Hedge Funds to Help Prevent a Market Implosion

Alphaville has been looking at the latest hedge-fund inflow numbers: investors poured $60 billion into the asset class just in the first three months of this year. That compares to $126.5 billion in all of 2005, which was itself a record. But are the record inflows a sign that the world's most sophisticated investors are worried about a market crash?

One mildly ominous sign for the market at large - there’s more money being bet on increasing numbers of companies hitting trouble. Funds which deal in the securities of distressed companies saw inflows of $7.5bn during the quarter - an increase of 10.7 per cent in the total assets devoted to that strategy.

I find that news more reassuring than ominous. The more money there is in distressed-asset funds, the less far those assets fall before they're snapped up by those selfsame funds. Once upon a time, distressed debt was debt which was trading at 10 or 20 cents on the dollar; today, it's debt trading at 80 or 90 or even sometimes 95 cents on the dollar. Distressed-asset funds reduce market volatility, and act as an all-important source of bids when most investors want to sell. Hedge funds aren't always a source of risk and volatility, you know.