September 6, 2007 / 12:18 PM / 12 years ago

Hedge funds conflicted on distressed assets - study

NEW YORK, Sept 6 (Reuters) - Hedge fund managers see investing in distressed assets as an opportunity too lucrative to pass up, despite concerns they have over troubled companies in their portfolios, according to a recent study.

The survey on attitudes toward investing in insolvent companies, conducted with 100 hedge fund managers, found conflicted sentiments about such investments at a time when tighter credit markets could drive more companies into bankruptcy.

“Hedge funds are under increasing pressure from their investors to perform, but the risks associated with that performance have increased dramatically, “ said Richard Bendix of law firm Schwartz Cooper, who directed the survey. “They are walking on the edge of a knife trying to balance those conflicting demands.”

Underscoring this pressure, a majority of those respondents who acknowledged that they were “unaware of [their] legal rights in an insolvency situation” nevertheless expect to invest in a troubled company within the next 12 months, according to the Lipper HedgeWorld & Schwartz Cooper 2007 Insolvency Survey.

That’s a concern because debt and equity markets have become relatively illiquid — meaning there is greater chance that investors who acquire stakes in troubled companies will be unable to find other buyers if things worsen and may instead be forced to defend their interests in bankruptcy court.

“Hedge funds today are going to to have to roll up their sleeves and get into the bankruptcy trenches,” said Bendix. “People in that world play by an entirely different set of rules.”

Nearly one in three hedge funds has consulted a turnaround or workout professional regarding positions in its portfolio, according to the survey.

But while the majority of respondents were concerned that insolvency issues could affect their portfolios, over 60 percent reported having investments in troubled companies and nearly 40 percent expect to purchase assets from distressed companies in the next twelve months.

Respondents expect that the housing, automotive, and construction sectors will present the most attractive distressed debt opportunities in the coming year. To Bendix’s surprise, energy was also included in this group — which as top performing industry suggests hedge fund managers expect a significant pullback.

“When you think about oil and gas that seems very counter-intuitive,” said Bendix. “Perhaps people are thinking of alternative energy or electric utilities — which may be having financial troubles or dealing with oversupply.”

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