Funds that invest in a basket of hedge funds are increasingly attracted to funds that can lend directly to small and medium-sized businesses, as banks, hassled from the credit crisis and asset write downs, leave a growing hole in the market.

"There are managers who are prepared to go net long in credit and think there are lots of opportunities there. They see opportunities on the long side in direct lending," said S&P’s director of fund research Randal Goldsmith on Thursday. Goldsmith also said managers of such funds see opportunities within convertible bond strategies. Convertible bonds give the holder the right to swap them later for shares in the issuer. Typically they pay a lower coupon than regular debt, but the shares are offered at a discount.

Goldsmith said fund of hedge funds managers were "generally very optimistic". "Hedge funds got redemptions in the first quarter, particularly in the credit area, but ... dislocation in the market creates opportunities. Redemptions from the underlying funds they invest in are leaving more open to new investors."