Funds Can Profit From Others' Misfortunes

While many market analysts warn of an upcoming surge in U.S. businesses filing for bankruptcy, institutional investors can still find ways to make money off corporate crises, according to Dow Jones News Service.
"We're seeing a lot of companies come under duress," said Russ Kinnel, director of mutual fund research for Morningstar, Inc. "Often when there's a lot of fear, that creates opportunity," he said.
Defaults don't necessarily lead to liquidations or bankruptcies. Some companies are able to refinance their heavy debt loads or get more time from bank lenders and bond holders, but the credit squeeze is putting more pressure on everyone.
Mutual funds like Martin Whitman's Third Avenue Value Fund, Franklin Templeton's Mutual Series funds and David Winters' Wintergreen Fund offer ways for individual investors to make good news out of bad news.
There are various strategies managers use, such as hunting for stocks that are trading at a deep discount and buying bonds traded for cents on the dollar before or during a restructure.
When the company exits bankruptcy, these bonds are often worth more and put bondholders in a valuable position, but also carry a higher risk of loss.
"There's more using Chapter 11 as a way to realize the value of a company and its assets through a sales process," said Reginald Jackson, president of the American Bankruptcy Institute and a bankruptcy attorney at Vorys, Sater, Seymour & Pease LLP in Columbus, Ohio.