Regulators have demanded that banks stop engaging in so much risky behavior - chiefly, distressed debt investing. And the banks have begun to curtail this type of investing.
But this has led to an unprecedented - though not unpredictable - situation: It seems the hedge funds are picking up the slack.
The distressed debt that banks are leaving behind is getting bought up, in a big way, by credit hedge funds. Fully $108 billion worth of distressed debt investments is being picked up by these groups.
Hedge funds are not as big as the large banks, with assets running "only" into the mid-hundreds of billions. But the more moves they make, the bigger they become.
Hedge funds, money-market funds and REITs - engines of shadow-banking - have exploded recently, in terms of capital and headcount. And top talent - for top dollar - has been leaving companies like Deutsche Bank AG (NYSE: DB) and Barclays Plc (NYSE: BCS) for the greener, riskier pastures of BlueCrest Capital Management and Pine River Capital Management.
Hedge funds are less regulated than banks, because they cater to a savvier investor with different goals than someone who has a run-of-the-mill checking, savings or retirement account. Grandma is not opening up a Christmas Club account for you with the likes of Carl Icahn - yet.
This freer atmosphere makes hedge funds the natural place to turn once you begin to rule out banks. They've become "shadow banks," and they've been getting into some pretty interesting areas.
Their investment in bankruptcy claims and distressed debt is of particular note.