Tag Archives: Distressed debt

Distressed Debt Fund of Hedge Funds to be Launched Soon

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As many hedge funds scramble to keep investor’s from redeeming and/or proposing to restructure the terms of the fund, other funds are getting ready for the next wave of hot investments: distressed assets.

As evidence that money will be moving into these areas is a story by Reuters about a new launch of a distressed debt fund of funds.  According to the article, the fund of funds will invest in other distressed asset hedge funds and will have a two year lock up person.  GAM chief executive David M. Solo told Reuters that “We are completing a thorough review of a range of the best managers in the U.S. and Europe so as to create a diversified vehicle to benefit from this unique opportunity.”

While this is the first article I have seen announcing a fund of funds focusing on this asset strategy, there are likely to be more of these fund of funds launching in the future.  The New York Times also ran a story this morning about “vulture investors” sitting on the sidelines for now.  While the NYT article discusses players biding their time, it also notes that the “volume of loan portfolios sold in the first three weeks of October has already beaten the previous monthly record.”  This indicates that the area is heating up and is likely to be a popular strategy near the end of this year and the beginning of next.  Additionally, other types of credit based funds, like asset based lending funds, are likely to be popular in the next year as the credit markets continue to be locked.

Investing in distressed assets has always been one of the central hedge fund strategies.  These investments might include investing in distressed debt and other types of distressed assets.  One of the bigger issues for investors in distressed asset hedge funds is going to be lock-up period.  Because the asset class is not as liquid, the lock-up for investors is going to be longer, as it will generally be in the hedge fund industry going forward.

Other relevant articles include:

Distressed debt hedge fund closes doors

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I previously wrote an article about distressed debt hedge funds and the popularity of such funds as they try to get in for a deal. However, the considerable amount of media attention which has been focused on this sector of the market has spooked investors enough to get them moving on redemption day. FINaltenatives is reporting that a fairly large hedge fund managed by Turnberry Capital Management is completely closing its doors. It is at least somewhat surprising that a group this large (the fund reportedly ran up to $800 million at one point) would close its doors immediately instead of trying to wind the fund down over the course of a couple redemption dates.

A few reasons why they might want to wind down the fund over a period of time may include: (1) the fund offering documents did not include a hedge fund gate provision, (2) the manager no longer thought the fund’s strategy was viable with such a severely reduced asset base or (3) the manager thought that he could get the best prices on the assets if he sold them in a large bundle instead of piece meal over time. The article also stated the manager is planning to start a corporate bond fund, which is another reason the manager decided to wind the fund down immediately.

What is most interesting about this event is the disconnect between the strategies managers wish to pursue and the strategies that the investing masses are willing to (remain) invest(ed) in.

The article is at http://www.finalternatives.com/node/5251.

ABL and distressed debt hedge funds are hot

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For the past nine to twelve months a central question from anyone I meet is: with the markets the way they currently are – how is your business? The answer, maybe surprisingly, has been great. Each month we have more and more clients; each month there are new hedge fund managers who are eager to get their fund up and running. As the conventional wisdom goes, there is always a hot market somewhere and there will always be managers who think they have an edge and who can exploit that hot market. Which brings up the million dollar question – what is the hot market now?

Recently we’ve seen an increase in the amount of asset-based lending and distressed debt funds. With the market dynamics changing and the level of liquidity decreasing on a daily basis, a niche for smaller liquidity providers has arisen. These funds will focus on a variety of distressed debts and other types of assets – we’ve seen: real estate hedge funds focused the acquisition of land, single family homes, multi-family units and other retail properties; asset-based lending hedge funds; factoring hedge funds; distressed debt hedge funds which may buy and repackage certain types of debt including mortgages and credit card receivables. For a discussion on the structure of distressed debt hedge funds (and other hedge funds with hard to value assets) see structure of distressed debt hedge funds.

As noted in this week’s issue of Business Week, hedge funds are stepping up as buyers of pools of mortgages which the banks are selling at fire-sale prices. The article notes that oftentimes distressed debt hedge funds are leaner organizations which have more room to negotiate with borrower’s because of their cost basis in the loan. Because of this, and because their employees deal with far fewer borrowers on a daily and weekly basis, the fund’s are able to fashion more manageable terms to borrowers.

The Business Week article can be located at:

http://www.businessweek.com/ap/financialnews/D928D3480.htm