In February, with the credit markets in turmoil, Highland Capital Management, one of the largest investors in the loans financing private equity buy-outs, decided to hedge its portfolio and bought $500m worth of credit insurance. “Risk management is an intense focus for us here,” Mark Okada, Highland’s co-founder explained at a conference call with investors.

Highland was not alone. Numerous banks and other hedge funds have sought downside protection as the market rout deepens. “When people are frightened, the first place they run is the credit default swap market,” says the head of debt capital markets at one leading Wall Street firm. But the soaring demand for insurance is creating a growing imbalance in the market that may have serious and adverse consequences in the wider financial market.