Hoping for fallout

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Tough markets could be good news for capital structure arbitrage

By Josh Friedlander

Once upon a time, when distressed companies used to go bankrupt, hedge funds could engage profitably in at least one flavor of a tidy strategy known as capital structure arbitrage. If a company looked near insolvency, funds could buy the debt and short the stock, with the notion that, in a restructuring, the senior debt holders would recover most of their money while equity holders would get the shaft.

Since the recent heyday of capital structure arbitrage, in