Nov. 1 (Bloomberg) -- The fallout from the subprime mortgage market collapse in the U.S., which led Merrill Lynch & Co. to post a record loss last week, is set to continue, said hedge-fund managers overseeing more than $17 billion of assets.

Michael Hintze, who runs London-based CQS, Bernard Oppetit, who founded Centaurus Capital Ltd. and Martin Lueck, director of research at Aspect Capital Ltd., said they expect further turmoil after a U.S. housing market slump caused credit market rates to rise in August and September. Investors spurned all but the safest investments, forcing writedowns of fixed-income holdings and a run of redemptions on some hedge funds.

``I don't think we have seen the full effects yet,'' Lueck said in a speech at the Hedge Royale conference in London. ``It's going to be a very tough time for U.S. markets.''

Investment banks will continue to bear the brunt of the declines, Hintze said. He has sought to protect his fund investing in asset-backed securities by reducing the amount it borrows to three times customer assets from as much as 10 times at the start of the year.

``Certain financial corporates have the potential to surprise people on the downside,'' Hintze said in an interview at the conference. He declined to give details. Hintze, an Australian who founded CQS in 1999, oversees a company with more than $8.6 billion of assets.

Oppetit said he intends to buy debt that investment banks have committed to finance and have then been unable to pass on to investors.

``All these loans will be sold too cheaply,'' said Oppetit, who helped found Centaurus in 2000 and now oversees about $4.5 billion in stock and bond investments. ``Investment banks need to face reality and move on.''

Lueck helped found AHL in 1987. The company is now part of Man Group Plc.

To contact the reporter on this story: David Clarke in Edinburgh at dclarke3@bloomberg.net.

Last Updated: November 1, 2007 11:42 EDT