Perella Weinberg Partners' Xerion hedge fund posted a 24 percent gain this year by investing in distressed companies and wagering that the debt of financial- services firms would fall, according to an investors' letter.

The $837 million fund has outperformed competitors, which lost 1.6 percent on average in the first half of 2008, data compiled by Chicago-based Hedge Fund Research Inc. show. Xerion trades the debt of firms with investment-grade ratings and the shares and debt of troubled companies.
There will be more chances to invest in companies going into or emerging from bankruptcy because of increasing losses at Wall Street banks and a slowing U.S. economy, wrote Daniel Arbess, 47, New York-based Xerion's founder and a Perella partner. Lending opportunities will also rise.
``We expect the present distressed-credit cycle to be deeper and longer than the preceding one in 2002,'' wrote Arbess, since companies laden with debt will have to contend with a ``moribund U.S. economy, a smaller financial system with much tighter credit underwriting standards, and a globally induced cost-price squeeze that erodes their profitability.''
In June the Xerion fund added new wagers that the debt of transportation and media companies would decline. The fund is also looking to provide financing to companies unable to get loans as Wall Street cuts back on providing debt and to investors forced to sell assets.
``The fact that we have avoided recent losses in credit and have fresh powder makes us liquidity providers to both companies unable to obtain conventional financing, and to investors looking to raise liquidity themselves by selling what they can,'' Arbess wrote in the letter. He declined to comment on the fund or its performance.
Companies with high-risk, high-yield debt are paying more to obtain financing after the price of the average actively traded loan fell to 88.34 cents on the dollar from above face value last June, according to Standard & Poor's LCD. The extra interest investors demand to own high yield, or junk, bonds, rather than Treasuries has widened to 779 basis points from 241 basis points last June, according to Merrill Lynch & Co.'s U.S. High-Yield Master II Index. A basis point equals 0.01 of a percentage point.
Joseph Perella, 66, former global head of Morgan Stanley's investment banking division, and Peter Weinberg, 51, who previously ran Goldman Sachs Group Inc.'s European business, founded Perella Weinberg in 2006. The firm bought Xerion in October to expand its asset-management business.
Perella was vice chairman of Morgan Stanley when he left the investment bank amid a shareholder revolt that led to the ouster of Chairman Philip Purcell. He had worked at Morgan Stanley since 1993, after leaving Wasserstein, Perella & Co., the New York- based advisory firm he founded with Bruce Wasserstein in 1988.
Peter Weinberg spent most of his career at Goldman, where he became a partner in 1992 and co-ran the investment banking business. He is the nephew of John Weinberg, who was co-senior partner of Goldman from 1976 to 1984 with John Whitehead, and sole senior partner until 1990. John Weinberg's father, Sidney Weinberg, ran the firm from 1930 to 1969.
Perella Weinberg said in October that it invested $100 million in Xerion. The fund returned 38 percent in 2007. Xerion, started in 2003 with backing from Greenwich, Connecticut-based hedge-fund firm Paloma Partners LLC, has returned 24 percent annually since inception.
While shares of financial-services companies have rallied this week, bets against their debt may still be making money. An index of 15 banks and securities firms designed by Credit Derivatives Research in Walnut Creek, California, has risen 23.6 basis points since the start of the month to 164.4 basis points, showing deterioration in the perception of credit quality at the companies.
Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.
Two of the oldest distressed-debt hedge funds have lagged behind Xerion's returns.
David Tepper, head of Chatham, New Jersey-based Appaloosa Management LP, lost 16.5 percent this year through June 30 in his Palomino Fund Ltd. Tepper's investments included bankrupt auto- parts maker Delphi Corp. The fund has returned 25 percent a year on average since it was started in December 1994.
New York-based Cerberus Capital Management LP, run by Stephen Feinberg, returned just 0.5 percent in its Cerberus International Ltd. hedge fund in the first half of the year. That fund has returned about 14 percent on average since it started in May 1993. Executives from the firms declined to comment or didn't return calls seeking a comment.
Separately, Victor Consoli, former co-head of credit strategy at Bear Stearns & Cos., joined Xerion in June as a senior member of the investment team, according to the letter.