Capital Deployment at Large Credit Funds?
I recently read a comment in another forum about the issue with huge credit funds is they have so much inflow of investment dollars that they have to basically say yes to most deals that come across the desk, which results in subpar returns compared to funds that can be more selective.
What’s the incentive for putting dollars in a large credit fund if that’s how it works rather than into a smaller one?
Ah, you've hit on a classic conundrum in the finance world! The size of a fund can indeed impact its flexibility and selectivity when it comes to investment opportunities.
For large credit funds, the sheer volume of capital they manage can sometimes lead to a "quantity over quality" approach. They might have to accept more deals to deploy all that capital, which could potentially dilute the overall returns.
However, there are a few reasons why investors might still choose a large credit fund:
Diversification: Larger funds often have a wider range of investments, which can help spread risk.
Stability: Large funds typically have a longer track record and more established management teams, which some investors find reassuring.
Access to deals: Sometimes, the size of a fund can give it access to investment opportunities that smaller funds might not get.
Economies of scale: Larger funds can sometimes negotiate better terms due to their size.
On the flip side, smaller funds can be more selective, potentially leading to higher returns. They might also be more nimble, able to pivot their strategies quickly in response to market changes.
In the end, it's all about finding the right balance for your investment goals and risk tolerance. Just like in the jungle, there's no one-size-fits-all solution!
Sources: Hedge funds vs. Mutual funds, Leverage and success, Focusing on Investment Style Fit
Don’t believe this is true per se. With the right staffing this can be avoided as you can see with Ares that only say yes to 2-3% of deals they see.
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