Investment Strategies of Hedge Funds

10

Distressed Securities

Cerbero, fiera crudele e diversa, con tre gole caninamente latra sovra la gente che quivi è sommersa. Li occhi ha vermigli, la barba unta e atra, e ’l ventre largo, e unghiate le mani; graffia li spirti ed iscoia ed isquatra. Dante Alighieri, Inferno, Canto VI, verse 13-18

Translation by H.W. Longfellow

Cerberus, monster cruel and uncouth, With his three gullets like a dog is barking Over the people that are there submerged. Red eyes he has, and unctuous beard and black, And belly large, and armed with claws his hands; He rends the spirits, flays, and quarters them.

Cerberus is the name of a hedge fund well known for its restructuring feats in companies going bust. The fund’s name, taken from Greek mythology, evokes memories of the Divine Comedy in which the Florentine poet Dante meets the three-headed, red-eyed dog Cerberus who guards the gates of hell and barks and rends the spirits of the damned. In the same way, the hedge fund Cerberus feeds insatiably on companies that have been caught by a downdraft and driven to the hell of bankruptcy, and through a creative destruction process seeks to restructure them and sell them out again to make a profit.

The distressed securities market has been a rather obscure area in the last twenty years, and only recently it has been under the spotlight of the press due to the Enron, Adelphia, WorldCom and Parmalat scandals. Certainly, the fact that distressed securities trade mainly over-the-counter contributed to ...