A Hedge Fund Strategy That's Been Limping Along For Two Years Is Making A Come Back

After every crisis, someone has to pick up the pieces. In the financial world, the cleanup crew often involves hedge funds and private equity firms that understand how to deal with distressed assets — how to restructure them, and make things shiny and new again.

You would think those funds would be quite busy over the last five years given the global financial crisis and subsequent European sovereign debt crisis, but they haven’t.

That changed in February, though, when distressed focused hedge funds posted their best returns in two years, according to research firm eVestment. They have produced the second best average returns of 2014 so far, at 3.57%.

That’s after activist hedge funds, who’ve returned an average of 3.91%.

“We saw improvement in sectors that have benefitted from the evolution of the market since February,” said Peter Laurelli, a VP and head of research at eVestment.

More specifically, Laurelli points to a turn around in the fortunes of emerging markets. At the beginning of the year, countries like Turkey, Argentina, and China were getting killed in the market. Since then, they have stabilised, and they make up a healthy portion of the distressed space.

Another reason why this space is improving is that investments that were made last year are starting to play out quite nicely.

Investors allocated heavily to distressed funds in the second half of 2013 (to the tune of $US4.3 billion) and now we’re seeing how that money was put to work, especially with funds focused on turn-around situations and taking advantage of mispriced assets in securitized credit markets.

This great news for firms like Blackstone — which raised a $US4 billion fund to invest in the distressed space in Europe back in 2009 — and for Avenue Capital, the hedge fund founded by billionaire Marc Lasry, which raised a European distressed fund in 2012. According to Bloomberg, deals in that space have surged as well.

Nice to know things are going to look a little more tidy around here.

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