(Reuters) – Wealth managers at Citi are telling their clients to watch for a burst of hedge fund activity in bad assets.
The wealth investor says in its most recent note that the biggest opportunity for hedge funds is probably around the Public-Private Investment Fund, which is part of the huge U.S. plan to stabilise the financial sector.
The idea is that the U.S. government will lend money to investors to buy up toxic assets from banks, thus setting a market price.
Citi notes that the loans are non-recourse ones, which means that any default is limited to the actual cost of whatever collateral is require.
In short, it limits liability is asset prices fall.
As a result of this, Citi says, hedge funds are likely to find the system attractive. But it warns:
“Returns are likely to be volatile, at least in the near term. To take advantage of these new opportunities, investors need a long time horizon and a lot of patience.”