05.02.2007 9:52 am
Solutia bonds take a tumble
St. Louis Post-Dispatch
Solutia bonds tumbled in value by more than 17 percent this morning after a bankruptcy judge ruled that they are unsecured debt. A series of bonds that matures in 2027 fell to 89 cents on the dollar from about $1.08 yesterday; bonds that mature in 2037 dropped to 87.5 cents from about $1.06.
The bonds, which are owned largely by hedge funds, were the subject of a longrunning legal battle. Some of the same hedge funds have taken positions in the bankrupt chemical company’s shares, which Solutia says are likely to be worthless at the end of its bankruptcy proceedings. The shares fell sharply Tuesday, to 35 cents from 56 cents the day before. They are recovering a bit this morning, trading at 40 cents apiece.
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David Nicklaus has covered St. Louis business for more than 25 years. His column appears three days a week on the Post-Dispatch business page. 
Sounds like hedge funds aren’t as omniscient as they would like to have people believe.
I suspect that the overall performance of hedge funds will conform to the basic risk vs. return principle that most economists believe applies to all investments. They assume high levels of risk, and so outperform markets in general when economic conditions are good. But they will most probably drop more than other markets when other markets drop. And over time, the people who invest in mutual funds will generally fare worse than other investors because the compensation for the managers of hedge funds is highly biased against investors. It’s a good thing that purchasing of hedge funds is limited to wealthy individuals who can afford to lose money.
Correction: I meant to say that over time, people who invest in HEDGE funds will generally fare worse than other investors…..