Hedge funds are known for their active and aggressive investment strategies, but they seem to be resigned to the fact that hard-line tactics may not get them far during this turbulent period. Instead the talk of the town currently revolves around global macro and market neutral strategies.

At the 14th Gaim International conference in Monaco, star hedge fund manager John Paulson - who made billions shorting the US sub-prime mortgage sector last year - said that the credit crisis was not over and total losses in the financial sector would eventually reach as much as USD1.3trn. 'The primary factor leading to recession will be a decline in consumer spending, and I believe that will be more pronounced in the coming months,' he told delegates

Even distressed funds, often cited as an ace in the hole in the current environment, have taken a back seat - at least for now. Distressed funds seek to buy the discounted loans or other debt of companies that have defaulted on debt payments or are set to enter into administration or financial restructuring, betting on riding out the tough times and earning strong returns from a turnaround.

Distressed debt investing will throw up opportunities as corporate defaults rise, but hedge fund executives believe this will take time. 'Until the credit cycle bottoms, it's not a good idea to go too long distressed, and it's not likely to occur before the end of next year,' said one manager.

Paulson also reckons it is too early to start distressed debt investing, but he believes a huge opportunity will eventually emerge. 'I do think, long-term, distressed presents an opportunity that is as much as USD 10 trillion,' he said. 'That is a reflection of how much the credit markets were overvalued on the upside.'