Highland Capital Management - Leveraged loans

The Texas-based highland is in choppy waters, but has not yet gone as far as suspending redemptions, as far as we know. The FT article says:

Like other investors, it has been hammered by the falling prices of leveraged loans. Highland’s main hedge funds, investing in distressed debt and other credits, were down 11.5 per cent to 14 per cent in January. While it is not clear how it fared in February, Highland’s recent performance contrasts with gains of 30-40 per cent in 2006 and 2007.

As a result, Highland executives, led by co-founder Mark Okada, are engaged in an intense dialogue with investors to discourage them from withdrawing their money.

...

Mr Yang said redemptions so far “haven’t been significant” and Highland is seeing inflows as well. Highland officials insist that the size of their holdings remains a source of strength, pointing out that $25bn of their loans are in closed-end funds that do not face redemption pressures.

And more on the general situation:

Highland’s fortunes underscore the rapid changes on Wall Street. At the peak of the buy-out boom, private equity firms worked to keep Highland out of deals because of its reputation for tough tactics. As the credit squeeze worsened, the same funds welcomed Highland’s cash. Now, market participants are monitoring Highland’s health because of its prominence in the leveraged loan market.

Question is how long the "storm" will last in leveraged loans. If it is, as we think, an permanent "gap down", Highland may have to ultimately book losses or shut down funds. Risk premiums on leveraged loans were simply unrealistically low, and that condition is unlikely to come back. Ever.