Power & Money: Biotech "Plagues" Hedge Funds

Greg Zuckerman of Dow Jones’ Hedge Fund Trades newsletter was on “Morning Call” today as part of our regular series “Power & Money.” He said the industry took a hit from a poor-performing biotech firm. But there’s something interesting going on in the distressed debt investing market.

About 30% of hedge funds had a position in biotech company Nuvelo. Unfortunately for money managers, Nuvelo dropped 80% in about a week after reporting less than stellar earnings. Instead of buying put options to protect their investment, these managers went “all in” and paid the price.

Distressed debt investing has worked for hedge funds, though. But it’s not the debt, loans and bonds that are bringing in the big bucks lately. About 20% of distressed investments have been in the stocks of troubled or bankrupt companies. Profits are being made when companies like Northwest Airlines work their way out of bankruptcy.