The last two years - with the advent of the credit crisis in August 2007 when the US housing market began to correct in a widespread manner - has seen equity markets go through regular periods of severely reduced liquidity.
The main beneficiaries of this phenomena in the collective investment market have been money market funds, absolute return strategies and the exchange-traded sector.
Money market funds, particularly given the nervousness about bank deposits, understandably attracted considerable assets looking for the so-called safe haven of cash. For some advisers and their clients, these funds brought a new set of risks because they did not take the time to 'look under the bonnet' and really understand what assets money market funds held.
In some cases, they were attracted by the return and did not focus on the risk sufficiently. Solid institutions like BlackRock, JPMorgan and HSBC saw huge flows into their cash funds and investors were rewarded for selecting these players with the 'sleep at night factor.' Those who went for some of the smaller players offering a higher return had some sleepless nights.
The Absolute Return sector is just beginning to develop but has already seen excellent strategies from the likes of BlackRock, Cazenove and Gartmore, but advisers need to ask themselves how clearly they understand what these funds are trying to achieve.
Absolute return funds are not a panacea design to create index-beating, market-beating returns in all environments. Properly managed, as the funds are from the groups mentioned above, they will give market exposure and produce a positive return over most sensible time horizons.
They are not designed to out perform in a bull market, but they should outperform in a bear market. As such, they are designed to be a base fund in a broad portfolio sitting alongside other actively managed and passive strategies.
It could be argued that they are a 'core' fund for all portfolios irrespective of market conditions, which is a view advisers would need to take depending on the type of client they are talking to.
Alongside money market and absolute return, ETFs have seen exponential growth in the last two years for a number of simple reasons: they are cheap and are offering liquidity and very broad asset diversification, particularly in areas where it is expensive or difficult to access in collective vehicles such as water or timber.
Again, it is worth asking - how much do advisers really understand about the risks relating to ETFs? In the new 1% world of the Retail Distribution Review, it is all too easy to focus too havily on the cost of a product or strategy and ignore the risks.
ETFs are not without risk. They are arguably exposed to the purist type of risk - beta or, put simply, the risk of the market.
A gold ETF, a water ETF, a FTSE 100 index all have exactly the same investment objective - to replicate the performance of the underlying index or basket of assets the ETF tracks.
An investment is not a good investment just because it is cheap. ETFs have a place to play in many portfolios but only if advisers and their clients understand the real risks of the accompanying index or asset.
Risk to retail investors
Joined as head of strategy, multi asset, in June
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