{
  "slug": "distressed-debt",
  "name": "Distressed Debt",
  "aliases": [
    "Distressed",
    "Special Situations Credit"
  ],
  "category": "credit",
  "description": "An event-driven credit strategy that invests in the debt of companies in or near bankruptcy — including bank loans, bonds, trade claims, and DIP financing — seeking gains from restructuring outcomes.",
  "investment_thesis": "Forced selling by yield-mandated holders, complex legal claims, and information asymmetry produce mispriced distressed securities; deep legal/operational expertise generates outsized returns through restructurings.",
  "edge_source": "Bankruptcy law expertise, capital-structure analysis, ability to lead creditor committees, and operational restructuring skills.",
  "typical_holding_period": "12-36 months",
  "typical_leverage": {
    "min": 1,
    "max": 2,
    "typical": 1.2
  },
  "expected_volatility": {
    "min": 10,
    "max": 18,
    "unit": "annualized-pct"
  },
  "expected_sharpe": {
    "low": 0.5,
    "high": 1
  },
  "drawdown_profile": "Returns clustered around credit cycles; deep drawdowns in early-cycle de-ratings, recoveries during workouts.",
  "correlation_to_equities": 0.4,
  "correlation_to_bonds": 0.3,
  "liquidity_profile": "annual",
  "instruments_used": [
    "bank loans",
    "high-yield bonds",
    "trade claims",
    "equity recoveries",
    "DIP loans"
  ],
  "asset_classes": [
    "credit"
  ],
  "primary_risks": [
    "legal/process risk",
    "valuation risk on illiquids",
    "credit cycle timing",
    "redemption gates needed"
  ],
  "fee_structure": {
    "management_fee": "1.5%-2.0%",
    "performance_fee": "20%",
    "hurdle_rate": "Often 6%-8%",
    "high_water_mark": true
  },
  "key_metrics": [
    "IRR",
    "MOIC",
    "recovery rates",
    "duration of holdings"
  ],
  "notable_practitioners": [
    "Howard Marks (Oaktree)",
    "Bruce Karsh",
    "Marc Lasry (Avenue Capital)",
    "Apollo Distressed"
  ],
  "exemplar_funds": [
    "oaktree",
    "avenue-capital",
    "elliott-management"
  ],
  "related_terms": [
    "chapter-11",
    "DIP-financing",
    "fulcrum-security",
    "loan-to-own",
    "covenant"
  ],
  "related_strategies": [
    "event-driven",
    "private-credit"
  ],
  "historical_drawdowns": [
    {
      "year": 2008,
      "event": "GFC mark-to-market drawdowns",
      "estimated_drawdown_pct": -25
    },
    {
      "year": 2020,
      "event": "COVID March widening",
      "estimated_drawdown_pct": -10
    }
  ],
  "academic_foundations": [
    "Altman Z-score",
    "Merton structural credit model",
    "Hotchkiss-Mooradian (1997)"
  ]
}