The subprime mortgage market and the attendant credit market distress is causing manner of failures, including that of a high-profile hedge fund. It begs the question: if someone is losing on this investments, someone else should be winning?

Helen Thomas at FT Alphaville reports on a couple of hedge funds that have profited from the subprime meltdown while acknowledging that mortgage-related hedge funds are a relatively small part of the hedge fund industry. Increased risk aversion has affected other areas including widened-out arbitrage spreads.

Citadel Group stepped up to purchase assets from Sowood Capital Management. DealBook reports on a number of other firms that are allocating (or raising) capital to take advantage of opportunities generated by recent market stress.

Here come the grave dancers. As the credit market continues to tighten, opportunistic hedge funds are coming out of the woodwork to pick over the debris. Meanwhile, other funds are also taking advantage of dislocations in the credit markets to quickly raise funds to put to work.

This raises a very good question. Is there too much capital out there patiently waiting for a moment to pounce? David Merkel at the Aleph Blog writes:

I’ve said it before, and I’ll say it again, there are too many vulture investors in the present environment. It is difficult for distressed assets to fall too far in such an environment, barring overleveraged assets like the Bear Funds.

One investor who know to be patient is Warren Buffett. Jeff Matthews notes that Buffett was incorrect in saying that the whole private equity thing, “isn’t really a bubble.” That error aside, this type of environment plays into the hands of an investor like Warren Buffett who has ample capital to put to work, but has been unable to find large enough investment opportunities with a reasonable margin of safety. As Matthews writes:

The private equity bubble has burst, and nobody knows how it will end. But one thing we can take to the bank: trust Warren Buffett to pick through the debris and find the values.

So whether it be the dislocations generated by subprime mortgages or private equity there seem to be any number of interested parties looking to put capital to work. Keep in mind that these investors often have access to information and deals that investors do not. It will be interesting to see how these distressed investments play out over time.

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