Hedge Funds Are Moving in on Municipal Debt, Including Puerto Rico Debt

According to The Wall Street Journal, hedge funds are starting to bet big on municipal debt by demanding high interest rates in exchange for financing local governments, purchasing troubled municipalities’ debt at cheap prices, and attempting to profit on the growing volatility (in the wake of so many small investors trying to get out because of the threat of defaults). These funds typically invest trillions of dollars for pension plans, rich investors, and college endowments. Now, they are investing in numerous muni bond opportunities, including Puerto Rico debt, Stanford University bond, the sewer debt from Jefferson County, Alabama, and others.

Currently, hedge funds are holding billions of dollars in troubled muni debt. The municipal bond market includes debt put out by charities, colleges, airports, and other entities. (Also, Detroit, Michigan’s current debt problems, which forced the city into bankruptcy, caused prices in the municipal bond market to go down to levels that appealed to hedge funds.)

Hedge fund managers believe their efforts will allow for more frequent trading, greater government disclosures, and transparent bond pricing and that this will only benefit municipal bond investors. That said, hedge fund investors can be problematic for municipalities because not only do they want greater interest rates than did individual investors, but also they are less hesitant to ask for financial discipline and better disclosure.

Now, hedge funds are reportedly suggesting short-term financing for Puerto Rico, which is in huge economic trouble with its $70 billion debt. These funds began buying up Puerto Rico bonds after their prices dropped a few months ago. Some of the bets are already paying off while other hedge funds are preparing for even bigger bets.

However, Puerto Rico’s debt crisis has become a huge problem for many investors, some of whom already have lost their life savings. At The SSEK Partners Group, our Puerto Rico bond lawyers have been meeting with investors that purchased muni bonds from brokerage firms, including Banco Popular, Banco Santander (SAN.MC), and UBS (UBS). Our securities attorneys are available to meet with you in Puerto Rico and the US. Hablamos Español.

Unfortunately, some brokers that sold Puerto Rico muni bonds reportedly suggested that investors borrow money to buy them, while other representatives told investors to buy the bonds and then borrow against their value. Already, UBS Puerto Rico has consented to pay $26M to settle SEC charges and pay fines and disgorgement over allegations that it sold mispriced closed end funds to customers. Unfortunately, investors will not get anything back from this, which is why you should contact our muni bond fraud lawyers.

Your initial case assessment with The SSEK Partners Group is free.

Individual investors flee US municipal bond market, Reuters, November 12, 2013

Hedge Funds Are Muscling Into Munis, The Wall Street Journal, November 11, 2013

Is Puerto Rico the next Detroit?, CNN, October 31, 2013

Individual investors flee US municipal bond market, Reuters, November 12, 2013

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Advice to Advisors: Financial Advisors Taught Ways to Avoid SEC Scrutiny, Stockbroker Fraud Blog, November 11, 2013

SEC Members Discuss Agency’s Core Mission, New Penalty Policy, and Private Offerings in the Wake of General Solicitation, Institutional Investor Securities Blog, November 12, 2013