REFILE-Hedge funds see big gains in distressed investing
(Corrects typographical error in last paragraph to than from that)
BOCA RATON, Florida, Jan 22 (Reuters) - Distressed asset investing, which has been in the doldrums for years, is making a comeback among hedge funds, which predict the strategy could be a top performer in several years, investment managers told a hedge fund gathering on Tuesday.
"Distressed, distressed and more distressed," said Bruce Richards, chief executive officer of the $10.7 billion hedge fund firm Marathon Asset Management, when asked about his best investment idea at the GAIM 2008 conference in Boca Raton, Florida.
"It's the greatest time we've seen since 1990," Richards said referring to the savings and loan crisis that left many financial institutions insolvent and forced a government bailout.
Richards said distressed investing is "a trillion dollar-plus opportunity" that has been caused by the meltdown in the credit markets.
In a panel discussion at the Global Alternative Investment Management Forum, Richards predicted that 162 mid-sized companies affected by the subprime lending meltdown would be forced into bankruptcy or restructurings in the next 18 months.
His firm is reinforcing its loan workout expertise and "vulture" lending group to gain large stakes in such companies, and recently purchased a residential loan workout service called Marix in Phoenix, Arizona.
"There's not nearly enough capital," said Richards, who said sovereign wealth funds like those in China, Singapore and the Middle East that have recently recapitalized U.S. investment banks aren't interested in mid-sized U.S. companies.
Arthur Samberg, CEO of the $7 billion hedge fund group Pequot Capital Management, said his firm is raising a third distressed fund, with the aim of "fixing what has been broken" among companies slammed by the subprime crisis.
"You have to have your pool of capital assembled," said Samberg, a long-time industry veteran whose main fund was up over 35 percent last year.
He said Pequot will be stepping up its strategy of control investing, which aims to gain controlling positions in faltering companies by buying debt or through recapitalizations.
Not everyone thought distressed investing would be so profitable this year. With dozens of new funds raising cash in the last six months, there could be too much money chasing too few opportunities, said Michael Roth, founding principal of Stark Investments, a $13 billion hedge fund group.
Assets in distressed investment funds grew to a record $105 billion last year from $70 billion in 2006, according to industry tracker Hedge Fund Research. The overall hedge fund industry has grown to about $1.8 trillion over the last two decades, although estimates vary.
"I think a monolithic amount of capital is chasing too few opportunities," said Roth, calling the strategy "a much smaller opportunity than expected." (Reporting by Dane Hamilton, editing by Leslie Gevirtz)
