Hedge funds with geared wrong-way bets in hot areas such as commodities and emerging markets are feeling the squeeze from market falls, but some top managers are using this opportunity to pick up stocks they like on the cheap.

Growing fears the U.S. will slip into recession led to widespread falls in stock, credit and commodity markets on Monday and Tuesday.

Hedge funds entering 2008 with a long bias in areas such as soft commodities and emerging markets raced to unwind positions, with pressure coming from prime brokers keen to reduce their leverage.

I think everyone now is shrinking positions. If you are long you are clearly in big trouble as a hedge fund, Neptune fund manager Rob Burnett said on Tuesday.

All the crowded trades are coming back -- long emerging markets, long grains -- they are all coming back on this deleveraging.

Russia's RTS index .IRTS fell 1.6 percent on Tuesday, having lost 7.4 percent on Monday, while Indian shares fell as much as 12.9 percent on Tuesday before ending down 4.97 percent.

Meanwhile, oil sank to a six-week low and commodities such as corn, soybeans and wheat traded sharply lower on Tuesday.

Many directional long-short managers who went into this year with a long bias, I think some of them are definitely having problems, one fund of hedge funds manager, who requested anonymity, told Reuters.

The Darwinian nature of the hedge fund industry, however, means those given more room to manoeuvre by investors and prime brokers have spotted a chance to pick up good assets at attractive prices.

We've heard of managers who've seen (credit) portfolios come through, offered by investment banks looking to close down certain books, the fund of funds manager said.

Managers who are not limited by margin requirements on their side are able to add to their portfolios. These are great opportunities for good-quality credit at distressed prices.

TAKING ADVANTAGE

Meanwhile, rather than buying into safe-haven stocks or stockpiling cash, some top long-only fund managers are viewing the falls as a chance to switch out of more defensive areas such as tobacco and utilities into battered areas such as retailers, engineers and small- and mid-caps, which they think look cheap.

Such sectors are likely to benefit from interest rate cuts. On Tuesday the U.S. Federal Reserve slashed benchmark rates by 75 basis points, and further cuts are expected in the UK.

Right now the things to look at are the riskier areas of the market, the more consumer-oriented, retailers and housebuilders, Aruna Karunathilake, manager of the Fidelity UK Aggressive fund, told Reuters at a dinner on Monday night.

It has been right to be in defensives, but we're at a stage where we're starting to look at cyclicals. We're trying to refine the pace of that, but after today's fall that's more like a trot.

Job Curtis, who runs the City of London CTY.L investment trust, has been reducing his overweight holdings in tobacco and utilities and buying Marks & Spencer and IMI, although he has reduced exposure to miners in recent months.

It is right to take some profits in defensives and move into more cyclical areas ... Cyclicals have performed very badly, they've probably got interest rate cuts coming up. People will be more willing to look at them.

The word that seems to be out there is panic, said Aberdeen fund manager David Boyle, who has been adding to consumer stocks, housebuilders, and firms with U.S. exposure.

We've been broadly taking advantage. As markets fall more, people tend to start worrying more. P/es (price/earnings ratios) are in single-digits, which even in the dark days of spring 2003 you didn't see. (Editing by Paul Bolding)

United kingdom Russia Investment