very high and some think its very low. Below is a chart of the FDC's 9 7/8 of 2015 (Seniors) vs FDC.25 of 2016 (sub) over the past year. This is because debt takes precedence over equity in its claim on assets if the company is dissolved (the rule is called absolute priority ). In some cases, these investors believe the company's situation is not as bad as it looks, and as a result, they anticipate their investments will increase in value over time. Hedge funds limit losses by taking small positions relative to their overall size. When buying a bond at 4 with a target price of 60, you risk 4 points to make 56 (mirror image of last example).
Learn how distressed debt can be a good investment for hedge funds, and find out if the risk/return relationship suitable for individual investors.
Capital structure arbitrage is a strategy used by many directional, quantitative, and market neutral credit hedge funds.
In essence, it is going long one security in a company's capital structure while at the same time going short another security in that same company's capital structure.
Distressed securities often appeal to investors looking for a bargain and willing to accept a risk.
If I buy a bond at 20 cents on the dollar, my downside is 20 points, with my upside being many multiples of that. By managing these risks, both types of investors may earn great rewards by successfully weathering a firm's tough times. There are various flavors of both Fannie and Freddie prefs with the more liquid instruments trading at a slight premium to others (also certain dividend language, par value, etc has its effects). In most cases, these securities carry a CCC or below credit rating from debt-rating agencies, such as Standard and Poor's or Moody's Investor Services. And just to add a little more complexity (because this is getting fun Depending on if the bond is trading above or below par changes the equation as well. Poker is a game of odds and expected value.
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