From the Wall Street Journal this week - Hedge Funds are Muscling Into Munis. Gordon Gekko is eying City Hall.
""The entire marketplace needs a broader capital base to be successful,'' Hector Negroni, co-founder of hedge fund Fundamental Credit Opportunities, said at a conference sponsored by Bloomberg LP last week. He called the entrance of new investors a "terribly important evolution of the municipal marketplace" and a step toward "more robust pricing, more robust liquidity and greater investor security across the board."
Hedge funds, which invest trillions of dollars on behalf of wealthy individuals, pension plans and college endowments, are barreling into the municipal-debt market at a time when many investors fear increasing defaults. Hedge funds now hold billions of dollars worth of distressed municipal debt, up from virtually no investments five years ago, municipal-bond analysts say.
The default concerns intensified after Detroit's bankruptcy filing in July, the biggest financial failure by a city in U.S. history. Detroit's turmoil drove down prices throughout the municipal-bond market to levels some hedge funds found attractive, because of the potential for whopping returns if the market rebounds.
Hedge funds can be a double-edged sword for municipalities. As eager buyers of new bonds, they are a source of liquidity as individual investors get more skittish. In return, they often want higher interest rates and more financial information from municipal officials than such officials are accustomed to providing. And hedge funds aren't shy about pushing for improved disclosure and financial discipline."