Hedge funds 'no risk' to Britain's financial system

The Financial Services Authority today said hedge funds were not posing any big risk to the financial system.

The watchdog said there was "no clear evidence" any fund posed significant systemic risk, they were generally running "relatively low-level" leverage. It also said the potential contagion risk from hedge funds was "contained".

A survey found today that hedge funds will increase their investments in distressed debt and equity this year - and expect to make more money doing it.

The most attractive areas for distressed investing will be banking, energy and healthcare, according to the Reuters HedgeWorld and Dykema poll.

Of 120 hedge fund managers questioned, 65 per cent said some of their portfolios were invested in financially troubled companies, up from 53 per cent a year earlier. More than one in three said they had put at least 20 per cent into distressed debt, up from one in 10.

Most said the risk profiles of distressed companies would be flat or declining, meaning hedge funds are likely to increase their profits by staying out of bankruptcy court.

"The perception is that there is less risk of bankruptcy, or greater investment returns from those type of investments," said Rick Bendix, co-head of the bankruptcy and restructuring practice at Dykema.

Managers are also buying more unsecured debt, which may be for sale at a sharp discount, and are purchasing more equity in troubled companies. The survey found 49 per cent of hedge funds invested in the equity of a troubled company in the past 12 months, up from 41 per cent.