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Hedge Funds Distressed Debt Securities

Hedge Funds & Distressed Debt

Hedge Funds & Distressed Debt Securities

Hedge Funds & Distressed Debt SecuritiesA company on the verge of declaring bankruptcy doesn’t sound like a great investment opportunity, does it? Hedge fund portfolio managers who know the ins and outs of distressed securities investing can make out money from the decimated portfolios. The idea is to purchase distressed securities at deep discounts in anticipation that the investment will be worth much more after a turnaround or change in market conditions.

It has been noticed that in the recent years, many hedge funds have invested in distressed debt market securities. Much of the distressed debts consist of commercial and real estate loans originally made by companies, banks and other financial institutions, which are now in default, under bankruptcy protection, or in unmanageable financial condition and heading towards bankruptcy.

With a growing number of companies on default rate or teetering on bankruptcy, the number of hedge fund managers acting as distressed debt investors is all at cyclical highs. Hedge funds are also labeled as “vulture funds” because they attempt to capitalize on the debt of troubled companies, however, the value these investors bring back to the restructuring process of the company can not be ignored.

A hedge fund manager prior to making any investments in a financially troubled company assesses the quality of its management, the value of its assets, and the true risk of the borrower. A legal assessment of the loan documents and the lender's legal position with respect to other creditors plays a vital role in this assessment. However, the main goalof the hedge fund portfolio manager is restructuring of the defaulted loan that has landed the borrower in troubled waters.

Guest Article contributed by Charles King

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