Going against the herd in hedge fund investing is often admired but rarely imitated, and the $42 million worth of losses that the investors of Helix Investment Partners have sustained is one example of why.

Fund founder and co-portfolio manager, Marko Budgyk, has taken an exceedingly skeptical view of the two-year rally in the high-yield and distressed bond market, often shorting bonds he insists are overpriced. Bravely insisting that his bearish, research-driven approach is “intellectually right,” he said he is prepared to wait for the “the long overdue” market correction.

Waiting has been an expensive two-year proposition for Mr. Budgyk’s investors. This year, Los Angeles-based Helix has dropped 7.83% in its credit arbitrage fund, on top of last year’s 8.10% loss. For the month of November, the fund was down 2.44%. In contrast, the Hennessee Group high-yield index is up 8.94% through November, with the distressed index up 15.05%. Last year, the indexes were up 18.44% and 26.78%, respectively. To be fair, Mr. Budgyk steered the fund to an 11.78% return in 2002 and 30.67% return in 2001.

Mr. Budgyk’s wager – that the poor economic fundamentals of dozens of companies in the sector would eventually force many of these bonds sharply lower in price – has yet to pan out. Moreover, many institutional investors have disagreed with him, and have poured hundreds of millions into the sector this year, in a chase for additional extra-yield as interest rates remain at record post-World War II lows. In turn, the new cash being put to work by dozens of new and expanding hedge funds has forced even the lowest rated bonds to record-high prices.

Nonetheless, Mr. Budgyk insists that despite the “psychological brutality of going against the crowd,” he will not scrap his investment style. Moreover, although the fund’s assets have dropped to $260 million from $450 million two years ago, there is a core of investors who share his view, he said.

As an example of how “the increasingly maniacal tone of the high-yield market” has worked against Helix, Mr. Budgyk offered up the example of Charter Communications, a St. Louis based cable company.

The fund had been shorting the company’s junior convertible bonds – rated CCC-, traditionally the lowest rating available by Standard and Poor’s outside bankruptcy – for several months, on the view that the company would have difficulty refinancing its nearly $20 billion in debt, Mr. Budgyk said. If the company had sought bankruptcy protection, the bonds – trading near $90 in October – could have dropped to nearly $80 in price, he added. Instead, Charter was not only able to sell new debt to raise cash, but the new bonds were rated CC, a historically low debt rating. Adding insult to injury, the Charter convertible bonds the fund was short rallied four points, locking in a loss for the month.

Reflecting on his two-year experiment in sticking with his gut feeling, Mr. Budgyk admitted he was wrong to believe that the high-yield and distressed markets could not become the favorites of momentum traders, who care nothing about fundamentals and seek only to ride trends. “There is just too much money coming into the sector that has to be invested, coupled with too many people who do not have a sense of how ugly it gets when a rally ends,” he said.