Distressed Debt Starts to go Mainstream

I mentioned on Monday that retail investors have a hard time buying up structured debt products which look very much as though they're being underpriced in the present credit crunch. Today comes the news that in the wake of TCW closing its new $1.56 billion distressed-debt fund to investors, Pimco is launching a new $2 billion distressed-debt fund of its own.

Now it's not clear whether either of these funds will be all that accessible to retail investors either. But this is clearly a move in the right direction. The perfect investor in distressed debt is one who has a very long-term time horizon and who doesn't much care about marking to market in the interim. And a retail investor who isn't going to need his money until he retires in some decades' time is a prime example of such an investor.

What this kind of fund doesn't want is investors who are trying to call a bottom to the market, and will be upset by volatility or further illiquidity. Such investors really shouldn't be in distressed debt in the first place: it's an asset class for investors with strong stomachs. So I'm puzzled by the final line of the WSJ article:

These vulture funds also face considerable risks if the debt markets remain depressed and hard to trade for longer periods than the fund companies anticipate.

I don't get it: it's not like these distressed debt funds are like private equity funds, and have to exit their positions before a certain date. In fact, the longer that the debt markets remain depressed, the more opportunities will present themselves to these funds. If was launching a distressed-debt fund today, I'm not at all sure I'd want the market to rebound tomorrow.