Hedge fund managers speaking at the Gaim USA 2012 conference in Boca Raton, Florida, this past week identified two of the most promising hedge fund strategies and sources of alpha for 2012.

Hedge fund managers are already licking their chops over the potential of distressed debt investments in Europe, as the continent’s banks struggle to strengthen their balance sheets in the face of the sovereign debt crisis. European banks may have to sell billions of dollars worth of distressed assets to meet the European Banking Authority’s call to increase their capital ratios, according to a story from Hedge Fund Review.

Some fund managers say European banks may have to offload $1 to $3 trillion in assets from their balance sheets at distressed prices in the next few years. Several U.S. hedge funds have already expanded their presence in Europe to try to capitalize on this opportunity. These include Strategic Value Partners, a hedge fund that manages around $4 billion in distressed debt funds; Columbus Hill Capital Management, Marathon Asset Management and Oak Hill Advisors.

What’s more, the distressed debt cycle could last longer than it did in the U.S., providing more opportunities. “This is not a situation like we had in the US in 2009 where the infusion of liquidity from the Federal Reserve created a v-shaped recovery. It will take longer to exit the distressed trade in Europe,” said Scott Krase, portfolio manager at Oak Hill Advisors and a speaker at the conference.

Conference speakers also highlighted U.S. high-yield bonds and bank loans as another area to watch in 2012. That’s because the default rate among high-yield investors is expected to be lower that what credit markets are currently pricing, and investors may be able to grab returns in the 7% to 8% range. Structured credit could generate returns in the 10% to 12% range.

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