MF Global Debt Dents Funds

Despite the $1 billion or more that is still missing from their accounts, MF Global brokerage clients are more likely to get their money compared to another group of creditors—-bondholders, among them funds.

The hedge fund industry in the aggregate appears to be holding a substantial amount of MF Global debt. Scores of large funds bought bonds or notes. They will get something back eventually from the bankruptcy but likely less than the money they lent.

However, there is a mitigating factor: each individual manager’s MF Global exposure is said to be small compared to total assets. Therefore the impact on return will not be significant.

Citadel and AQR are among the managers that bought MF Global convertible bonds. In addition Citadel got MF Global stock, which will almost certainly recover nothing from the bankruptcy. In total Citadel invested around $28 million in MF Global.

Another manager that invested in MF Global debt is Angelo Gordon & Co., which holds a $12 million note. Angelo Gordon  is known for a strategy that seeks opportunity in bankruptcies. But the fact that this note was purchased before MF Global went under suggests it was not part of a deliberate distressed strategy by Angelo Gordon at the time. Now it has become a bankruptcy play.

How much will the creditors recover? The bankruptcy agreement for Lehman Brothers, announced last week, is suggestive.

Depending on which Lehman entity they lent to, bondholders are getting from less than 21 cents to the dollar to more than 30 cents to the dollar. But MF Global debt holders may do better.

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