Rush to cheap corporate debt is risky gamble

LONDON (Reuters) - Investors queuing to pour cash into discounted corporate debt are in for a risky ride as hedge funds continue to dump assets on the market and default rates have yet to peak.

There is rising interest from private equity and hedge funds to scoop up debt in secondary markets. Last year Mark Devonshire and Mark McGoldrick left Merrill Lynch and Goldman Sachs respectively to start their own funds.

"We are probably getting someone coming to see us every week about raising a new debt fund," Michael Halford from law firm SJ Berwin said at a conference this month.

Data firm EPFR Global shows flows into high-yield bond funds reached a net $4.4 billion between November and early February, at a time when most fund sectors saw outflows.

But plenty of players are warning that early adopters may be burned, as continued forced selling by hedge funds could further deplete values, and defaults could still rise, threatening to deflate debt portfolios further.

http://www.reuters.com/article/ousivMolt/idUSTRE51M31S20090223