Although distressed debt hedge funds have yet to benefit from the credit crisis, they undoubtedly will in the coming year, Reuters reports.
“You ain’t seen nothing yet,” said a hedge fund-of-funds executive speaking on the condition of anonymity. “It’s going to be huge. The tea leaves are not difficult to read. It will come in all sorts of forms—banks having to offload stuff. It’s not just the debt of distressed companies. The time must come [for banks to sell assets], having got themselves into a tremendous hole.”
Distressed funds buy the debt of firms that have defaulted on debt payments, but get them at discount. The reason such funds haven’t benefited from the subprime meltdown is that the junk bond default rate is only at 1% because many banks are hesitant to sell debt at distressed prices.
“As it stands, it’s a bit precipitous to suggest there are lots of opportunities,” said Tim Gascoigne, a manager of hedge funds-of-funds at
As to why banks are sitting on distressed debt, Ken Kinsey-Quick, a manager of a hedge fund-of-funds at
Through the end of November, distressed hedge funds have risen 8.29%, trailing the Credit Suisse/Tremont Hedge Fund Index’s 12.04% gain.