Distressed Rally

Chidem Kurdas

You buy the debt of a bankrupt business at a steep discount. Then you wait. And wait. Eventually you receive a reward for your patience.

Something like that has been happening. People talk about a distressed rally. Companies at the late stage of bankruptcy, that is, toward the end of their restructuring process, have been a source of good profits for a small number of funds.

At that late stage, many of the issues have been resolved, says an investor. The assets gain value from not having as much uncertainty hanging over them.

The Dow Jones Credit Suisse hedge fund index shows that distressed managers made 12.15% in the 12 months ending as of May. This was the best performance for the period. Year-to-date, distressed was the third best performer. As usual, the numbers vary by index database.

One big player that gained from the distressed rally is Permal, the hedge fund investment arm of Legg Mason.

Distressed debt investors did not do as well as expected in the aftermath of the 2008-2009 shock. With the Fed keeping money so easy, there weren’t many opportunities. The funds that survived bought into a relatively small pool of bankruptcies. Starting last year, those turned profitable.

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One Response to “Distressed Rally”

  1. Distressed Debt Blurs Boundaries | HedgeFundSmarts Says:

    […] Some investors do not usually invest in private equity because they want to be able to withdraw if and when they wish. But they are willing to make an exception and put up with illiquidity because they find distressed strategies attractive—-last year these were among the best performers. […]

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