"Given that the bottom or reversion to growth in equity markets is hard to predict – it makes logical sense for hedge funds to follow distressed strategies in a bid to make profits in uncertain markets."
It would represent a significant turnaround in fortunes for the strategies which struggled to perform in 2008. A poll of 33 single manager funds and funds of hedge funds done in November 2008 by Lipper found that one in five thought distressed strategies would top the performance tables of 2009.
According to Financial Express Analytics, Man’s RMF Distressed Strategies fund has lost 29.24 per cent since launch date 1 July 2008, Thames River Distressed Focus fund has returned -15.48 per cent over the last six months and the distressed sector is down 28.75 per cent.
Short bias was the only strategy to have generated positive returns over the last six months:
Meanwhile, a new Debtwire report suggests that hedge fund managers and proprietary desk traders are anticipating a rise in North American distressed mergers and acquisitions in 2009 due to consolidation and forced selling amid the current economic climate.
The report says that as the consolidation among banks and fund closures in 2008 are expected to carry over into 2009, competition for positions will be cut, allowing new funds to push into the market.
More than half of the 100 survey respondents believe the recession will stretch through at least the first half of 2009, while 35 per cent think it will extend through the end of 2009, making it the longest on record since 1933.
"A good number in the distressed investing community view the downturn as an opportunity and expect to take advantage in 2009, through an increase in distressed investing, including increased distressed M&A activity and DIP financing—provided they have their own cash to finance it without outside leverage," says Michael Reilly, co-leader of Bingham McCutchen’s global financial restructuring group.
Tony Robinson, the chief strategist for Netherlands-based fund of funds manager Finles Capital Management, also believes that investors should start to increase their exposure to high yield and distressed strategies, with an emphasis on cash-flow generation.
Robinson, who was speaking at the Finles Alternative Investment seminar in Utrecht, argues that a 'Great Depression' outcome with a one to two-year relentless decline in equities markets is unlikely as total money supply in the US is currently growing at nine per cent a year, compared with a contraction in the 1930s.
Many stock markets around the world have reached valuation levels typically seen at the end of major bear markets, he adds.