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Fund managers take risk off the table amid Ukraine crisis

Fund managers are shunning risk and are fearful of tensions between Russia and Ukraine, with 81 percent of investors admitting they think geopolitical risk poses a threat to financial market stability, according to new research.

Investors have reacted to the concerns over Ukraine by hiking cash, ditching equities to a 15-month low and taking on extra protection, according to the monthly Bank of America Merrill Lynch fund Manager Survey for March.

Unarmed Ukrainian troops bearing their regiment and the Ukrainian flags march to confront soldiers under Russian command occupying the Belbek airbase in Crimea on March 4, 2014 in Lubimovka, Ukraine.
Getty Images I Sean Gallup/Staff
Unarmed Ukrainian troops bearing their regiment and the Ukrainian flags march to confront soldiers under Russian command occupying the Belbek airbase in Crimea on March 4, 2014 in Lubimovka, Ukraine.

Twenty-seven percent of investors say that a geopolitical crisis is the biggest tail risk – up from 12 percent in February. Hedge funds are also getting out of risk, and have reduced both leverage and exposure to equities.

(Read more: Putin:Crimea as part of Ukraine a 'shocking injustice' )

"Responding at a point of growing tension in Ukraine, 81 percent of investors said they see geopolitical risk posing a threat to financial markets stability – more than four times the reading one month ago," said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research.

As well as geopolitical risks, asset managers are shying away from risky assets because they are now too expensive, the research showed. Some 12 percent of investors now think stocks are overvalued than at any other time since July 2000.

However, Hartnett advised risk-adverse investors to put their spare cash into stocks despite the rise in geopolitical risks.

"With neither inflation nor recession posing a threat, we believe the equity bull market is far from over and investors should be putting excess cash into risk assets," said Hartnett.

(Read more: Global stocks slide as Crimea referendum looms)

Flaring tensions between Russia and the West over the future of the Ukrainian region of Crimea have accentuated a flight to safety, as global stock markets face increased volatility.

Spot gold has gained almost 3 percent in the last month, peaking at $1,366 on Monday, marking a 13 percent increase since the start of the year.

The yield on the U.S. 10-year Treasury has remained flat at around 2. 69 percent.

(Read more: Fund managers pick cash over cautious companies)

The proportion of investors taking lower than average risk in their portfolio has increased to 14 percent from 2 percent in February. Sixteen percent of global asset allocators say that they are overweight cash, up from 12 percent last month.

Average cash balances remain high at 4.8 percent of portfolios, while demand for protection against sharp falls in equity markets has increased to its highest level in 22 months.

The online and telephone survey polled 241 fund managers with a total of $636 billion of assets under management.

By CNBC's Jenny Cosgrave: Follow her on Twitter @jenny_cosgrave

World Economy