The flow of people and capital into the distressed debt investing sector continues to swell, as both banks and hedge fund managers target bargains among the wreckage left by the credit crunch and a possible recession.

Anchorage Advisors LLC, a $7 billion hedge fund firm focused on credit and special situations, said last week it's hired Daniel Allen from Morgan Stanley. Allen, who was co-head of North American credit trading for Morgan Stanley when he departed in May after six years there, will join Anchorage as a partner and senior portfolio manager in August. Rather than head a new team or launch a new strategy, he will be "an added talent to the investment team," according to HedgeWorld.

While at Morgan Stanley Allen focused on bank debt, high yield bonds and distressed securities. Previously he was a loan trader at Goldman Sachs. Anchorage was founded in 2003 by two Goldman distressed debt managers, Kevin Ulrich and Tony Davis.

Citi Alumni Planning at Least Two Fund Launches

Meanwhile, separate groups of senior bond traders from Citigroup are planning to start at least two distressed debt hedge funds.

MarketWatch reports that Jeff Jacob and John Humphrey, who started Citigroup's proprietary distressed debt trading business in 2004, are leaving to start an independent venture and are taking several teammates from Citi's global special situations group with them. Jacob reportedly will remain with Citi through the summer to help with the transition.

Randy Barker and Geoff Coley, who co-led Citi's fixed income department until late 2007, are are in "the very early stages" of starting a fund that will likely focus on distressed debt and other credit-related strategies, according to Reuters.

"Barker and Coley are looking to hire traders and other employees and have had early conversations with potential investors," the story says. However, it says the two men face "an uphill climb" attracting investors, because their group at Citi was responsible for a large chunk of the bank's $45 billion in credit losses in the last three quarters.

Other recent high-level hires by credit hedge funds include A.J. Mediratta, former head of international debt capital markets at Bear Stearns, joining Greylock Capital Management, and Gregory Hanley and Alan Mintz, who co-lead Bear Stearns' distressed debt team, joining Tudor Investment Corp. to start a new credit investment business.