Hedge funds are becoming key players in the US distressed debt market, as well as the market for futures, junk bonds and credit derivatives where thye now account for roughly a third of all trading, according to a report published on Tuesday by Greenwich Associates, an investment advisory company.

Hedge funds move to dominate the less efficient and liquid markets for exotic financial instruments which they target as a way to generate above-normal returns. Hedge funds now have about $1,000 billion in funds under management, still a relatively low proportion of the investment market, and are restricted by much lower regulations than conventional mutual funds.

“Hedge funds made up 82 per cent of trade volume in US distressed debt and almost 30 per cent of volume in US below-investment grade bonds and credit derivatives,” says the study.

Now hedge fund managers are shifting their focus towards Europe and China investing in distressed companies’ debt at a minor fraction of its nominal value, later threatening the companies with refinancing or insolvency. Critics argue that hedge funds have disrupted many a rescue plan in an effort to reap off a quick profit.

“You are talking about relatively narrow markets in general . . . [but] these are the markets that are targeted by hedge fund strategies. What it generally shows is that assets under management are still small but in terms of their importance to Wall Street and to the brokerage community they are massively important,” William Wechsler, one of the report’s authors, said on Monday.

“They [the hedge funds] take these markets that are relatively inefficient and they focus a lot of intelligence and a lot of research on them and those inefficiencies start to whittle away.”