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FRM Part II · FRM Exam Part II · Hedge Fund Investment Strategies

A distressed debt fund buys senior secured bonds of a company that has filed for bankruptcy, intending to influence the restructuring plan and receive equity in the reorganized firm. Which type of distressed strategy is this?

This is active, control-oriented distressed investing. The fund buys debt, often in the fulcrum security, to influence the bankruptcy reorganization plan and obtain equity in the restructured firm. Passive distressed investors simply trade mispriced securities without seeking control over the process.

  1. AActive control-oriented distressed investing, in which the fund seeks influence over the reorganizationCorrect
  2. BPassive trading of distressed securities purely for mispricing
  3. CCapital structure arbitrage between convertible bonds and equity
  4. DFixed income relative value on the yield curve

Explanation

Buying debt in the fulcrum position to obtain influence or ownership through the reorganization is the active, control-oriented approach. Passive investors only trade mispriced securities without seeking control. Capital structure arbitrage and curve trades do not involve influencing the restructuring.

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