WEST PALM BEACH, FL (www.hedgeco.net) – The newly released Fitch Report said, �Credit-oriented hedge funds have become a vital source of capital to the credit markets.� According to the report, hedgefunds which specialize in credit markets help to provide vital liquidity to higher yielding and less liquid investment asset classes �including high yield bonds, leveraged loans, collateralized debtobligations (CDOs), credit derivatives and unrated or subordinated structured finance tranches.
The report surveyed leading prime brokers and other important market participants. Roger Merritt, Managing Director, Credit Policy said, �While hedge funds provide much-needed liquidity to the markets, it is fair to ask whether credit risk has become re-concentrated within certain hedge funds and, as a result, whether the credit markets may be more fundamentally linked than in the past.�
The report further showed that credit-oriented hedge funds are increasing at a faster pace when compared to the overall hedge fund market. Ian Linnell, Managing Director, European Banks said, �Widespread hedge fund participation in virtually all facets of the credit markets is a relatively young phenomenon. As such, if several credit-oriented hedge funds de-leveraged, this could result in price declines across multiple segments of the credit markets, which could lead to increased refinancing risk and/or reduced issuance activity.�
The Fitch report warned that the rapid growth of hedge funds in the credit markets has also led to links between unrelated segments, which may lead to new risks. The outperfomance of small cap over large cap stocks and of growth over value stocks observed in June typically helped these managers. However, a problem arising from one segment of the market could also spill over to the others. While the report acknowledged that hedge funds are important sources of capital to the markets, it however raised concerns over the behavior of hedge fund investment vehicles, which the report says could also lead to new risks.
Paul Oranika
Editor-in-Chief
HedgeCo.Net
Email: Editor@hedgeco.net
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