What Are the Primary Motivations for a Hedge Fund to Sell CDS Protection?

Hedge funds sell CDS protection for several reasons. The primary motivation is to generate income by collecting the regular premium payments (spreads) from the protection buyer.

They may believe their analysis indicates the reference entity is less risky than the market perceives, making the premium an attractive return. Selling a CDS can also be part of a complex strategy, such as a capital structure arbitrage trade, where the fund takes offsetting positions in a company's debt and equity.