Hey all: I would like to invest in distressed debt. Is there any way for individual (re: poor) investors to participate? Does any one know of any Distressed Debt Mutual Funds? tks.
I doubt it. Typically these investments are nowhere near liquid enough to work in that type of structure.
I would like to know this as well. I don’t know of any DD mutual funds around today, but I was reading in an old book that big shops like Fidelity had some DD funds in the 80s.
I dont think so. Distressed debt is a part of Private Equity (basically Alternative Investments). Mutual funds generally don’t invest in stocks which are less than $5. Distressed debt investments are very long term investments and too much cash can be tied with this type of investments. Mutual funds prefer to invest in highly liquid securities as it can be redeemed at will. Distrssed debt is risky investments and mutual funds manager don’t get bonuses on the basis of performance. No leverage for them as they are regulated by SEC. All they get is management fee.
Maybe some closed end funds do it; that would take care of the liquidity problems, but you’d have to deal with fluctuating premia/discounts to NAV.
You also have no real market to mark to, which makes performance/risk presentation difficult.
Distressed debt isn’t priced?
bchadwick Wrote: ------------------------------------------------------- > Distressed debt isn’t priced? Some is, a lot isn’t. Quite often you’re trying to buy enough to control the company, so it becomes a private investment, so any price it trades at isn’t the most helpful to an investor.
Is “distressed debt” more of a hedge fund thing or a private equity thing?
naturallight Wrote: ------------------------------------------------------- > Is “distressed debt” more of a hedge fund thing or > a private equity thing? I would say it is a part of Alternative Investments. There are many hedge funds as well as Private Equity firms who solely invest only in Distressed debts. I am not sure which has bigger % of assets invested in DD.
Hedge fund. There are obviously junk debt mutual funds that end up owning some pretty desitressed stuff.
Ticker: JNK (ie Junk) is an Lehman HY ETF, currently yields ~15%
thanks all.
Joe, There are some DD ETFs on the market, but the problem with them is that they are “index” ETFs, meaning there both is junk and gold nuggets in it. What you really want to own is individual instruments and to those you will not have an easy access unless you are HF/PE shop.
I’d also note that High Yield aka Junk is not the same as Distressed. I dont see any fund managers (mutual fund that is) participating in the legal process or a workout of some distressed or defaulting securities like the guys at a PE/HF shop would do. If you want crappy debt with high yield and good liquidity then hit up a fund or etf, if you want more illiquidity and potential for bigger gain on the investment then it may be a dif story
tvPM Wrote: ------------------------------------------------------- > I’d also note that High Yield aka Junk is not the > same as Distressed. I dont see any fund managers > (mutual fund that is) participating in the legal > process or a workout of some distressed or > defaulting securities like the guys at a PE/HF > shop would do. > > If you want crappy debt with high yield and good > liquidity then hit up a fund or etf, if you want > more illiquidity and potential for bigger gain on > the investment then it may be a dif story please define your definition between distressed debt and high yield. I’d really like to know your perspective b/c in my world they are the EXACT same thing.
I don’t know if there are any (or any good) DD ETF’s out there, but there are a lot of DD closed end funds - many of which are trading at big NAV discounts.
ConvertArb Wrote: ------------------------------------------------------- > please define your definition between distressed > debt and high yield. I’d really like to know your > perspective b/c in my world they are the EXACT > same thing. I did HY for my summer MBA internship. The bonds were not in default and paid a, uh, high yield (8-20%). You had to understand covenants, but nothing about the bankruptcy legal process. Our group was one half of Corporate Bonds, Investment Grade was the other. I think with DD, you are dealing with bonds that have actually defaulted. So the yields would be extremely high as the debt is selling for something like 20 cents on the dollar. And there’s the legal aspect of the bankruptcy process you have to deal with, in addition to the financial analysis.
naturallight did a nice job. HY is below investment grade corporate debt (say what you will about ratings accuracy), but its making debt payments as scheduled. There is risk that they may default on the payment, which is why they yield so much. Distressed is not making proper payments. Whether defaulted, bankruptcy, tripped a covenant, etc that obviously pushes the price down as well. Typically require a lot more work than just buying the asset and receiving the payment, there is a workout process with the company in many cases, etc. I am not sure exactly what world you live in but I hope that helps.