Hedge funds using debt-trading strategies honed on Wall Street are expanding at a record pace as they profit from risks big banks are no longer taking.

BlueCrest Capital Management LLP doubled its New York staff in the two years through December, while Pine River Capital Management LP increased its global workforce by one-third in 2012. Hedge-fund firms are hiring from companies such as Deutsche Bank AG, Barclays Plc and Bank of America Corp. as their credit funds have attracted $108 billion since 2009, data compiled by Chicago-based Hedge Fund Research Inc. show.

The flow of funds and people is taking place as regulators demand banks curb proprietary trading and back riskier wagers with more capital to prevent another financial crisis. That has allowed so-called shadow-banking firms to expand in businesses contracting at the largest lenders, including distressed-debt trading and fixed-income arbitrage, a strategy that seeks to profit from short-term price differentials.

“The regulatory posture in the U.S. and in Europe is unequivocal: They want to transfer risk to the shadow-banking system,” said Roy Smith, a finance professor at New York University’s Stern School of Business and former Goldman Sachs Group Inc. partner. “It does come at the cost of interfering with some financial capabilities of the large banks to function as market makers and arbitrage providers.”

BlueCrest, Millennium

Credit hedge funds, part of a less-regulated shadow-banking system that also includes money-market funds and real estate investment trusts, are still minnows compared with Wall Street’s largest lenders. BlueCrest, Pine River Capital and Millennium Management LLC, three of the fastest-growing funds, have combined assets of about $67.6 billion, according to people with knowledge of the matter. JPMorgan Chase & Co.’s corporate and investment bank had an average of $413.4 billion in trading assets in the first quarter, up 5.6 percent from a year earlier.

Still, debt-focused hedge funds are expanding rapidly. They attracted $41.4 billion from pension plans, wealthy individuals and other investors in 2012, the most since 2007, after a combined $57.4 billion of net inflows in the two previous years, HFR data show. The three-year total was a record.

Hedge funds focusing on fixed-income arbitrage boosted returns by 51 percent last year, while fixed-income, currencies and commodities-trading revenue at the nine largest banks rose 14 percent, excluding accounting charges, according to data compiled by Bloomberg.

‘Brain Drain’

The strategy, once employed by Long-Term Capital Management LP, focuses on exploiting pricing inconsistencies between assets rather than making bets on the market’s direction at a time when Berkshire Hathaway Inc. Chairman and CEO Warren Buffett and Goldman Sachs President Gary Cohn are predicting losses for fixed-income investors when interest rates rise.