4/29/11

I was recently talking to a hedge fund manager about career paths and the qualities he looks for in hiring analysts for his fund. Before the conversation, I had always discounted fixed income research as a career stepping stone. However he made an interesting comment about fixed income research vis-a-vis equity research. In his opinion, Equity Research Analysts, while they are very knowledgeable about an industry or a company, are largely concerned with earnings growth, price targets, and the next product. On the other hand, a fixed income research analyst largely focuses on weather the investor will get his money back. As a result, the fixed income analyst will do a much more thorough analysis of a company's balance sheet, income statement, and other SEC filings compared to an equity research analyst. While the fixed income analyst is largely concerned with preservation of capital, the equity research analyst is much more focused on EPS growth and catalysts for stock price appreciation.
As a result, this hedge fund manager views a prospective hire with experience in fixed income research as a major plus. Indeed, he requires all his analysts to do a rotation on the fixed income research desk in order to gain that experience. The focus on a company's credit worthiness and financial strength acquired through fixed income research seems to be a valuable one.
On this site, for better or for worse, there seems to be a predetermined path that is recommended for all of the aspiring John Paulsons and David Teppers. While this is just one person's view, I wonder what you all think about it?

Comments (24)

4/29/11

1) It is unlikely that he is going out there and hiring 50 jr sellside fixed income research analysts - so WGAF? He will continue to hire ex IB analysts. If it is a distressed/credit fund PMs will value restructuring, lev fin and other credit intensive IB groups 10x the value of a random FI research guy.
2) That's very simplistic. The analytical rigor in credit analysis is very limited compared to equities. I'll leave that statement as a teaser to see if anyone disputes.

Financial Modeling

5/1/11
DurbanDiMangus:

That's very simplistic. The analytical rigor in credit analysis is very limited compared to equities. I'll leave that statement as a teaser to see if anyone disputes.

I work for a large traditional AM firm, have worked in a quant fixed income research group and recently switched into a fundamental equity research group. I strongly disagree with your statement. It's actually the opposite. I find my work in FI research much more intellectually demanding than equities research.

You are probably gonna say, well, it's QUANT FI vs FUNDAMENTAL equities, of course the quant stuff is more complicated, but that's exactly my point. Quantitative research is the bread and butter of FI research, just like fundamental research is more useful than quantitative research in equities. So I think the "analytical rigor" is higher in FI than equities just because of the nature of the asset classes.

Now if you are just talking about researching credit worthiness, then yea no shit I agree with you. That's like rating agency work and what kind of sophisticated investor actually trust them?

5/1/11

A clever person I came across once made the following claim: if you can do fixed income, you can do stuff that 90% in the investment industry can't. There's bound to be some job security in that.

Also, remember that whereas equities is all hopes and dreams, the real meat of traditional banking is fixed income.

5/17/11

The chief investment officer of a major buyside AM firm once said during a presentation I was attending that it is 20x easier to move from FI Research to Equity Research that vice versa.

5/17/11

Wouldnt the level of balance sheet analysis really befall on the specific shop? I mean, lets say you're a deep value fund, you'd be analysing notes and the numbers to do see if they are accounting irregularities you can exploit either in the short side or the long side.

5/18/11

This is very odd because I recently spoke to one who said the same exact thing about debt capital markets being way more involved than equity capital markets groups.

Financial Modeling

6/1/11

True... I once worked for a PM at a very large hedge fund. He remarked that his interest in hiring me vs. others was that I had fixed income experience (coincidentally he worked for the Fed) before going to B-school and then the hedge fund.. Just my $.02 worth...

6/1/11

old-line asset mgmnt: higher base salary, lower bonus ... unless high flying like a HF ... maybe the chance to become a PM in 9-12 years if you work hard, stay with it, get a CFA.

you'll need to read your 10-k's and q's. lots of individual prospectuses.
you won't have to build great models, but you'll have to build and maintain some -- sell side will give you their models, I think.
you might get an industry-sector to cover.

role obviously depends. what do they do? do they present themselves as a great asset manager & way to get beta + a little alpha to corp bonds as an asset class? they own a portfolio for their investors like a mutual fund?

most importantly,
be able to tell a story about how you'd look at a bond

e.g. junk bond co

it's a host of issues:
-legal, any covenants to cover you? where does the particular issuance fit in the capital structure? what claims does it have?
-organizational, do you like management? do you like direction of the company? how it is set up? are the strategic choices smart? who are the other owners on the co's cash flows?
-finance, can the co COVER ITS PAYMENTS? can the co return principal/roll when it'll have to? what is the rating? duration? convexity - are there embedded options that'd let the co refinance giving negative convex? or is it puttable? is it convertible to equity?
-trading, liquidity of the issue?

alternatively, think of the risks, http://en.wikipedia.org/wiki/High-yield_debt
has a good start list. get some books, the kinds you'd find in a b-school library.

knowning option adjusted spread might start to set you apart, dunno ...

6/1/11

Thank you thank you, very helpful good sir.

Take it for all it's worth.

6/1/11

I was wondering about this as well although it has been covered before in some aspects. How exactly does credit compare to equity research in terms of bonus compensation? Also as an international student, am I right in assuming that perfect writing skills are less important in credit research? thanks

6/1/11

credit is considered to be a bit more quantitivate than equity - this is largely a function of the product itself. equity research will often incorporate the issuer's "story" - which may not be necessary for credit.

credit is divided up into sectors and HY and IG i.e. there may be a senior analyst that covers IG retailers AND another senior analyst that covers HY retailers.

Comp is pretty similar to equity - may be a little higher than ER depending on firm.

6/1/11

fixed income research on sellside is great. great track for buyside

Best Response
6/1/11

fixed income research...what is the end result? (Originally Posted: 12/26/2011)

Hi guys, I have been trying to work out what the end result of a fixed income analyst's research is. For example, an equity research analyst comes up with a target price or a range of prices for a stock. What is the equivalent for a fixed income analyst, is it a target yield over a risk free asset of a similar maturity?

This is what I think happens:
1) you perform credit analysis on a bond and come up with a credit rating, say +BBB
2) you look to see what the historical spread between +BBB credits and a risk free government bond of the same maturity has been, say 120 bps for arguments sake.
3) You compare the current spread to the historical spread.
4) If the current spread is wider (250bps) you might make a buy recommendation, or if it is tighter (100bps) you might make a sell recommendation.

Is this correct or could someone with knowledge on this comment/help?

Thanks

6/1/11

On the buy side, you are essentially managing a portfolio of bonds, so you are trying to evaluate which bonds are worth adding.What you said is what a FI analyst does on the buy side.

6/1/11

FI research is not only about bonds. No you don't come up with a credit rating and compare it with historical spreads, your analisis needs to be much deeper. You do pretty much the same as an ER analyst, and you analyze the country macro data instead of the cash flows, ebitda etc if you are talking about govis. You come up with reasons why you think the market has mispriced something. For example you can look at correlations between different assets.
As an example many people saw, over the summer Italian bonds were overprized compared to the Spanish ones, since the risk of Italy going bankrupt was much higher by pretty much any metric. However the risk premium was much lower. So many people went long Spain and short BTPs, which payed off pretty well until the ECB intervention.
You also prepare possible scenarios for different results in macroeconomic releases, auctions, central bank interventions and things like that. You take a position on whether you think they are going to move rates or intervene the currency or they are going to get screwed in the next auction and why.

As for the report itself, the outcome generally is a target entry price and a target exit price.

6/1/11

Man, when are you going to start scoring again?

Under my tutelage, you will grow from boys to men. From men into gladiators. And from gladiators into SWANSONS.

6/1/11

Are you doing a more fundamental related sector like high yield or investment grade, or a more macro type product like rates, emerging markets, or a structured products type role?

6/1/11

It is at a PWM firm if that helps with your question. Therefore I assume its investment grade since it is trust related, however like I said before, I have limited knowledge to that is just my answer based on what I know as of now.

6/1/11
6/1/11
patternfinder:

Of course, I would just buy in scales.

See my WSO Blog | my AMA

Add a Comment
WallStreet Prep Master Financial Modeling