Why Fixed Income?

For starters, I should be clear, my expertise is not structured credit, but private credit/direct lending and distressed debt/special sits/rx/debt activism. That being said, this is one of the better primers I’ve come across on structured credit (BNY Mellon publication)

https://www.insightinvestment.com/globalassets/documents/recent-thinkin…

Make note, in particular, of the waterfall structure of returns for investors. To your query about returns, the reality is - as is true in most contexts - for those willing to take on more risk, they will, on an incremental basis, continue to earn additional returns at the margin for each additional unit of risk taken on the part of the investor. Similarly, to illustrate, if you were willing to take risks commensurate with CCC rated debt/bonds, you’ll earn rewards (read: “returns”) commensurate with taking CCC credit risks. If you want to increase rewards while investing in credit, there are three ways of doing just that (save levering the actual portfolio by borrowing from or with derivatives): 1 take additional credit risk (e.g. go up the risk curve/down the quality curve) 2 take additional duration risk (e.g. go out longer w/r/t portfolio duration and, therefore, increase time to maturity of the underlying portfolio holdings) 3 take additional liquidity risk/get illiquid (e.g. private credit/direct lending, etc...) The same remains, broadly speaking, true in structured credit.

Insofar as credit analysis and career trajectory, I’m not really the best source of info on that as it’s not my specific slice of the world, so to speak. That being said, I’ll share my understanding but, please, take it with a grain of salt.

First, credit analysis; this depends first on the role and second on the process/strategy/niche/etc... employed by the firm at which you’re working. Some firms undertake a more substantial in-house credit analysis effort than others; that’s going to, in turn, affect the nature of your experience. Similarly, the role into which you’re hired also serves to materially influence the nature of your experience in that trading will differ from investment research and so on. Moreover, some shops on the buy side which run especially lean may end having significant overlap in trading and investment research/analysis by nature of their organizational structure.

Second, career trajectory; this is hugely dependent on the nature of your role at the firm, their process/strategy/niche/etc... and their organizational structure. That is to say, because some firms rely more on in house credit analysis, others have portfolio management teams where analysts do some trading and traders do some analysis, and so on, the exit opps will with similar distinctions based on the given context. However, there is, to my understanding, a less transferable skill set (or at least a perception to that end) acquired by folks working entry-level roles in ABS/“structured credit” as compared to, say, LevFin/RX/SSG at a bank, HY/Leveraged Credit asset management at a mutual fund, or from either Distressed Debt/SSG/RX or Private Credit/Direct Lending at an alternative manager who has a significant presence in alternative credit (say, at the very least, ten-figure AUM across their alternative credit strategies).

Generally speaking (excepting for the funds which structure mountains of unsecured, subordinated, cov-lite horse ~ who are completely and utterly fucked at this present juncture as once distress/insolvency/etc... really materializes in this current downturn, the funds who went all-in on debt facilities further and further down the capital stack and with fewer and fewer contractual credit enhancements {e.g. covenants} are going to start going belly up like fish in a barrel that some redneck just emptied a clip into) the structured credit or “ABS” space has retained its relevance and continued to see robust growth post GFC, with new/novel products/applications of securitization, increased assets, and so on. At the right firm, you can do really well for yourself in Structured credit, I have a friend who was at a top bucket shop which has, historically, been a dominant player in the space (think Octagon, Golub, CVC, CIFC, Halcyon, MJX, Alcentra, etc...) who is in his late 20s (e.g. 26-29) started there out of undergrad, and is now a principle at a midtown SFO; empirically speaking, the exit oops are there, but you still have to be a top performer and, depending on the shop, it is possible to pigeon hole yourself.

Hope my ramblings are at least somewhat helpful. Feel free to PM me and good luck out there!

It can be done; it’s exceptionally difficult to pull off. Best tactic (imho) is:

1. Skill up: CFA, CAIA, MBA, etc... This shows commitment/that you want to be there

2. Network your dick off: you don’t have the experience and/or pedigree to naturally slide into one of these roles, make friends with guys in the space who can refer you.

3. Build our a portfolio of work (think research reports, models, etc...) and share them with people in the space. Tell your story, ask for feedback.

People in this world love a go-getter. Making this jump will probably be a miserable process (if even possible for you at all) but, if you think the work is that much more interesting, certainly a worthwhile endeavor.

Hope this helps.

-DDD

A few thoughts - some incomplete but figured I'd put something out there.

1. Fixed income investors are one reason, they are often larger institutions and have specific needs to fill that indexing can't really get to. Insurance money, for example, has a host of asset/liability matching concerns... on top of tons of others. You can't simply buy the TLT and call it a day. Others may have restrictions on having to own the underlying - that could be public sector who can't for whatever crazy reason actually buy the ETF/Mutual fund, a preference or legal need. Some of it is risk based - you might have a preference to hold the underlying securities should someone default, say the difference between having money in the general account with an insurance company vs. a separately managed account. 

If you are high net worth - good luck passively managing a tax exempt muni strategy. That's a huge segment of the market rife with structural, tax, etc. implications. I really wouldn't understate the difference in who the investors are, and why they are buying fixed income securities. I have found that once you can wrap your arms around that, it helps to paint some of the macro picture on bonds that can be challenging to wrap your head around otherwise. 

2. Structure of bonds themselves make it tough. You have all sorts of covenants, inconsistencies, pledges, subordinate vs. senior, coupon differences... it all adds up to a real challenge to 'passively' index to in a meaningful way. Add in informational asymmetry and the resources required to parse this stuff out, you end up in a scenario where again it simply lends itself to active managers, mispriced or inefficiently priced stuff, etc. Security selection plays, often, a huge part in being a successful manager - thus there's opportunities here. That's before you even get to issuer level analysis, securitization, underlying assets pledged (maybe I noted that above) - but there's just a lot involved. 

3. Mechanically it's a pain. Imagine a passively indexed high yield fund. Sure, they exist and I can buy them - but you have defaults you have to deal with, creation/redemption that I can't fathom is fun - especially when liquidity disappears from the markets, what a headache. Aside from that, when you get into higher yielding or more opaque stuff - liquidity becomes a real concern - price discovery is already an issue, add in even larger players who are relatively price agnostic and simply buying up slugs to hold.. ugh. There's certainly good things that come of it, having easy ways to get exposure to credit is a good thing - but I think there's a limit that is lower than equities in the market overall. 

Those are a few that come to mind - I think the more concise version is that fixed income tends to be a less efficient, less standardized, fragmented market that lends itself to more opportunities for active management - thus you see it more prevalently. Plus, many of the players in the markets have needs that are better accomplished through, largely, active management of funds - which isn't always simply stock picking to generate alpha.