Distressed investing to climb in 2007

Virginia Parker, founder and chief investment officer of hedge fund of funds firm Parker Global Strategies, said during the firm’s 2007 Hedge Fund Outlook event that the strategy performed better than expected and that trend will continue into the new year. According to the Edhec Alternative Indexes, distressed strategies have returned 13.4% this year.

A low rate of defaults, expected to be between 2% and 3%, will favor distressed strategies, added Marti Murray, president of hedge fund Murray Capital Management. Distressed investing should also see strong returns as demand from corporate and private equity investors for mergers and acquisitions activity is likely to remain high.

Sectors where hedge funds can expect to see the most opportunities include auto suppliers, airlines, paper and packaging, home building, sub-prime lending and healthcare.

There are several factors that could have a negative impact on returns in distressed investing. These include a recession, severe losses in private equity or banking sectors or a spike in default rates, Murray said.

Investments in the global equities market is also expected to increase as investors are likely to make more investments in Europe, Latin America and Asia, Murray said. Parker said China should continue to be a hotbed for investments, as foreign investors continue to flood in.

Thailand is likely to see a drop in hedge fund investments as the government has passed legislation that will tax short term foreign investments in an effort to try to control rise of the Thai bond.

Parker said she expects a better year for currencies managers. There should be some weakness in the US dollar driven by US Treasury lowering interest rates in second half of the year, Parker said. Interest rates are likely to rise in Europe and Japan, strengthening the countries’ currencies.

Other areas, such as global energy and natural resources, are also expected to be attractive for investors this year, Parker said. The average price for oil is expected to be roughly $10 higher than current levels, which will make the market attractive for investors, added Leigh Goehring, managing director of Chilton Investment Company.

While the demand for oil is expected to remain high, the demand for renewable transportation fuels such as ethanol and biodiesels will cause global agricultural markets to perform well also, Goehring said.