What type of investments do distressed debt hedge funds focus on?

Distressed debt hedge funds primarily focus on investing in securities of corporations that are either in bankruptcy or at a high risk of facing bankruptcy. The goal of these funds is to purchase debt securities at a significantly reduced price, often during times of financial distress for the issuing companies. Investors in distressed debt are looking to capitalize on the potential for recovery when a company restructures or emerges from bankruptcy, which can offer substantial returns if the company successfully navigates its financial challenges.

This investment strategy requires a deep understanding of the legal and financial aspects of bankruptcy proceedings and the ability to assess the possible outcomes of distress situations. By targeting these high-risk investments, distressed debt funds aim to exploit the price inefficiencies caused by uncertainty and negative market sentiment surrounding the corporations in distress. This focus differentiates them from other types of funds that might target high yield bonds, emerging market equities, or commodity funds, which do not directly deal with companies facing imminent financial crises.