In a world of ample capital, i.e. the savings glut, the competition for scarce investment returns has become increasingly fierce. We recently found a couple of examples of this very thing.

Serena Ng in the Wall Street Journal notes the paradoxical situation of a limited number of defaults hurting an investment strategy. Distressed debt investors are apparently having a difficult time finding enough situations in which they can invest.

“Hedge-fund investors like returns, and it’s extremely difficult for managers to put their money to work when defaults are so low,” says Mark Patterson, chairman of MatlinPatterson Global Advisers LLC, a private-equity firm that buys distressed debt in the hope of gaining controlling stakes in recovering firms.

Indeed, if managers can’t find more good investments soon, “some hedge funds might have to give back their money, unless they have very patient investors,” says Harold Rivkin, principal of H. Rivkin & Co., a broker of distressed and bankrupt bonds in Princeton, N.J. “This whole area is cyclical, and when the number of buyers overwhelms the supply, the money will switch to other places,” he adds.

While some managers are finding other ways in which to utilize their expertise (and their capital) it shows the difficulty of running a single strategy hedge fund. A number of newer hedge funds are expanding their investment palette to include private equity deals.

The Economist notes the growing trend of hedge funds invading private equity investor’s turf. This in turn is causing some friction. Most private equity deals involve multiple investors so there is room for both sets of investors to cooperate as well as compete. The question for investors is what will happen to the returns from such deals.

Whether hedge funds and private-equity firms co-operate or fight, the line between them is blurring. That’s fine, but with more investors hunting on the same ground, returns might be trampled. If so, it will be even harder to justify the fees.