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Ever broader arb opportunities

Credit hedge funds and proprietary trading desks are starting to encroach on the trades once reserved for the distressed, equity long/short and merger arbitrage funds. US airline companies have been in trouble for several years now, most recently because of the overwhelming costs of their defined-benefit pension plans. This year, for the first time, credit-specialist hedge funds have been taking a variety of trading positions as a result.  Even before the pension problems, credit hedge funds were taking various positions on airlines this year, such as putting on long/short trades on an airline's secured and unsecured paper.

They have also been active traders in media and telecom securities, especially as various companies in these sectors turn up as leveraged buy-out and merger candidates.

Making bets on LBOs

It's the latest form of capital structure arbitrage, a strategy that became particularly popular in 2002 and 2003. Back then the rout in both the debt and equity markets had caused so much spread widening and dislocation between debt and equity prices that there were, relatively speaking, easier trades to put on during the 15 months or so that spreads tightened.

It has been tougher to find those this year.

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