Vulture investors, contrarians still pick up the scent of cash.

Economic instability often sends investors to safe havens, such as T-bills, or even to the sidelines with their cash.

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That also means it can be time for the vultures. Today isn't any different.

With stock markets volatile and real estate prices sliding downward, a new crop of vulture investors has popped up hoping to skim a profit off of distressed debt and other risky investment vehicles.

"It's really the true strength of our system," said Richard Morganstem, president of the Los Angeles network of Tech Coast Angels, whose members fund early-stage technology companies that hope to one day be acquired or go public. "These funds are providing liquidity to the market at a crucial time. In any ecosystem, even the vultures have their place."

And there are plenty in L.A.

Some of the region's largest asset managers, including Los Angeles-based TCW Group, have or are raising special funds that will cherry pick the best of the distressed debt now clogging the nation's financing pipeline.

TCW Chief Investment Officer Jeffrey Gundlach recently told clients that its new $1.56 billion Special Mortgage Credits Fund, which closed last month, will focus on higher-rated distressed securities that are likely to recover first.

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"Sub-prime will likely stay well into next year," said Gundlach, who managed a similar successful fund earlier this decade. "Investors who thought they owned 'this' only to discover they own 'that' will be very slow to participate in these markets."

Other local asset managers are getting into the game in an even bigger way. Los Angeles-based Oaktree Capital Management, which has grown to a more than $28 billion money manager by specializing in the most out-of-favor investments at any particular time, reportedly may raise up to $5 billion for a fund to acquire leveraged buyout-related debt.

High-end M&A activity has slowed in recent weeks as so-called "hung bridges"--leveraged debt that couldn't find a buyer--have prevented investment banks from making new commitments. Oaktree did not return calls for comment.

Even so, investment managers will have to choose wisely since credit rating agencies, widely criticized for being slow to warn investors about the precarious nature of mortgage-backed securities, are still downgrading many funds as the nature of their liabilities becomes clearer.

That could lead specialty funds that buy too soon holding the bag, especially given the volatility of the economy.

"We've been in a Goldilocks economy," said Ed Learner, director of the UCLA Anderson Forecast. "It wasn't so overheated that the Fed would have to raise interest rates, but it wasn't soft either. But that's behind us now."

Staying wealthy

The new interest in distressed debt has even spurred demand for related research.

B. Riley & Co., a Los Angeles investment house, a few months ago launched a distressed high-yield research desk in response to requests for reliable information on opportunities in that segment.

"When things start getting hit and there's a little bit of chaos out there, people are willing to pay for good street research--even hedge funds," said President Bryant Riley, noting that research commissions in August were the best in two years. "When it's harder to make money, people are more willing to do their work."

Separate from the investment bank, Riley himself manages a $180 million hedge fund that focuses on a dozen or so deep-distressed value companies with market caps of less than $500 million.

"We try to find small caps where all the bad news has been discounted out of the price," he said. "We always try to keep some dry powder, which is good right now because we're seeing a lot of opportunities."

For wealth preservation specialists like Drew Zager, distressed anything has no place in the fixed-income portfolios of his affluent clients. Zager, the Los Angeles managing director of Morgan Stanley Private Wealth Management, trends toward U.S. dollar high-grade, tax-exempt municipal bonds and taxable corporate-backed paper to preserve the "stay-wealthy" portion of a client's net worth.

Even so, Zager's team is taking advantage of what they see as a current anomaly in the bond market to lock in returns by shifting from shorter-term to longer-term bonds providing an unusually high yield.

"What we have been seeing now is treasury yields come down and municipal and corporate yields go up," said Zager. "It won't last long, just until the markets stabilize, but each piece of bad news gives us more time to move our clients' assets."

Mostly though, Private Wealth Management's philosophy has been to stay the course. "We really haven't had to do more than tweak here and there," Zager said. "This is a time for investors to stay with the best credit quality but to take advantage of anomalies to improve returns."

By DEBORAH CROWE

Staff Reporter