Friday, February 13, 2009

Making money out of distressed assets

The Efficient Market Hypothesis (EMH) has its critics, most notably among the behavioral economists. Mispricings can be spotted and smart traders can make money for some time atleast, especially when the markets are in turmoil. And the present market conditions are a great opportunity for such investors. The illiquid market in distressed assets, surely opens up huge opportunities for "vulture" investors, who aim to buy doubtful quality assets on the cheap in the hope of reaping big returns. The Financial Stability Plan announced by the Obama administration seeks to attract precisely such investors to re-create the market in distressed assets.

However, the hedge funds, private equity firms, and leveraged buyout specialists, some of who made spectacular killings even as the sub-prime mortgage bubble was deflating, appear to be standing and waiting, not ready to take the bait. Have the events of the past few months and the uncertainties surrounding distressed assets become so overwhelming as to scare them away? I suspect not. A few months down the line, we could well be talking about a few superstar vulture investors who have made spectacular profits by making smart investments in distressed assets.

But given the stigma associated with making money out of a national misfortune (or calamity), a lot of these investors would prefer to make their money in anonymity (atleast till some one like Steve Schwarzman throws open the doors!) if that is possible, and the discussion about them would be only confined to media whispers. The behaviouralists would rationalize that the social stigma attached with feasting on distressed assets is playing a significant part in holding back the vulture investors from the market. If this is true, then it is only appropriate that Tim Geithner include a "patriotic seal" to these invitations!

No comments: