U.S. and European hedge funds, both start-ups and established, are starting to make forays into the European high-yield and distressed-debt markets, according to London-based salesmen. "Hedge funds have been monitoring the market for the past four years and are now beginning to step in," says a salesman at Deutsche Bank. "The equity arb desk here has passed me at least 10 new [accounts]. There is undoubtedly a significant increase in interest in European high-yield," adds a salesman at Credit Suisse First Boston. Some are established hedge funds entering the distressed market for the first time and others are start-ups, he says.
One London-based hedge fund manager with $1.2 billion under management says his firm is already playing the U.S. distressed market and is now investigating the European mart. He declined further comment. Salesmen mentioned that U.S. mega-players such as Tudor Capital and Green Tree Asset Management are looking at European high-yield and distressed as well as some European newcomers such as Blue Bay and Standard Bank. Hugh Willis, BlueBay's head, says his fund will invest opportunistically in European high yield. The other firms could not be reached for comment.
"Hedge funds are attracted by volatility and equity-like returns," says a salesman at Merrill Lynch. He says the new interest should help the European high-yield and distressed markets continue to develop, because previously there were few investors willing to take on this kind of risk. Merrill just reassigned a high-yield salesman to focus solely on hedge funds because of the increased demand, he adds.
The CSFB salesman says hedge funds are looking at a few different kinds of bonds. These include telecom and cable names such as Versatel and Song Networks, non-telecoms such as Polestar and Clubhouse, and so-called fallen angels, such as Equitable Life, Swissair, Marconi and Atlantic Telecom. He says hedge funds are also buying leveraged bank debt from the likes of NTL and UPC. "We're burning the furniture. Sixty percent of the high-yield market is distressed. We're taking the European high-yield market and putting it in the furnace," he says.
A hedge fund strategist at Goldman Sachs says he also has been seeing increased interest from existing funds and start-ups in high-yield and distressed debt. Most of the funds tend to pursue event-driven, equity arbitrage or relative value investment strategies. "Based on the number of people coming to us asking for funding, we've noticed an increased interest in this area," he says.