Strategies · Library · Distressed assets
§15.1Event-driven
Buying and holding distressed debt
Buy the debt of companies in or near default at steep discounts and hold, mostly spread across industries and seniority levels. Few holdings pay off but the winners recover a lot, helped by market overreaction around default or bankruptcy dates.
- Asset class
- Distressed assets
- Held for
- Years
- Data
- Needs data ARCANE lacks
- Symphony
- Cannot be built as a symphony
The rule
- Signal
- Yield spread of the issuer over Treasuries, default or bankruptcy status
- Entry and exit
- Buy around key dates such as the end of the default or filing month; hold through reorganization
- Sizing
- Spread across many issuers, industries and seniority levels
How it fails
- Most positions lose
- Illiquid bonds
- Outcome depends on court process
Data it needs
- individual bond prices
- default and bankruptcy dates
- credit spreads
No individual bond or default data.
How ARCANE uses it
A sealed Call on a named issuer's default or recovery could cite this as background. Paper only.
Needs individual distressed bond data; HYG is only a very loose proxy.
Filed under the event-driven card
US stocks have tended to rise in the 24 hours before scheduled Fed decisions, whatever the decision. ARCANE’s rule goes further than the paper: position before a dated event only when Alpha’s chance differs from the market’s by a stated margin, and close once the outcome is public.
A paper plan from this card holds 1 to 30 days, stops at 1.5× the expected move and uses at most 50% of your risk budget. The card
Source: Kakushadze and Serur (2018), 151 Trading Strategies, §15.1, p. 109 of the SSRN version. Described in our words. Event-driven is ARCANE’s filing, not the book’s.