News & Insights

Reuters Hedgeworld & Dykema Insolvency Outlook Survey Reveals Reversal As Hedge Funds Return To Troubled Companies

Hedge Fund Managers Expect Flow of Investment Capital to Re-open for Distressed Companies

February 23, 2010

Chicago

Armed with war chests of capital to deploy and greater comfort levels dealing with distressed companies, hedge funds have reversed course and begun repositioning themselves to capitalize on higher returns generated by financially troubled companies, according to the results of the Reuters HedgeWorld & Dykema 2010 Insolvency Outlook Survey.

“As their outlook for financially troubled companies has improved, hedge funds managers have shifted gears, reprioritizing which positions in the capital stack present the best opportunity,” said Richard Bendix, co-leader of Dykema’s Bankruptcy and Restructuring practice. “While specific loan to own strategies have become less attractive, hedge funds of all sizes have noticeably increased their portfolio allocations to financially troubled companies.”

“Hedge fund managers are doing what they do best: adjusting,” added Chris Clair, managing editor of Reuters HedgeWorld. “As sentiment grows that the credit situation is improving, more managers are putting more money to work in the distressed space, and those managers clearly feel more comfortable than they once did exploring opportunities further down the capital structure.”

Announced today, highlights from this third annual survey of hedge fund managers include: 

  1. 65 percent of hedge fund managers report having a portion of their portfolios invested in financially troubled companies, up from 53 percent in 2009.
  2. 59 percent of respondents who invested in financially troubled companies have seen these positions increase in value in the past year.
  3. 56 percent of respondents expect that the availability of capital to financially troubled companies will increase in 2010, up from 37 percent in 2009.
  4. Loan to own strategies have fallen out of favor with hedge fund managers: 17 percent of respondents report loaning money to a financially troubled company in pursuit of a loan to own strategy, down sharply from 43 percent in 2009.
  5. Surprisingly, while secured loans remained the preferred distressed debt investment vehicle, hedge fund managers reported that the rate of subordinated debt investments tripled from 7 to 21 percent in 2010.

For a complete copy of the survey results, please contact Brian Kiefer at (312) 252-4113 or visit http://www.dykema.com/bankruptcy/2010InsolvencySurvey.pdf