Hedge funds credited for helping to save U.S. companies in distress
In the Occupy era, hedge funds have become known as the dirty villains of capitalism.
The people who run these funds, like John Paulson—who collected $3.7 billion in compensation in 2007—are routinely portrayed as money-grubbing gluttons.
And when another hedge-fund manager, George Soros, pocketed a billion British pounds in 1992 by betting against the currency, he was widely excoriated.
But a new study coathored by UBC Sauder of School business professor Kai Li suggests that hedge funds have had a beneficial influence on U.S. companies that file for protection under Chapter 11 of the U.S. Bankruptcy Code.
Li, along with professors from Columbia and Queens University, examined 474 Chapter 11 filings between 1996 and 2007 involving companies with assets of $100 million or more.
They were able to observe that hedge funds were involved in 87 percent of these cases—and these were the ones that had the greatest chance of surviving through the process.
When hedge funds got involved, it was more likely that the corporate CEO would be fired and there would be reduced pressure from other stakeholders for a payout involving the liquidation of assets.
“We find that hedge funds are more like mediators than predators,” Li said in a UBC news release. “They use the power of a controlling stake to negotiate between the desires of top executives fighting to preserve their high salaries, and the company’s lenders who may want to cut their losses by dismantling the company and selling off the pieces.”
When hedge funds were the largest unsecured creditors, this had a positive influence on the stock price and on other creditors' recovery of debts.
The study appeared in the American Journal of Finance, which is published by the American Finance Association.
Here in Canada, hedge funds played a major role in keeping many of Canada's national daily newspapers afloat, including the Vancouver Sun and Province, when they were owned by CanWest Global Communications Corp.
They were later assisted by Wall Street banks J.P. Morgan and Morgan Stanley, which offered $700 million in loans.
The newspaper chain subsequently become known as Postmedia. Since last June, however, the parent company Postmedia Network Canada's nonvoting shares have nosedived, falling from $17 down to an all-time low of $1.50.
The Postmedia Network B shares reached a high of $17.75 on June 24, 2011, and are now trading at an all-time low of $1.26.
Follow Charlie Smith on Twitter at twitter.com/csmithstraight.