The Market Vectors-Coal ETF (NYSEArca: KOL) is down 13% over the past, extending a trail of woe that has seen the largest coal exchange traded fund tumble nearly 30% over the past two years.

KOL’s struggles are encouraging some hedge funds to short not only shares of companies held by the ETF, but also short distressed debt issued by several of KOL’s most embattled constituents. Hedge funds are betting against debt issued by the likes of Walter Energy (NYSE: WLT), shares of which are down 80.3% this year, and turning around going long coal company bonds for pennies on the dollar.

“The endgame: swapping that debt for controlling shares of the companies if they go bankrupt. Once coal prices rebound, mines and other assets can be sold at a profit,” report Timothy Puko, Matt Wirz and Matt Jarzemsky for the Wall Street Journal.

Walter is emblematic of the coal industry’s struggles. The stock currently trades just over $3, a long way from its triple-digit price tag in July 2011 when hedge fund Audley Capital said shares of Walter Energy were worth $240, more than double where the stock traded at the time that audacious claim was made. [Investors Stick by Coal ETF]

Hedge funds such as Brigade Capital Management LP, Caspian Capital Management and Knighthead Capital Management LLC have feaster on Walter bonds, the Journal reported, citing unidentified sources familiar with the matter.

Alpha Natural Resources (NYSE: ANR) and Arch Coal (NYSE: ACI), which are down 64% and 39%, respectively, this year, are also favorite targets of hedge funds specializing in distressed debt. Those companies both trade below $3.