Hedge Funds Expect Recession, More Blowups, Distressed Opps.

Apr 4 2008 | 11:13am ET

Hedge funds are bracing for a recession and further meltdowns this year, and are putting more of their assets into distressed debt, according to a new survey.

According to Debtwire, 70% of proprietary trading desks surveyed predict a recession in 2008 with none ruling one out, while 57% of hedge funds said they expect a recession, and 43% percent of institutional investors agreed.

Three-quarters of respondents said they plan to place more of their assets in distressed debt this year. They were also unanimous in the belief that hedge fund liquidations will increase in 2008, with about one in 10 predicting a 50% to 75% risk of systematic shock, compared to zero in last year’s study.

Two-thirds of survey participants picked financial services as one of the top three sectors offering the greatest distressed investing opportunities in 2008 and almost three-quarters listed first-lien loans among the three most attractive instruments for the next year.

“We've already seen a brisk pick-up in the fourth quarter of 2007 of commercial loan and bond restructurings beyond the subprime and asset-backed defaults we saw all summer,” said Michael Reilly, co-leader of Bingham’s Financial Restructuring Practice Group. “Distressed debt momentum is building rapidly because lenders who were hammered in the asset-backed markets in 2007 are now forced to be more conservative in the commercial markets in 2008."

“There is clearly a sizeable and growing interest in distressed debt investing going into 2008,” Mick Solimene, managing director, Macquarie Securities (USA), added. “The euphoria we’ve seen in the buyout market over the past few years is clearly muted at the present time. As the liquidity chill takes longer to thaw, distressed debt investors will have greater capital to work their way through an increasing supply of distressed opportunities in 2008.”

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