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Academic research reveals hedge funds more like 'guardian angels’ than 'vultures’

Wednesday, May 09, 2012

Beverly Chandler, Opalesque London: Latest research from academics Wei Jiang, Kai Li, and Wei Wang from Columbia University, University of British Columbia and Queens University respectively shows that – contrary to popular opinion – hedge funds have a positive influence when investing in U.S. companies filing for Chapter 11 bankruptcy.

The study, co-authored by Sauder School of Business finance Prof. Kai Li, Hedge Funds and Chapter 11 and published in The Journal of Finance, reveals that when a hedge fund invests in a distressed company, other creditors in the transaction fare better and there is a greater chance a company will emerge from bankruptcy.

"It’s a common view in the media and popular opinion that hedge funds are 'vulture investors’ who dismantle companies to maximize profits in the shortest time-frame possible," says Li. "We found the opposite is true. Our data show that hedge funds strategically invest in troubled companies with the intention of becoming major shareholders after they emerge from bankruptcy. They are motivated to strengthen firms, not tear them apart."

Unlike mutual funds and pension funds, which have very stringent requirements on the types of companies in which they can invest, hedge funds are able to take on ......................

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