Distressed-debt funds that were circling Dana ( DCN) like vultures now have the upper hand. The company said Friday that it had filed for bankruptcy after missing payment on its bonds.

Dana will try to reorganize through Chapter 11. "They don't have a great management team, and the debt load is really big. But if they can restructure it, it's still a valuable business," said a hedge fund analyst before the announcement.

Most distressed players have been buying the cheap bonds with the hope of getting equity when the company completes its restructuring processes. Other hedge funds have been shorting the debt where they saw more downside (therefore more profit to be made) than on the stock. The results should be mixed.

Curiously, a fair amount of bidding on the debt went on after the filing. Before the news, bonds traded in the 65 to 68 range, or $650 to $680 for a $1,000 par value. After the announcement, the bonds jumped to 69 to 70.

The bidding reflected two things: first, a short squeeze on the part of managers who had shorted the bonds and who had to buy them back; and second: a last-minute and frantic bid from distressed players.

Wealthy and Bullish

Even if they're slow to make the adjustment, a growing portion of rich Americans are testing the alternative-investment waters.

A new study by Northern Trust reveals that 70% of high-net worth individuals with more than $1 million in liquid assets have some exposure to alternative assets, including hedge funds, private equity and real estate.

Those investors allocate 18% of their portfolios to alternative assets, with 13% to real estate, 4% to private equity and 1% to hedge funds. Equities continue to be the dominant asset class for sure, making up 49% of the allocations, followed by bonds at 15%.

But the richer they are, the more bullish investors are on alternative investments. Affluent individuals with more than $5 million have 28% allocated to alternative assets, with the bulk of it in real estate funds (18%), followed by private equity (7%) and hedge funds (3%.)

So it's not a myth that hedge funds remain the baby of institutional investors. But things are changing.

One-Way Street

The securities industry brain drain picked up speed last week, with two London-based Morgan Stanley honchos defecting to hedge funds.

Stefano Russo, co-head of sales for investment management for Morgan Stanley in London, is leaving for Renaissance Technologies, a $5 billion hedge fund staffed by scientists and nerds who use math to predict the market. Renaissance has averaged a 35% annual return since 1989.

Davide Serra, head of the European banks team, is leaving to partner with The Children's Investment Fund Management, a corporate-activist manager that played a key role in blocking the merger between Deutsche Boerse and the London Stock Exchange last year. The fund generated a 50% return last year.

On a more adventurous note, Charles Kirwan-Taylor, chairman of U.K. corporate brokerage at Credit Suisse First Boston, is leaving to set up his own hedge fund.

Moguls

Intrawest ( IDR ), the Canadian resort operator, is under pressure from Pirate Capital to sell. The company announced last Tuesday that it hired Goldman Sachs to review its strategic options. The stock rallied on the news, gaining approximately 13% to close Friday at $33.

In the aftermath of the news, the hedge fund activist disclosed in a regulatory filing that it had increased its stake to 11.83%. In the filing, Pirate "commends" Intrawest for hiring Goldman Sachs and says it should use its expertise for "initiating a sale of the entire company."

An Intrawest insider says that all options are on the table, not only a sale, but everything from merger to acquisition to partnership.

"While we appreciate and listen to the input of all shareholders, the letter from Pirate Capital changes nothing about the broad strategic review that our board has initiated and that we announced earlier this week," said the company in an official response to Pirate's filing.

Pirate is more specific and is shopping for potential bidders. It says in its filing that it has spoken to various parties willing to acquire Intrawest at a "substantial premium" and that the "fair valuation" of the stock is $45. The stock recently traded for $31.68.

Dissent

There is a disconnect of sorts between what commissioners of the Securities and Exchange Commission say and what the staff is doing.

Chairman Christopher Cox took the unusual step last week of rebuking the agency's enforcement people for issuing subpoenas to journalists.

Regarding hedge funds, Cynthia Glassman publicly lashed out at the hedge fund registration rule that recently went into effect. "In my view, the registration requirement we adopted (and that I voted against) was not well thought out ... The unintended yet totally predictable outcome here is that global funds are excluding U.S. investors and that U.S. domestic funds are lengthening their lock-up periods or closing their funds."

Hedge funds turning into private equity-like vehicles as a result of the rule? There has been a lot of ink spilled on the subject.

Given the increased interest in India, it comes as no surprise that managers dedicated to Indian stocks would flourish. Recently, Permal Group, a multibillion-dollar fund of hedge funds manager, launched Permal India. "India is an attractive market for hedge funds and we are seeing a growing number of hedge funds in India," says Omar Kodmani, Permal's senior executive officer. Just last week, Carret Asset Management, a private investment advisory firm, launched Carret Global India Fund, a fund-of-funds vehicle also focused on investing in Indian hedge funds.

Gautam Prakash, manager of Cambridge, Mass.-based Monsoon Capital, a hedge fund manager investing exclusively in small-cap Indian stocks, says his fund is closing to new investors. The $300 million fund returned 67% since inception in December 2004. "We take substantial ownership positions in small companies that are not very liquid; therefore, there is only so much money you can put in," says Prakash. He invests $10 million to $15 million per company and prefers not to own more than 25 different names.

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