Question

Explain the 2 types of investment strategies used by distressed investors and explain why should investors be concerned with J factor risk?

Briefly describe the performance of distressed securities in the last 5 years ?

Discuss two risks associated in the securities?

Discuss two factors that may detract a distressed investor ?

Answer 1

Let us first understand the meainng of Distressed Investor: The below table helps in analysing the features as below:

Meaning of Distressed Investor	A Distressed Investor means an investor who invests in distressed debt instruments of a Company.
Meaning of Distressed Debt Instrument	Distressed debt instruments implies that the asset managers invest in companies which deliver often with less corelated returns and play a constructive role in the corporate restructuring process. A Distressed investor buys the debt instrument
Meaning of Distressed Debt Investment	Distressed Debt Investment include public and private debt, loans and bonds, vendor and trade claims.
Mechanism of Distressment	An Distressed Investor typically buys the debt instruments at a discount from a creditor or on the secondary market.

The two strategies for Distressment can be analysed as follows:

1. The distressed manger in the companies may go in for "Cherry picking" wherein they will selectively choose companies.

2. The distressed manager in the companies may adopt a practical approach of continous monitoring and control mechanism for distressed companies.

J Factor Risk:

J factor risk refers to the effect of the judge on the results of any bankruptcy proceeding, especially prepackaged bankruptcies, which can be important in distressed debt strategies. The judge may rule more in favor of debt or equity security holders, and thus have a dramatic impact on their respective returns.

Hence, the Distressed investor also should take into account the track record of judges and their respective judgements.

Performance in the past 5 years:

In the past 5 years, the dedt distressing industry has come in a positive manner. Many consultants and experts in this regard are available in many countires such as the US, UK, Europe, Brazil and India.

Two risks associated with Securities:

Operational RIsk	It is the risk associated due to the organization's internal activities.
Financial Risk	It is the risk associated by unfavourable movements of market prices of financial variables.

Two factors that detract a distressed investor:

1. In the case of a pandemic like COVID -19, where the financial system globally is destroyed, investors move away from debt distressment,

2. In the case of World War where in there was a great depression in 1930s.