Alternative funds hold over $16 bln in Puerto Rico debt -Fitch

NEW YORK, Aug 13 (Reuters) - More than 60 alternative fund managers hold more than $16 billion of Puerto Rico debt as hedge funds and distressed debt investors dislodge traditional mutual funds in the island's debt market, according to a report by Fitch Ratings on Wednesday.

U.S. mutual funds, traditionally the most prominent investors in the usually sleepy municipal bond market, have seen their ownership fall to 52 percent of the $65.1 billion market, Fitch said. Puerto Rico is struggling with a sluggish economy and is widely expected to restructure some of its debt.

The island passed a law known as the Recovery Act in June. The law allows some of the commonwealth's public corporation to restructure their debt in a move that is designed to shore up debt issued by the central government.

"The number of hedge funds trading Puerto Rico bonds is increasing, although exposure to specific credits has become bifurcated by whether they support or oppose the new Public Corporation Debt and Enforcement Recovery Act," Fitch said.

Fitch said that more than $23 billion, or 36 percent, of the $65.1 billion in bonds currently carries monoline credit protection, which provides a secondary source of repayment.

Fitch-rated U.S. closed-end funds run by 14 other fund managers have cut their Puerto Rico holdings by 65 percent on average since last summer, Fitch said. The remaining exposure is held in sales tax and general obligation bonds, half of which is insured, Fitch said.

(Reporting by Edward Krudy; Editing by Lisa Shumaker)

Alternative funds hold over $16 bln in Puerto Rico debt -Fitch