Saks Bonds Worth Just 1 Cent Hand Hedge Funds a Painful Lesson

At first glance, Saks looked like exactly the kind of mess hedge funds love.

Just months after the company borrowed $2.2 billion to finance its takeover of rival Neiman Marcus, the newly formed luxury retail powerhouse was already running short on cash. Creditors spooked by the pace of the slide rushed for the exits, offering the bonds for less than 40 cents on the dollar.

A Saks Fifth Avenue store in Chicago.

Photographer: Scott Olson/Getty Images

Bargain hunting hedge funds gleefully took the debt off their hands. This was, after all, a marquee name with valuable brands, prime real estate, big-name backers and a business that executives said just ...