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Alternative Market Briefing

Favorable conditions prevail for L/S Diversified and Special Situations strategies

Tuesday, June 30, 2020

Laxman Pai, Opalesque Asia:

The balance of risks has slightly deteriorated on the back of mounting concerns over renewed Covid-19 infections in southern U.S. states. However, data releases continued to surprise on the upside, both in the U.S. and the EMU. U.S. banks rallied on additional softening of the Volcker rule.

According to Lyxor, the cyclical rally is losing steam, but the positive market performance continued to provide a tailwind to the more directional strategies, including L/S Diversified and Special Situations strategies.

Distressed hedge funds typically purchase distressed debt at a deep discount and seek to profit as companies turn around.

A company's restructuring usually requires a change in its business activity (e.g. product mix, cost structure, productivity), and/or in its organization (e.g. corporate management, ownership), and/or in its funding (e.g. capital structure, liabilities, asset sales).

Some strategies focus on sovereign distressed debt or distressed structured products.

The more diversified the distressed debt universe, the better. The current average U.S. distressed yield is above 25%, with wide differences according to each situation, to the seniority of the debt instruments, the recovery prospects, etc.

Historically, distressed strategies hurt in the early phases of a distressed cycle. They usually deliver double-digit returns when restructurings are progressing, supported by an improving economic environment.


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