Subprime Mess to Help Hedge Funds Focused on Distressed Debt

The subprime loan fiasco will actually boost the returns of hedge funds holding instruments that take advantage of distressed debt, or inefficiencies in the market, AFX International Focus reports. But hedge funds holding credit default swaps, a form of credit protection, will suffer, industry insiders said.One fund that will benefit is the $13 billion Paulson Credit Opportunities

Fund. Year to date, it’s up nearly 130%, rising 40% in June alone.

“Volatility in the market is a tremendous opportunity for hedge funds because they can go both long and short of assets,” said David Aldrich, managing director for the Bank of New York. “Some of the very smart hedge funds have taken advantage of this and made huge gains as a result of taking the right positions.”

 But not everyone is so sanguine about the outlook for hedge funds. Philippe Bonnefoy of hedge fund Cedar Partners believe more funds will suffer than will gain. “Long-only investors and other institutional investors may find it is much worse than was previously expected,” Bonnefoy said.

 The staff of Money Management Executive ("MME") has prepared these capsule summaries based on reports published by the news sources to which they are attributed. Those news sources are not associated with MME, and have not prepared, sponsored, endorsed, or approved these summaries.