The astute observer might have noticed a clue last week about the direction of hedge funds in the coming months, with the announcement that Hong Kong-based asset manager Sun Hung Kai Financial is teaming up with New York's Paulson & Co. to offer its clients the opportunity to invest in distressed global financial companies. Sun Hung Kai's USD100m offshore fund will act as a feeder to Paulson's Recovery Fund, which was launched on October 1 last year to take stakes in financial institutions.

Investing in distressed assets has been a hot topic among hedge fund managers and investors for many months, and it is now clear that some of the early investors in this strategy jumped the gun, in some cases expensively.

But the industry was galvanised by John Paulson's comments at the Gaim conference in June, when he told delegates: 'Long-term, distressed presents an opportunity that is as much as USD10trn. That is a reflection of how much the credit markets were overvalued on the upside.'

Paulson's views are not to be discounted lightly. This is a man who generated profits of more than USD3bn in 2007 by betting that the US housing bubble would burst, and whose funds are reckoned to have gained between 10 and 20 per cent last year while the average hedge fund was losing 18 per cent, according to Hedge Fund Research. If Paulson believes the time has come to plunge into the distressed asset market, it's worth betting that rival managers will be swift to follow.