SHARES may be in the midst of one of their stormiest periods this century, but some “safe-haven” funds have managed to make double-digit returns amid the turmoil. Advisers are even recommending investors salt their Isa allowances in hedge funds, which have produced returns of up to 20% since the market peaked in June.

Often viewed as a high-risk gamble or an investment for the super-rich, advisers say that the best hedge funds are one of the surest ways to make money if the stock market uncertainty continues. And you no longer need huge sums before they will open their doors to your cash.

Mark Dampier at Hargreaves Lansdown, a financial adviser, said: “Some hedge funds are extremely high risk but others are designed to preserve your capital and grind out positive returns whatever the market conditions.

“I’m increasingly coming round to the idea that they should be a core holding in everyone’s portfolio – I’m thinking of investing myself.”

The UK stock market was calmer last week as the FTSE 100 index of leading shares rose 3% to 6,029. However, the market is still 7% lower than on January 1 – the rockiest start to the year since the 1930s – and 10% lower than its peak of 6,732 in June.

Record numbers cashed in their stock-market investments in December, pulling £377m more out of unit trusts than they put in – the second negative month in a row, according to the Investment Management Association. In November, £330m more was pulled out than invested.

Net Isa sales were just £17m, compared with £107m in December 2006. Equity-fund sales were particularly bleak with outflows of £844m, of which £242m came out of commercial property funds.

Despite the unnerving climate, advisers are warning investors not to miss out on this year’s Isa allowance by sitting on their hands.

Everyone can invest up to £7,000 in an Isa and the returns will be sheltered from the tax-man – but you must use your allowance before the end of the tax year, April 5.

There are two options: invest your entire allowance in an equity Isa, or put up to £3,000 in a cash Isa and the remaining £4,000 in stocks and shares.

This year the market setback has unnerved people who were planning to put the maximum into equities, but advisers say there are several ways to invest in equities and still make money when markets fall.

Hedge funds

Individual hedge funds – which use a range of strategies to make money whether markets rise or fall – cannot be held in an Isa. Funds of hedge funds, however, can, and advisers are recommending them for the first time.

Tim Cockerill of Rowan, an investment manager, recommends Dexion Absolute, Alternative Investment Strategies or HSBC Global Absolute, up 7%, 1% and 7% respectively since the market peak in June, while the FTSE All-Share has fallen 12%. They all invest in a range of hedge funds and strategies to reduce risk.

He also likes Thames River Hedge+ which has returned 17%, though it uses a more risky investment strategy so may not be suited to nervous investors.

It has benefited from owning Paulson Advantage, run by New York hedge-fund Paulson, which bet correctly that the sub-prime mortgage market would collapse when everyone else was positive. Exposure to GLG, which invests in emerging markets, has also helped its performance.

Close AllBlue, another fund of hedge funds, is the choice of Mick Gilligan at Killik, a stockbroker. Listed on both the Alternative Investment Market and the Guernsey stock exchange, it has returned 7% since June.

Dampier prefers Blackrock UK Absolute Alpha, which does not invest in hedge funds but is run using hedge-fund techniques. Since the credit crunch began it has been the best performing UK fund rising 7%. Since its launch in April 2005 it is up 29%.

Dampier said: “Most fund of hedge funds are trading at a premium because they are in demand, which means the share price is higher than the underlying funds are worth. Blackrock’s fund is better value and easier to understand.”

Run by Mark Lyttleton, UK Absolute Alpha is one of the few schemes taking advantage of a change to investment rules that enables managers to use derivatives.

Lyttleton uses a strategy known as “going short”. If he thinks a company’s share price is going to fall, he can buy a derivative that will rise in value as the share price drops.

Lyttleton said: “I have done well out of shorting some of the retailers, housebuilders and pub stocks which are vulnerable to a consumer slowdown.”

Advisers warn that the funds will get left behind when the market recovers, but many think they should be a core holding in a balanced portfolio.

Gold funds

Investors in the Merrill Lynch Gold & General fund, which invests in gold-mining shares, have benefited from a stunning 39% gain since June last year, making it far and away the best performer. Investec Global Gold came in second at 31% after the gold price shot up to more than $900 (£457) a troy ounce.

Opinion is divided about whether investors should be buying into gold now. Ross Norman of The Bullion Desk, the top forecaster for the London Bullion Market Association for the past four years, predicts that gold could reach $1,170 this year.

However, Cockerill said: “Over the long term it still looks a good investment, but short-term I don’t think it is time to buy. When confidence returns to the stock markets I can see speculative money being pulled out of gold which could cause the price to drop.”

Bond funds

After years in the doldrums, bond funds have bounced back: Baring Directional Global Bond, which invests in government bonds worldwide, is up 16% since June – a stunning return for normally boring bonds.

Brian Dennehy at Dennehy Weller, an adviser, said: “Fund managers are genuinely excited about the prospects for bonds over the next few years as high quality corporate bonds are yielding 7% or more.”

He recommends Artemis Strategic Bond, which invests in a combination of high quality and higher risk bonds, or New Star Sterling Bond, which focuses on blue chip bonds.

Cautious managed funds

You would expect these multi-asset funds, which invest in a blend of equities, bonds, cash and occasionally property to have held up. But investors have discovered too late they are not protected against downturns.

The average fund is down 5% since June while the worst performers are BGI Global Income Plan down 17% and New Star Tri-Star, which has fallen 15%. But CF Ruffer Total Return, with 42% in equities, 50% in bonds and 3% in gold bullion, has risen 6% since June.

FOLLOWING THE HEDGE FUND ROUTE

HEATHER and Lawrence Mitchell, with their son Samson, have invested this year’s Isa allowance in Blackrock UK Absolute Alpha, a fund that uses hedge-fund methods to try to make money even when markets are falling.

The couple, from Esher in Surrey, were looking for a fund that could provide steady but positive returns whether the stock market was rising or falling.

In the past, property funds had served the purpose, but as returns have taken a slide they decided to plump for the Blackrock fund instead.

Heather, a freelance market researcher, said: ‘We wanted a fund that wouldn’t crash when shares plunge.

‘We’re pleased with how it has held up while stock markets have fallen.’

Explore Money

• Property & Mortgages

• Savings

• Borrowing

• Investment

• Funds

• Insurance

• Consumer Affairs

• Tax

• Pensions

• Broadband

Times Recommends

• How to find a good tradesman
• How to join the internet vigilantes
• Five ways the banks fleece us