Hedge funds now account for 82% of US trading in companies' distressed debt, threatening to destabilise yet more companies on the brink of insolvency, according to a new survey by Greenwich Associates.
The investment advisor's report shows that hedge funds are now a bigger player in distressed debt and other exotic markets such as credit derivatives than they are in conventional bond and equity markets.
Hedge funds are gaining in the distressed debt market at the expense of the banks, and the concern among many in the market is that as hedge funds naturally have shorter-term priorities, they are more likely to cause volatility in the company's position by threatening to hold up restructurings or push companies into bankruptcy.
Several companies in recent years have fallen foul of hedge fund-driven negotiations, the most recent example in the UK being My Travel, which managed to close a consensual restructuring in January but was held up for months by hedge fund bondholders.
The figure of 82% is a result of years of targeting the US distressed debt market, but the funds are also starting to make inroads elsewhere, with many snapping up Parmalat debt at bargain prices and looking to buy into the mounting bad debt in China.