Read How To Arbitrage Different Institutions During Bankruptcy
Counter intuitive investing can be enormously profitable. Buying bonds when their companies declare bankruptcy (not merely buying risky companies that happen to avoid bankruptcy) earned 379% on average last year. Thanks to forced selling due to institutional investors' peculiarities:
Distressed Debt Investing (DDI): I believe filing of bankruptcy causes certain lenders and investors in high yield and leveraged loans to sell their holdings for "uneconomic" reasons. In other words, forced selling. This may be anything from CLOs that need to empty some baskets to insurance companies that bought paper at par in the primary, and cannot own defaulted securities. In that, I would think that while the event of bankruptcy may not be the "low" on a particular security, many times it will be an event that forces some sellers out and provides a catalyst for future capital appreciation.
The returns calculated by DDI are below. Check out their full piece here.
Disclosure: No Positions