Hedge funds are a worthwhile investment at this time when equity markets are suffering, according toSchroders Private Banking.

The UK-based firm sees particular value in fixed income macro strategies and short-biased credit traders, which have the potential to offer asymmetric returns and thrive in the current risk-off environment.

Such trend-following strategies tend to make modest losses in sideways trading environments, but benefit when markets are taken by surprise and move fast in either direction for a long time, says Schroders.

The firm acknowledges that London-listed hedge funds failed to protect investors in 2008 and have struggled ever since. These funds are now trading at big discounts and Schroders is looking to hold onto its positions and hopes to realise value.

Overall, the private bank sees more value in equities than bonds. As investment in robust, dividend-paying companies has become a crowded space, Schroders also focuses on more risky firms with valuations priced for the worst.

“Slowing economic activity is likely to lead to disappointment in corporate profits relative to expectations,” said Robert Farago, head of asset allocation at Schroders Private Banking. “However, the peak in margins has historically occurred more than a year before the peak in equity markets. The environment of low inflation, low interest rates and low wage inflation is a positive backdrop and means that margins should remain high.”

As the bank sees more crises as likely, it sees value in cash holdings, gold and inflation-linked bonds. The key risks will continue to be the eurozone, oil price hikes caused by turmoil in the Middle East, a hard landing in China and a potential policy slip by the US government.