By Hilary Potkewitz

Positive sign? 'Credit crisis' hedge funds close up shop

Distressed debt funds that started in wake of credit collapse saw fat returns in mere months. Now they're closing while the going's good, years earlier than planned.

Did you hear? The credit crisis is officially over—at least according to the handful of hedge fund managers who have shut down their “credit crisis funds” over the past few weeks.

Manhattan-based BlueMountain Capital Management abruptly liquidated its distressed debt fund in early February, after just 11 months of operation, returning the money to investors. The $100 million fund was launched last spring to take advantage of the liquidity crisis by snapping up cheap debt that investment firms were unloading for cents on the dollar.

By January, the fund had gained 34%. BlueMountain co-founder Stephen Siderow decided to quit while he was ahead. It was initially marketed as a two-year fund.

“Most of the opportunity is behind us,” said Mr. Siderow, whose firm manages about $4 billion. “I just don't see a whole lot of upside. There will still be opportunities, but nothing like what we just had.”

Also moving on is Highland Capital, a $25 billion Dallas-based money manager, which just liquidated its distressed debt fund four years earlier than planned. The fund launched in November 2008, investing in collateralized debt obligations, the toxic securities largely credited for causing the financial crisis, and surprised its managers with gains of 138% by the beginning of this year. Highland managers decided to fold the fund, rather than push their luck.

Similarly, hedge fund firm Silverback chose to liquidate its aptly named Opportunistic Convertible Fund after just 10 months in the game. Chapel Hill, N.C.-based Silverback focused on what the investment industry calls convertible arbitrage, buying distressed convertible bonds and capitalizing on the spread between the depressed price of a company's bonds and its stock price. Good call: The $500-million fund boasted gains of 121% when Silverback pulled the plug in December.

Most of these firms' investors simply reinvested with the same fund family, taking managers' advice to direct their money to other strategies. “It's time to move on,” declared Mr. Siderow.

But not everyone is willing to leave the post-crisis-market for dead. Marc Lasry, managing director of Avenue Capital Group, is said to be launching a brand-new distressed debt fund—and more than likely will be buying up some of the cast-offs from liquidating funds.

The Manhattan-based money manager, with $18.5 billion in assets, intends to raise $3 billion for its latest effort over the next three months, according to reports. That's an ambitious goal: of the 750 or so hedge funds that launched last year, only two had assets of more than $1 billion.

Avenue Capital's spokesman declined to comment.