The Asia Debt Fund, run by Mo IbrahimÆs 3 Degrees Asset Management, had a great year in 2007 and returned 14.22% with no down months. For that accomplishment, Asia Debt Fund copped the AsianInvestor Best Distressed/Special Situations Fund award earlier in 2008.

AsianInvestor spoke to Ibrahim to find out how the fund has performed so far this year.

What have been the fundÆs returns in 2008?

Ibrahim: Through June, we have returned 3%. Compared to our peers, who are largely down between 1-5%, this is a decent performance.

What is your outlook for returns?

Looking forward, I expect returns are likely to trend towards the high end of our historic range, about 25% plus. Tight liquidity, soaring inflation and new accounting rules are culminating, at a time of economic weakness, to result in what could be the best Asian distressed debt opportunity since the Asian financial crisis 10 years ago.

What is driving those opportunities?

There is a rapidly growing number of non-economic sellers, meaning institutions looking to sell assets at marked down prices, not at intrinsic value. This is creating an unprecedented opportunity to invest in world class Asian companies at fire-sale valuations.

This is likely to continue through the summer, wherein the opportunity set is likely to get even larger and entry prices even more attractive.

Are there any other sellers out there who are desperate to exit toxic positions?

Yes, we are also seeing the emergence of new types of sellers, i.e., hedge funds facing redemptions and private equity firms unable to refinance maturing loans on portfolio companies. We are seeing, on a daily basis, major dislocations between debt prices and underlying asset values. Some are temporary, and some persist for prolonged periods, creating an exceptional investment opportunity.

Will liquidity ever return?

Once the dust settles, liquidity will return to the market, and our investments will be the first to rally as we typically rank first in the capital structure. We believe this is the right time to invest in Asian distressed debt.

What else has been happening in your firm?

We bought out our seed investor last year to become an independent firm to fully benefit from the opportunity. WeÆve assembled an all-star Principal roster by adding Michael Gilmore, the ex-Nomura head of Asian consumer and media research, and Jeff Tolk, the ex-HSBC head of Asian structured credit.

Any new fund plans on your drawing board?

Yes, we are launching ASO, a $300 million Asian distressed private equity fund that will target acquiring world class Asian companies at fire sale valuations.