Future residents of the Cottage Gate development in Middletown, New Jersey, may be surprised to learn their granite countertops and two-car garages were paid for by a hedge fund.

But after Kara Homes Inc. declared bankruptcy in October, hedge fund Plainfield Specialty Holdings provided financing to help the troubled homebuilder keep operating, assuming loans to pay for the construction of individual houses at Cottage Gate and elsewhere.

If bricks and mortar on the Jersey shore sound atypical for hedge funds, think again. These funds are increasingly dabbling in troubled assets of all stripes -- from plots of land to controlling equity stakes.

In the process they are showing that, rather than adding volatility and risk to financial markets, hedge funds can provide a stabilizing floor under distressed assets.

Any notion of a crash will certainly be mitigated by hedge funds, said UBS joint global head of leveraged finance Steven Smith. They can soften a downturn by bringing liquidity to the market. We won't just fall off a cliff.

With record assets under management, and a need to achieve appealing levels of return for investors, the lightly regulated industry is playing a key part in keeping both distressed companies and investors afloat.

Liquidity is the lifeline, Deutsche B