Hedge funds like Appaloosa Management, Paulson & Company and Blue Mountain Capital gathered in a conference room at the Barclays offices in Midtown Manhattan last September to talk about what was then the hottest trade: Puerto Rico.
An hour into the conversation, however, it became clear that if things started going bad, not everyone in the room was going to get along. Some had wagered on real estate, while others had bought up the debts of the central government and its troubled electric utility.
Those divisions intensify an increasingly contentious battle the hedge funds are beginning to wage to salvage an investment that, less than a year ago, looked like a sure thing.
This week's announcement by Gov. Alejandro García Padilla of Puerto Rico that the commonwealth may seek to delay debt payments has thrown the hedge funds' investment strategies into turmoil.
The governor said that at the rate the debt is developing, every person in Puerto Rico would owe creditors $40,000 by 2025.
Puerto Rico is struggling with more than $70 billion in debt and a sluggish economy.
Gov. Alejandro García Padilla plans to discuss the island's fiscal crisis on a televised broadcast on Monday night.
Even debts that appeared to be secure now seem in jeopardy, sending hedge funds and other investors scrambling to re-examine their legal rights and potential remedies should the government push for a restructuring.
A vast restructuring of the commonwealth's bonds could scare away more risk-averse investors from buying them for many years to come, causing major problems for the hedge funds.
"Those investors are not coming back," said Robert Donahue, a managing director at Municipal Market Analytics. "The hedge funds miscalculated and they are feeling the pain."
While some hedge fund managers say they were caught off guard by Governor García Padilla's call for a debt restructuring, they are not panicking, even as the price of some of their bond holdings has fallen 17 percent in the last two days.