According to the Financial Times, hedge funds are now stepping in to invest in Puerto Rico debt. In other words, it appears that professional investors believe the currently depressed price of Puerto Rican debt constitutes a potential return that more than compensates them for the risk of owning this debt. We see this as an indicator that professional investors view a brighter future for Puerto Rico as a bet they are willing to make.
What is tragic is that many retail investors, including wealthy and conservative Puerto Ricans, cannot participate in this possible recovery because of the advice of their trusted financial advisors. Specifically, many retail investors in Puerto Rico have suffered significant damages from which they cannot recover because leverage was used by their investment professionals in connection with investing in Puerto Rican bonds. This use of leverage, both within the retail investors bond funds and through margin loans from retail investors financial advisors, increased the risks far beyond the returns of this strategy.
One of the risks, that has now been realized by many retail investors, was the possibility that the bonds would subsequently have to be sold at depressed prices in order to unwind the leverage or margin. In other words, bonds were liquidated out of retail invesstors portfolios at big losses in order repay loans used to buy the bonds. In some cases, this scenario has completely wiped out investors portfolios.