Finance

Bloodsport on Wall Street: Hedge Funds Make Mayhem for Profit

In high-stakes battles over corporate debt, hedge funds may pressure companies to default.

Illustration: David Krančan for Bloomberg Businessweek

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By Claire Boston and Davide Scigliuzzo

April 18, 2019 at 9:00 AM UTC

This article is for subscribers only.

This article is part of the April 22, 2019 issue of businessweek.

Conventional investing isn’t a zero-sum game: One investor can buy shares of Apple Inc., and another can buy Microsoft Inc., and both can make money. Even if the two companies brutally compete with each other for market share, both can grow as long the technology business does.

That’s not true with the financial instruments known as credit-default swaps. In this arena, one investor comes out the winner, and the other will be the loser. These derivatives are a way to wager on whether a company will default on its debt. They work like insurance for lenders—except you don’t have to own the company’s debt to buy protection against failure. The trader on one side of the bet collects the insurance payments as long as things go well; the one on the other side can get a big payday if they don’t. Someone’s going to get hurt.