Hedge funds circle distressed debt opportunities

In a week which saw money market fund Sentinel Management take action to suspend hedge fund redemptions and Goldman Sachs join forces with a group of investors to bail out its Global Equity Opportunity hedge fund with an injection of $3bn cash, Nick Sparks of F&C Partners believes the autumn will bring a swathe of new opportunities for hedge funds.

Sparks who is part of the team which manages F&C Event Driven Ltd, a listed fund of hedge funds which invests in funds targeting companies requiring catalysts for change such as bankruptcy or balance sheet restructuring, expects current volatility to continue for a couple of months. But added that when investors return from the summer holidays they will focus on "the opportunity sets created from mispricings."

"Warren Buffet famously said 'It's only when the tide goes out that you learn who's been swimming naked'. Those institutions which allowed themselves to be carried by the tide and were caught up in buying highly leveraged structures without doing the proper analysis, are now finding themselves stranded. Until we know how far the risks have spread within the system, we cannot guess at the full extent of the problem. One thing we can be confident of, however, is that there will be plenty of buying opportunities.

"People are panic selling now which is leading to transactions which don't make sense. As companies become less efficient and look to de-equitise, hedge funds will be able to pick up the debt very cheaply and release it back to the market at a higher price once restructuring has taken place. This is what happened between 2001 and 2003 after the TMT bubble burst and many telecoms companies sold their debt at next to nothing. Then as now a lot of the capital that was released to keep these companies heads above water was provided by hedge funds."