Hedge Funds Fuel Credit-Default Boom

Not only are hedge funds making loans to companies that banks won’t, they are also fueling a major boom in loan credit-default swaps, a market that Bloomberg News says hardly existed before this year. “We’ve started using them when we haven’t been able to get our allocation of loans,” Mark Conway of London-based hedge fund CQS Management told Bloomberg News. Others have obviously had the same idea, as the credit-default swap market has zoomed to $7 billion, according to Lehman Brothers figures. In addition to CQS, other top hedge funds in this new market are Cairn Capital and BlueMountain Capital, which has discovered the swaps have been a lifesaver. According to its managing director Jeff Kushner, in a Bloomberg interview, his firm used it twice recently when it could only get a fraction of the money it was looking for. “This could change the face of the loan market,” Robert Reoch of JP Morgan said to Bloomberg News. Reoch knows something about credit default trades. He reportedly is one of the pioneers in the field, having made one of the first such transactions 12 years ago for JPMorgan. “The old guard is gradually being replaced by a new breed.”