The latest trading trend has private equity firms and hedge funds racing to invest in troubled firms, but onlookers think an economic downturn could prompt a duel, the Wall Street Journal reports. Though they are trading in the same field, the two parties benefit from distinct strategies; hedge funds earn high interest while p.e. firms bet on future profits from buyouts. Although p.e. firms are looking for long-term gains and HFs are banking on risky short-term returns, it seems p.e. firms have the upper hand. Some p.e. firms, like the Carlyle Group, keep tabs on lenders so they can exclude future deals with difficult lenders, and current interest rates are making it easy for p.e. firms to obtain good loan terms. A number of p.e. firms, including Texas Pacific Group and Kohlberg Kravis Roberts & Co., are doing their best to prevent HFs from getting their hands on bonds and loans, a precaution that demonstrates the potential for rivalry exists. For now, there are no potential catastrophes on the radar; S&P reports that in the last 12 months, less than 2% of companies with below-grade debt defaulted, and the only industry showing problems is the automotive arena.
