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.