The crazy world of credit hedge funds

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How long before credit markets come unstuck? Credit hedge funds are hiring just the same.

Last weekend's Sunday Times contained an interesting snippet from Hugh Willis, founder of Blue Bay Asset Management, on where we're at in the credit cycle. He said the cycle comes in four stages, as follows:

Stage one Spreads tighten dramatically. Began in October 2002, ended late 2004.

Stage two Low volatility both at the index and single credit level. This ended earlier in 2007.

Stage three Index volatility remains low, but single credit differentiation becomes more marked. We may be beginning this stage right now, according to Willis.

Stage four Markets become disorderly and credit failure becomes briefly systemic (ie, credit Armageddon). No signs of this yet, but Willis says he's "vigilant", just in case.

Despite - or perhaps because of - the dangers of credit meltdown, credit focused hedge funds are still eagerly adding staff. Financial News highlights Deutsche Bank debt supremo Hope Pascucci's decision to join her husband in a new US-based credit hedge fund (not a typical move, admittedly). And Willis predicts that the European credit market, currently 40% the size of America's, will be on a par with the US in five to six years' time.

Recruiters say ongoing hiring at credit hedge funds is a no-brainer. "There's a lot of demand in the collateralised debt obligation (CDO) market," says Chris Sevenoaks at recruitment firm Finance Professionals. "US CDO funds have come over to Europe in the last 19 months, and some of the leading names in the market are hiring."

Sevenoaks says a two-year credit analyst in a hedge fund can expect 60k to 70k base salary, plus a potential bonus of 100% or more.

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