New York (HedgeCo.net) – Last week’s court decision in favor of J.P. Morgan Chase and the inherited debt of Washington Mutual was the latest in a series of failed bets made on litigation outcomes by hedge funds. The case involved $6 billion in senior bonds from WaMu and investors included Appaloosa Management and several other hedge funds.

This case is one of several in the last year where the final decision went against hedge fund investors. Bondholders of the telecommunications company Nortel anticipated a decent payout when the company’s bankruptcy hearing, but judges in the case devised a plan to divide $7 billion in cash in a different manner and the bonds tumbled as a result.

There were also bets made on the preferred shares of Fannie Mae and Freddie Mac when lawsuits were filed that challenged the government’s handling of the mortgage companies during the financial crisis. The shares tumbled when the lawsuits were thrown out back in September.

The distressed-debt segment of the hedge fund industry has been attracted to these litigation bets as the result of the low interest rate environment and historically low levels of defaults.

Rick Pendergraft
Research Analyst
HedgeCoVest