When buy the dip doesn't work. "Most distressed situations have not worked out in 2015," exclaims one distressed hedge fund manager facing significant losses on the year, "It wasn’t just energy. It was anything with loads of leveraged debt on it." As Bloomberg reports, distressed hedge funds dropped 5% in 2015 through October, putting them on pace for their worst year since 2008, when they lost 25%... and November isn’t looking like it will be much better.

Ugly!!

Hedge funds that specialize in the debt are grappling with their worst declines in seven years. As Bloomberg reports, funds managed by Knighthead Capital Management, Candlewood Investment Group, Mudrick Capital Management and Archview Investment Group all posted losses through October. And year-end bonuses at Wall Street desks that trade distressed debt could be slashed by a quarter, Options Group said.

After six years of easy-money central-bank policies kept over-leveraged companies afloat and left scant opportunities for traders who profit off the market’s scrap heaps, a rout in commodities prices in 2014 presented what had seemed like a perfect chance to buy again. Instead, those prices only declined further this year, causing the debt of everyone from oil drillers to coal miners to fall deeper into distress. As the losses intensified, gun-shy investors pulled back from almost anything that smacked of risk, spreading the losses to industries from retail to technology.

November isn’t looking like it will be much better. A Bank of America Merrill Lynch index of distressed debt is down almost 8 percent this month as the average price of bonds in the benchmark dropped to 57 cents on the dollar, from as high as 75.6 cents in February.

Hope remains though...

"Now is the time you should be putting capital to work, anticipating that it’s going to be messy for the next six months or so" in the energy industry said one manager.

And firms are raising capital for the turn...

"The increasing fragility of certain business models is beginning to be reflected in a number of ways, including wider credit spreads, lower liquidity, and a material and sudden expansion of the stressed and distressed debt universe," Canyon Capital wrote in a letter dated Oct. 19, explaining its rationale for the new pool.

“This has been a tough year for distressed,” one manager concluded...

“There’s a lot of people that won’t have the ability to stick around. They won’t see the eventual rebound. You have to have staying power.”