Over the past several decades, distressed securities have become a popular investment target for hedge funds across the United States. At the most basic level, a distressed security is an asset or financial instrument of a company involved in the bankruptcy process. Distressed securities come in a wide variety of forms, ranging from preferred shares and corporate bonds to bank debt and trade claims. In many cases, the financial distress of an asset stems from a company’s inability to fulfill its obligations to creditors. For this reason, distressed securities are often featured at a price that is much lower than their typical market value.
Due to the significant reduction in value, distressed securities are an ideal target for investors seeking to rehabilitate the asset. If a hedge fund or other investment entity believes that the market has overestimated the distress of a particular asset, it can reverse the unfavorable situation and potentially realize considerable profits upon resale. Since distressed assets are typically involved in Chapter 11 or Chapter 7 bankruptcy, there is a considerable level of risk involved.
Due to the significant reduction in value, distressed securities are an ideal target for investors seeking to rehabilitate the asset. If a hedge fund or other investment entity believes that the market has overestimated the distress of a particular asset, it can reverse the unfavorable situation and potentially realize considerable profits upon resale. Since distressed assets are typically involved in Chapter 11 or Chapter 7 bankruptcy, there is a considerable level of risk involved.