Hedge Funds Buying And Selling Lehman Claims

Oct 31 2012 | 11:41am ET

In the thriving and surprisingly robust market for claims against Lehman Brothers Holdings, hedge funds are playing a big part.

Hedge funds are among both the biggest buyers and sellers of claims; many found their assets with Lehman's London-based prime brokerage frozen in the wake of the investment bank's collapse. But what could have proven a disaster may turn out a boon.

That's because Lehman's liquidators are doing a better job than perhaps initially expected in recovering assets. Most now expect that claimants will be paid at least the full amount of their claims, and possibly more: Under British law, a bankruptcy estate must pay 8% annual interest on claims if it can.

That prospect, plus a deal with Lehman's U.S. brokerage earlier this year, has investors positively bullish on the bankrupt bank. Claims are fetching at least face value on the secondary market; some are even selling at a premium, where in the wake of the collapse they got less than half of par.

Hedge funds are taking advantage on both sides. Claren Road Asset Management recently sold a $400 million claim for approximately face-value. And hedge funds including Elliott Management Corp., King Street Capital Management and Paulson & Co. are buying and holding claims, The Wall Street Journal reports.

What's more, the biggest buyers of the claims include investment banks—which may be buying them on behalf of hedge fund clients.

The first payments on claims are expected in November.

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