Using a penny stock to hedge long positions in a bankrupt company's bonds sounds like a recipe for disaster, and for some hedge funds trading Delphi ( DPHIQ) last week, it was. As reported here last week , many event-driven funds were caught leaning that wrong way after Delphi sought Chapter 11 protection on Oct. 8, although some appeared to have traded out of the bonds the day before the filing. The stock, a study in volatility throughout the auto-parts suppliers' ordeal, continued to trade erratically in the filing's aftermath. After plunging the day before and the day after the news broke, the shares caught a midweek bid after David Tepper's Appaloosa Partners announced a 9.3% position. The trade reminded some managers of the punishment meted out by Kirk Kerkorian to funds that were short shares of Delphi's biggest customer, General Motors ( GM), after GM's credit rating fell to junk last summer. Delphi's shares remain absurdly volatile but are tenuously correlated to GM because both companies are locked in negotiations with the United Auto Workers. Given GM's reported progress on that front Monday, it is possible Delphi CEO Steve Miller could win enough wage and benefit concessions to keep his own stock alive in some form for the duration of the company's reorganization.
Hennesseein' Ain't Believin'
The Bayou Management scandal continues to resonate weeks after the hedge fund's managers pleaded guilty to fraud . Greencastle, Ind.-based DePauw University, one of the fund's direct investors, sued its advisory firm, the Hennessey Group, whose advice, it says, led it to allocate 0.94% of its assets into the now-infamous hedge fund run by Samuel Israel. The $4.03 billion endowment, which allocates 15% of its assets to hedge funds, had $3.25 million invested in the Bayou fund that it now considers lost. In a lawsuit filed in U.S. District Court in the Southern District of Indiana, the institutional investor accuses Hennessee of making misleading or untrue statements and failing to conduct thorough due diligence. The lawsuit claims Hennessee didn't mention early trading losses in the fund and should have picked up on the falsification of Israel's resume.