Wednesday, January 28, 2009

More about Wall Street's Deluded Distressed Investing Crowd

Overpriced, rumormongerous tabloid Debtwire (just kidding, we love our competition) apparently had a little extra free time and did a survey in which it polled "100 hedge fund managers, prop desk traders and other asset managers" to forecast how they perceived distressed debt opportunities in 2009 (we were not aware there are 100 specimens of this endangered species left out in the might make sense to put them all in zoos before they become extinct). Among the major findings of the glorified census were the following:

- Financial services sector is expected to offer the most opportunities for distressed investors. Auto manufacturers and suppliers may be the most lucrative sector for investors in 2009. Opportunities are expected to be spread relatively evenly throughout other sectors, reflecting the breadth of the recession.

- 73 percent of respondents predict an overall decrease of the liquidity in distressed debt trading. 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. Investors likely will continue to see a buyers' market in 2009, allowing them to be more selective with where they commit their capital.

- 2008 saw a 23 percent increase from 2007 in respondents who did not use hedging strategies. With significant declines across all markets in 2008, most hedging strategies proved ineffectual, with 34 percent of respondents not using any hedging strategies. The use of credit default swaps as a preferred strategy dropped 6 percent in 2008 from 2007.


- Fewer respondents used leverage to manage their fund in 2008 compared to 2007. Out of those who did, 49 percent plan to use less in 2009.

- More than half of the survey respondents believe the recession will stretch through at least the first half of 2009, while 35 percent think it will extend through the end of 2009, making it the longest on record since 1933.

- Heading into 2009 the appetite for primary deals has shrunk, with approximately 10 percent of respondents planning to allocate 10 percent or less to the primary.

Perhaps the words of Michael Bruder of Macquarie sum it up best "[we are in a distressed investing cycle that] may be remembered for the exceptional buying opportunities for those astute distressed investors that are able to navigate these volatile markets." Truly insightful. Sphere: Related Content
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