said they expect 2015 to be a volatile year with market sentiment subjected to multiple conflicting forces, such as monetary easing in Europe and Japan, versus imminent tightening in the United States.

At the same time, the Chinese economy is slowing while the picture is muddied by geopolitical risks within Europe following the election of an anti-austerity government in Greece and the politically volatile situation in Russia and Ukraine.

"The overriding feature for 2015 will be bouts of higher volatility and risk-off episodes that mean investors will need to be far more wary," said Ashok Shah, investment director at London & Capital.

Chris Paine, fund manager at Henderson Global Investors said bonds in particular remain vulnerable.

A bond-buying programme announced by the European Central Bank this month, aimed at jump-starting the sluggish eurozone economy could prompt investors to seek out better yields elsewhere, even if it means taking on less liquid asset classes.

"The ECB's latest policy will keep yields low, but the starting point of negative deposit rates will likely prompt investors to move up the spectrum into higher yielding but less liquid assets," Mr Paine said. "The ECB's actions are designed to improve the growth and inflation outlook for the eurozone. If, for any reason, investors become sceptical that the policy can achieve a better outlook, then risk assets could be vulnerable again."