According to the survey by Thomson Reuters HegdeWorld and law firm Dykema, 36 per cent of 155 fund managers questioned said they have invested in distressed debt in the past year, down from 48 per cent in 2007.
Meanwhile, 41 per cent said they had put money into distressed equities, a two per cent decline from a year ago.
Of those who were prepared to lend money to firms in financial danger, 44 per cent preferred the use of secured loans, where debt can be swapped for equity giving a fund control of a company if it files for bankruptcy.
Rick Bendix of Dykema said wariness about distressed investing reflects a widespread caution over the prospects for economic recovery.
"Given the economy, you would think that people would perceive there would be greater risk in the next 12 months," he remarked.
According to EurekaHedge, hedge fund assets declined by $350 billion during 2008.