Hedge Fund Advisers’ Systemic Risk Disclosures in Bankruptcy

CLS Blue Sky Blog

Hedge funds’ distressed and default debt investments in the United States have increased dramatically in the last two decades (from around $70 billion in 1998 to around $867 billion in 2007) and hedge funds with strategies that focus on distressed investing continue to proliferate. The proliferation of distressed-focused hedge funds resulted in hedge funds’ market share of around one quarter of the total distressed-debt market and established the distressed-focused strategy as the fifth-largest hedge fund strategy.

The significant increase of hedge fund participation in the bankruptcy process, among other factors, resulted in an increased emphasis in the literature on the role of hedge funds in bankruptcy. Scholars, practitioners, and members of the federal bankruptcy bench voiced concern over hedge funds’ hidden agendas and offsetting positions, hedge funds’ attempts to manipulate the negotiation and reorganization process, and their seeking control of the debtor at the expense of other stakeholders. Because of…

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