Smart-Stock.net

One of the trends in this time of economic crisis is the cashing out on the part of hedge fund investors.  The New York Times published an article yesterday about this very subject.  Considering the house’s rejection of the proposed bailout package, such a cashing out (and loss of investor confidence) seems likely.

Basically, during this period of insecurity and uncertainty, hedge funds are bracing for a series of investor withdrawals, which will force some hedge funds to dump investments (including distressed assets).

According to James McKee, director of hedge fund research at San Francisco consulting firm Callan Associates, “Everybody’s watching for redemptions, and there could be a cascading effort, where redemptions cause other redemptions.”

Some hedge funds are losing money, and some of closing down entirely.  Over 350 have been liquidated so far this year, up about 24 percent from last year.

So where’s the good news in all of this?

For those hedge funds and investors who have the assets, bravery, and patience to weather this storm, they will benefit from seeing many of their competitors vanish.  Furthermore, not all in the industry have lost faith in hedge funds.

David E. Smith, CEO of Coast Asset Management, a Santa Monica, Calif. based fund worth $5.6 billion, believes that “It’s clearly been a very tough year for investors in general, but I think hedge funds have done a good job of navigating very tough markets and don’t get the type of recognition that they should.”

To better deal with the increase of distressed assets in today’s financial marketplace, more and more law firms are starting to specialize in distressed asset management. According to a recent article on Law.com, Bryan Cave is the latest law firm to create a distressed asset group.

Many firms are receiving an increasing number of calls from lawyers needing advice on bank collapses, and according to Bryan Cave regulatory specialist Karen Garrett, “We decided to be proactive and not wait and be reactionary.” Among the goals are to better assist the failing banks, clients who have funds in such banks, and private equity groups who hold contracts with such banks.

In addition to Bryan Cave, Andrews Kurth and Thacher Proffitt & Wood have created distressed asset practice groups. These firms join the increasing number of hedge funds and investment firms also investing in distressed assets.

According to Garrett, there is already plenty of work to do: “We remember the 1980s and the early 1990s, so we know the depth of legal work that comes up when you start having a rash of bank failures and near failures.”

A recent Reuters report states that an increasing number of hedge funds are investing part of their portfolios in distressed assets.  A survey of 100 hedge fund managers by the Schwartz Cooper law firm found that more than 60 funds have invested in distressed companies, and almost 40 funds plan to buy assets from such companies within the year.

Richard Bendix, director of the survey, explains it this way: “Hedge funds are under increasing pressure from their investors to perform, but the risks associated with that performance have increased dramatically.”

For investors and fund groups planning to invest in distressed assets, it is paramount that they fully understand insolvency situations, namely, their legal obligations should they be unable to sell their stakes in distressed companies.

These responsibilities aren’t dissuading an increasing number of investment firms.  The fund managers surveyed are especially interested in the housing, automotive, construction, and energy sectors as upcoming distressed asset opportunities.

Whatever their inherent risks, it’s becoming clear that distressed assets are a growth opportunity too lucrative for aggressive investors to pass up.