Thames River Investments (TRI) has launched a fund which invests in distressed securities.
Distressed securities are stocks of a company undergoing, or expected to undergo bankruptcy or restructuring in an effort to avoid insolvency. As a result, the prices of these securities fall as the holders, reacting emotionally to the threat of potential bankruptcy or financial distress, panic sell, sometimes ignoring the underlying worth of the company. As investments, distressed securities can be risky as the company may not recover
The Thames River Distressed Focus Fund accesses four debt managers, who are normally impossible to access by small investors, because these specialist managers usually have a minimum investment requirement of at least $1m and the best of whom are closed to new investment. Minimum entry is $10,000 or sterling/euro currency equivalent.
Approximately, 20% each will be placed with these four managers, while the remaining 20% will be split into smaller percentages for up and coming and higher compression managers where the returns may be higher but with more volatility.
According to TRI, a 1998 study on the returns of all post-bankruptcy equities for companies emerging from bankruptcy between 1980 and 1993 found the average cumulative abnormal returns in the 200 days following emergence range between 25% to 139%.
The firm noted that the debt market is cyclical. "Defaults peaked in 2002 and are expected to fall in 2003.
The beginning of this distress cycle was 1999/2000 and many companies are now starting to emerge. Supply will exceed demand. This represents a limited window of opportunity that comes around once every 10 years."
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