The funds that would survive and flourish in a market crash

2 mins. to read
The funds that would survive and flourish in a market crash

Since the financial crisis we have had a decade of virtually zero interest rates that has resulted in a high and potentially unsustainable level of global debt. This now stands at £168 trillion or 327% of world GDP, compared to 276% before the 2007 meltdown.

The cheap and readily available liquidity has pushed up asset prices to the point where they look dangerously overvalued and another financial crisis is now a distinct possibility. The resultant stock market crash would be extremely painful for anyone over exposed to the mainstream areas of the markets, but there are a handful of funds that would survive and flourish in these calamitous conditions.

The ultimate safe haven is gold, which acts as a store of value and cannot be undermined by the actions of the central banks because of its relatively fixed supply. When markets crash investors tend to buy gold to protect their wealth and this forces up the price.

Many financial advisors suggest that you keep about 10% of your financial assets in gold and the most convenient way to do this would be to invest in a physically backed gold ETF. These track the spot price and can be bought and sold on the stock exchange.

There are various ETFs that you could use including ETFS Metal Securities Limited Physical Gold (PHAU), db ETC plc Physical Gold (XGLD) and the iShares Physical Metals plc Physical Gold ETC (SGLN). All three are backed by gold bullion stored in a secure bank vault and held by an independent custodian, which is about as safe as you can get.

Many financial advisors suggest that you keep about 10% of your financial assets in gold.

Another option is a market neutral long/short fund. These use derivatives like CFDs to short sell stocks that the manager thinks will fall in value. By balancing the long and short books they are able to reduce their net market exposure to virtually zero so that the returns will be driven purely by the stock selection decisions.

A good example is Absolute Insight Equity Market Neutral. The £444m fund aims to achieve attractive, positive, absolute returns in all market conditions on a rolling 12-month basis. It invests in equities across different geographic regions to take advantage of the best long and short opportunities, but is always market neutral.

The fund was launched in October 2007 just before the last financial crisis and has held its value remarkably well with a modest cumulative return to date of around 24%. Over the same period the FTSE 100 initially fell by more than 40% and is currently only 14% higher than where it started.

It is impossible to predict the exact timing of a crash, so if you have mainstream investments that you want to keep you might want to consider hedging part of the exposure. The easiest way to do this would be to use a short equity index ETF that rises in value when the associated benchmark falls.

There are several different examples linked to a range of indices, but if you have exposure to the UK stock market a decent option would be the db x-trackers FTSE 100 Short Daily ETF (XUKS). All of these products reflect the inverse daily price movement of their benchmark, although the long-term cumulative return would differ.

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