Bloomberg Businessweek

WALL STREET Bloodsport

In a cutthroat game, hedge funds can profit by pressuring companies to default

Conventional investing isn’t a zero-sum game: One investor can buy shares of Apple Inc., and another can buy Microsoft Inc., and both can make money. Even if the two companies brutally compete with each other for market share, both can grow as long the technology business does.

That’s not true with the financial instruments known as credit-default swaps. In this arena, one investor comes out the winner, and the other will be the loser. These derivatives are a way to wager on whether a company will default on its debt. They work like insurance for lenders—except you don’t have to own the company’s debt to buy protection against failure. The trader on one side of the bet

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