Salient to Investors:

Hedge funds using debt-trading strategies are expanding at a record pace as they profit from risks big banks are no longer taking.

Roy Smith at NYU said regulators in the US and Europe want to transfer risk to the shadow-banking system and interferes capabilities of the large banks to function as market makers and arbitrage providers.  Smith said that if these hedge-funds fail, the real question is to what degree will the market suffer.

Credit hedge funds are minnows compared with Wall Street’s largest lenders.

Debt-focused hedge funds attracted $41.4 billion from pension plans, wealthy individuals and other investors in 2012, the most since 2007, and versus a combined $57.4 billion of net inflows in 2010 and 2011.

Warren Buffett and Gary Cohn are Goldman Sachs are predicting losses for fixed-income investors when interest rates rise.

Jason Rosiak at Pacific Asset Mgmt said there’s a continuous brain drain on Wall Street and hedge funds are playing in asset classes they previously hadn’t played.

Stefan Krause at Deutsche Bank said hedge funds will benefit the most post-crisis from the coming asset appreciation.

Constance Melrose at said average investment-banking salaries fell 14 percent in 2012 versus a 3 percent decline in salaries at alternative-asset managers, and business strategies are moving out of the banks and into the hedge funds.

Aetos Capital said fixed-income arbitrage strategies are benefiting from a relative lack of competition from large banks.

Fed Governor Daniel K. Tarullo said the move of fixed-income trading strategies to hedge funds could be pose a risk to the financial system.

Anne Casscells at Aetos Capital says  fixed-income arbitrage usually gets hurt during a big crisis such as LCTM in 1998 or the recession of 2008, and has very good returns afterwards – the difference now from 1998 is that banks are under regulatory pressure not to return to proprietary trading or even positioning.

Boston Consulting says the average ROE at Wall Street firms fell to 10 to 13 percent in 2012 from 15 to 20 percent before 2008.

Economists expect the global economy to grow 2.28 percent in 2013 versus the 2.32 percent annual average since 2005.

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