Reduce your exposure to mortgage-related bonds and delay investing in hedge funds - that is the message from investment specialists LOM Asset Management Limited.

Following an investment policy meeting to determine new strategies, vice-president and general manager Jon Heckscher, said clients should downsize on the amount of their mortgage-related investments in favour of government-issued bonds, while waiting for hedge funds to cover their current redemptions before getting into new ones.

He called on the US Federal Reserve to cut interest rates in a bid to prevent a sizeable sell-off of the equity market.

"What the Fed has done is to raise interest rates because they are worried about that there will be inflation crisis," he said.

"But in order to get the pricing of the market back to where it was the Fed should cut the interest rate, and then they can still say they are targeting inflation.

"It is because the liquidity crisis has caused a repricing in the market and we are just reacting to the repricing and then we can sit back and see what needs to be done next."

Mr. Heckscher said the main reason for getting out of the $10 trillion mortgage market is a lack of liquidity, and that the sub-prime market, which makes up an estimated 15 percent of it, is now the main driving force behind the volatility.

He reckons that the structured credit market (Collaterised Debt Organisations, Asset-Backed Debt, etc) will come under further pressure as large insurance companies, banks and other financial institutions are forced to price their securities using a market price rather than a model price, and the lack of liquidity in the market will cause significant differences to emerge between these two prices and will put further downward pressure on the valuation of these bonds.

The US liquidity crisis has caused the institutional cost of borrowing to rise by about 0.50 percent and Mr. Heckscher believes that the Fed will acknowledge this and cut their target rate to 4.75 percent on September 18.

He said: "We want to make sure that our clients are protected and although there is volatility at the moment, that level will settle down in three to six months.

"But in the meantime, any time there is a kind of fears in the market the Treasuries will underperform.

"So our message is - reduce exposure to the mortgage-backed bonds and when you sell put your money into government bonds."

Equally, Mr. Heckscher reckons clients should sit tight on their hedge funds and wait to see when the time is right to invest in new ones.

He said the recent increase in redemptions coupled with stricter borrowing terms from bankers is putting pressure on a number of hedge funds to dramatically reduce their leverage and, as a result, many funds find themselves underperforming as they try to realign themselves to comply with these new conditions.

Meanwhile LOM have taken the lead by cutting their target exposure to hedge funds by 1.5 percent down to 13.5 percent of their overall balanced portfolio.

"We believe the hedge market is going to be in for a rocky road for the next six months because there is a lot of pressure on hedge fund companies from their prime lenders," said Mr. Heckscher.

"We are not telling clients to sell their hedge funds, we are just telling them to delay on any new investments until the current hedge funds have sold to cover for their redemptions and the current volatility.

"We had a 15 percent target in hedge funds, but we had money on the side line for cash and we have taken it and put it into cash investments."

And he believes the current situation with the hedge fund market will open up a number of doors for smart investors out there over time.

"I do think this will create a lot of opportunities and a lot of new hedge funds will come up from this," he said.

"Everything I have said we have done and are writing in our own portfolios, within our mutual portfolios and our clients' portfolios and we are continuing to recommend this."