Investing in distressed companies is poised to become even more appealing to hedge funds in 2007 as markets conditions continue to regard the strategy which has outperformed expectations, with approval.

Distressed strategies have returned 13.4% this year overall. With low rate of defaults, expected to be between 2% and 3%, distressed strategies will be favoured. Strong returns are predicted for distressed investing as demand from corporate and private equity investors for mergers and acquisitions activity seems to remain high.

Auto suppliers, airlines, paper and packaging, home building, sub-prime lending and healthcare are the sectors, where hedge funds can expect to find most opportunities. While factors that could have a negative impact on returns in distressed investing include, a recession, severe losses in private equity or banking sectors or a spike in default rates.