Hedge funds are increasingly investing in distressed funds that are in liquidation according to Walkers, the global offshore law firm. Th...

Hedge funds are increasingly investing in distressed funds that are in liquidation according to Walkers, the global offshore law firm. The trend, which has accelerated significantly over the past two years, mirrors the increase in the capital managed by hedge funds and the number of distressed opportunities say Walkers. Hedge funds are much more willing than banks to get involved in the distressed debt sector as they have a greater appetite for risk and a requirement for high returns. Often, a hedge fund will buy out as much of the original investment in a distressed fund as possible, trying to become the sole, or at least the largest, investor. They may then step in with priority liquidation funding for litigation against wrongdoers in the form of a preferred loan. Funds recovered are then distributed to all the investors, including the investing hedge fund, which also receives back its loan in priority to all other claims. “With so much money and fewer traditional investment opportunities, hedge funds readily accept these types of unconventional high-risk, high-payoff ventures," said Sandie Corbett a litigation partner at Walkers in the insolvency and restructuring group. “As private equity funds and hedge funds continue to converge, we see an increase in hedge fund involvement in distressed funds liquidation," said Kevin O'Connor, a partner in the investment funds group at Walkers.