A report on financial magazine Barron's said hedge fund investors are now eyeing to take opportunities in risky assets that foreign and US banks are no longer keen to exploit.

One of the assets that hedge funds are most likely to invest in are European bank loans, as the new Basel III banking rules required owners of such assets to unload them as early as possible. The new banking rules, said the Barron's report, forces banks to comply with increase capital level requirements by year 2019. The implementation, however, has been delayed as regulators are granting banks a leeway due to the recent debt problems in the Euro Zone, the report added. Citing Los Angeles-based Canyon Partners as an example, hedge fund firms had begun to snap up snapping up multibillion-dollar syndicated loans that were issued before the financial crisis but was not repaid, and restructure them in return for shareholder equity.

The report also said that real estate investments has picked up traction, PricewaterhouseCoopers managing partner of the real-estate practice Mitch Roschelle explained, "It's shadow banking. As the real-estate market continues to improve, credit risk becomes less complicated to underwrite for a nonregulated entity like a hedge fund without the regulatory nuances that a bank or an insurance company might encounter."

As the US market broadened, more equity funds are looking into emerging markets for potential investments. Salient Partners chief Lee Partridge favors Brazil as the Bovespa index is at a 16% loss for the past twelve months through December 18. London-based Cube Global Opportunities Fund head Francois Buclez has ventured into frontier-market stocks in sub-Saharan Africa as he projected that secular growth in the region is particularly strong in the next four or five years.

Puerto Rico is now seen as the next haven of municipal bonds, the report said. Some emerging-markets hedge-fund managers, who are experts in handling sovereign-debt problems, decided to tap discounted bonds as they expect Puerto Rico will undergo a restructuring.

Aside from the mentioned assets, hedge funds are still taking chances in the more obvious risky investments, like short-selling and US government securities. Buclez said, "This is the bread and butter of corporate banks. They borrow short-term and lend long-term."