If you had any remaining doubts that hedge funds are taking over the world, a new study from institutional in-vestment consultant Green-wich Associates Inc. shows that the already considerable influence of hedge funds on the fixed income markets grew last year as hedge funds trading volumes in bonds and credit derivatives more than doubled between the first quarter of 2005 and the first quarter of 2006. "Hedge funds now generate 45% of annual trading volume in emerging market bonds and 47% of annual volume in distressed debt," says Green- wich Associates consultant Tim Gaston. In certain products, they provide so much liquidity that markets couldn't function efficiently without them.

Hedge funds have been especially active in snapping up the latest exotic collater- alized debt obligations (CDOs)–pools of similar assets carved into different payment streams–that have been hitting the debt market. CDOs used to be fairly straightforward instruments that were backed by corporate bonds, notes Gaston. "But now you have CDOs backed by CDOs by CDOs."