Hedge funds are betting that some of the largest U.S. coal companies are heading for the financial slag heap.

The coal industry is in a prolonged slump with a long list of causes topped by sluggish demand and competition from cheap natural gas, which have pushed prices to historic lows. Many investors have abandoned the sector. Eight coal-mining companies traded on the New York Stock Exchange are down an average of 29% in the last year. The conditions are ripe for hedge funds that target distressed investments. They are first...