New York-headquartered global hedge fund firm Davidson Kempner is set to close its Distressed Opportunities Fund, citing a more challenging environment for hedge funds that invest in the debt of distressed companies, according to a report by Reuters.
The report cites a letter sent to investors and seen by Reuters as confirming the decision to close the fund, which managed approximately $2bn and had delivered positive returns — up 5% for the year so far – with the performance not deemed strong enough. No current investors lost money in the fund, according to the letter.
Davidson Kempner, which oversees $38bn in total assets, pointed to market shifts as a key reason for the closure. In the first 12 years of the fund’s operation, ample liquidity and restructuring opportunities fuelled its success, allowing companies to re-enter public markets after restructuring. However, the landscape has changed.
The hedge fund highlighted that low interest rates over the past decade, coupled with weakened covenants and lender protections after the Global Financial Crisis, have led to a significant drop in corporate default rates and restructuring opportunities. This decline has reduced the availability of profitable distressed investment opportunities in liquid public markets.
Davidson Kempner will continue to invest in distressed assets but sees greater potential in credit markets, including corporate bonds and structured deals. The firm believes such investments would be better suited for its closed-end fund or multi-strategy funds rather than the soon-to-be-closed Distressed Opportunities Fund.
Despite the fund’s closure, the lead managers of the Distressed Opportunities Fund will remain with Davidson Kempner, according to a source familiar with the matter.
