Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

Distressed Hedge Fund Finds Shorting Opportunities In Junk Bonds

Southpaw Asset Management is a Connecticut-based hedge fund focusing on distressed debt opportunities. It was founded in 2005 by Howard Golden and Kevin Wyman (both of whom are left-handed, accounting for the name of the fund) and today manages $1.1 billion.

Southpaw revealed in its latest Letter to Shareholders that they see a bubble in the high yield US market are preparing to short many issuers as they become "stressed" or "distressed".

As Messrs. Golden and Wyman put it: "The combination of federally manipulated interest rates and investors searching for income has kept the party rolling. At some point, however, we believe the lights will dim, the music will stop and the hangover will be extremely unpleasant."

Further, they perceive there is an improbable bunching of US treasuries and high yield, and beseech the reader to go back to the 101 of asset classes and reversion to the mean: "We have repeatedly expressed our view on the dangers of comparing high yield bonds to U.S. government securities so we will not belabor the point here. Suffice it to say that we believe the risks being taken in high yield, given the nature of the companies and their capital structures, are more comparable to equities than Treasuries. High yield bonds were historically called junk bonds for a reason, and thinking an asset class is going to behave differently than it has in the past seems to us to be a recipe for disaster."

Before the reversion to mean occurs (which will coincide with the "tourist investors" becoming aware that junk bonds are … junk bonds), Southpaw will go short: "It probably goes without saying that we are particularly excited about short opportunities in high yield. We look forward to transitioning our short exposure to high yield bonds in the cash market."

The Letter further discusses their current long positions in distressed situations which they uncovered through their network of bankruptcy attorneys and turnaround finance specialists.