Turbulence, as shown by the trailing 30-day annualised volatility on the FTSE 100 index of UK shares, has slumped from a peak of more than 80 per cent in October 2008 – shortly after the bankruptcy of Lehman Brothers – to around 10 per cent as at 31 March, according to Bloomberg data cited by the asset manager.

“There are two explanations for this move. The first is that the decline in volatility accurately reflects a return to stable economic growth. This would naturally be very positive for risk assets as investors would demand a lower risk premium, resulting in higher asset prices and positive investment returns.  The second is that investors have grown complacent following the substantial rise in risk asset prices since last March and are consequently mispricing future investment risk,” the firm said.

The fund manager pointed out that measures of market volatility, such as swap spreads, deviations of stock prices from their long-term averages, option volatility as measured by the US VIX Index, and other measures, had been at historic lows in the months immediately prior to the credit crunch.

It continued: “The second is the less sanguine of the two explanations and where Saltus feels need for concern – the last volatility “lows” were swiftly followed by the credit crunch and Lehman collapse.”

Saltus said complacency can be explained by what is known as “anchoring”, a form of psychological bias whereby expectations are dominated by recent experience.

Anchoring is particularly dangerous in investment management as it encourages investors to take more risk when asset prices have risen and less when prices have declined; effectively beguiling investors to buy high and sell low,” the firm continued.

Dan Kemp of Saltus Partners, said: “Our portfolios hold a strong cash buffer and defensive investments such as equity market-neutral hedge funds and distressed debt which should deliver consistent absolute returns if less sanguine conditions prevail.  However, we are also holding alternative funds at significant discounts which would benefit disproportionately should risk assets continue to perform well.”