Hedge funds are growing increasingly prevalent across various market sectors, as the overall size and scope of the alternative investment vehicles require more capital to grow. But the tightened correlation hedge funds are causing among various sectors, including CDOs and derivatives, could cause an unpleasant domino effect across credit markets should a substantial credit event occur, Fitch Ratings warned last week.

"This was something that we started looking at in the beginning of the year. It was not spurred by auto activity - there was a realization on our part that everywhere we looked, hedge funds seemed to be becoming more and more significant participants in all of the sectors that we cover, whether it is the cash market or the credit derivatives market," said Fitch analyst Roger Merritt.

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