New-York based Optima Fund Management has introduced the Scott's Cove fund, the company's first distressed securities fund.
Registered in Bermuda, the fund is an offshore hedge fund aimed at investors who are looking to add a high risk investment to their portfolio for growth.
The distressed securities market consists of US firms which have been in financial difficulties and which have now filed for Chapter eleven status. This is a position where the company is on the verge of bankruptcy and calls in outside help. Its debts are frozen and the company works with a bank on a package of financial help to get the company back on its feet. This gives any bonds issued by the company the level of junk bonds.
The fund will pick and choose companies from the distressed securities market that look likely to recover from their financial problems. It will not invest in any technology or telecommunications companies.
These types of investment can be risky due to the fact that they invest in companies that are on the brink of financial disaster. This risk is slightly reduced by the fact that even if the companies do collapse, they will still leave hard assets such as merchandise and office buildings which can be sold off. However, the bulk of any such assets will probably go to the liquidators.
In the long term, if these companies recover from their financial misfortunes, investors can benefit from having invested in them when their share prices were lower.