Guide: Timing – when is the right time?
Chen et all from Morgan Stanley in their paper “The Distressed Corporate Debt Cycle from a Hedge Fund Investor’s Perspective” (http://www.iijournals.com/doi/abs/10.3905/jai.2008.708848 )recently discussed the 3 stages in a credit cycle: deteriorating, improving and flat and performance of distressed debt in each of these measured over 3 historical cycles. This research showed that the most attractive returns achieved by investors where during the credit improving stage and least in the credit deteriorating stage. Improved access to capital markets, improving trade, increasing valuations & etc all contribute to distressed debt investments increasing in value in such an environment. In addition, following a deteriorating credit environment with high default rates, investors have a much larger pool of distressed opportunities to choose from.
Tracking distressed debt performance as an asset class is however difficult. There is no “passive” way of getting exposure to distressed debt and there are no “distressed benchmarks”. This makes it difficult to say whether investors are getting any “alpha” or is it simply they are getting access to the “distressed debt beta” by investing with a manager.
As to measuring performance, there are only a limited number of fund of fund indices which track performance of distressed debt funds. These include:
- HFRI ED: Distressed/Restructuring Index (non investible, https://www.hedgefundresearch.com/mon_register/index.php )
- HFRX Distressed Securities Index (investible index, https://www.hedgefundresearch.com/hfrx_reg/index.php?fuse=login&loginflag=1 )
- Credit Suisse Tremont Hedge Fund Index: Event Driven : Distressed (http://www.hedgeindex.com/hedgeindex/en/default.aspx?cy=USD)
- Barclay Distressed Securities index (http://www.barclaygrp.com/indices/ghs/Distressed_Securities_Index.html)
- Hennessee Distressed Index (http://www.hennesseegroup.com/indices/returns/strategy/distressed.html)
My favourite place to keep track of distressed funds is the EDHEC Distressed Securities index which is in fact a blend of the above indices. Most important is actually a free index to use (https://risk.edhec.edu/indices-investment-solutions).