Q&A - Credit HF Analyst

Personally I have not. If you are looking for investment analyst roles, will be a tough sell. I could see gow you can convince someone who has more of a trading background to consider you, but most credit HFs want analyst candidates to have some fundamental background unless you are trading stuff that has more of a techchnical bent to it.

Hi, thank you so much for doing this. I wanted to start off by asking the type of sales and trading profiles (if any) that are usually found in credit hedge funds. I realise that most are from backgrounds associated with levfin and restructuring, but I was wondering if for example distressed/HY trading roles would also have a good chance of breaking in. Thank you!

Distressed desk analysts tend to have a very strong placement into credit HFs.

Have seen a few make that transition and it’s easier to do so the sooner you make it, i.e., the cheaper you are. As an example, it’s going to be hard to convince some PM at a distressed fund to hire a MD level research analyst that is used to getting high 6 figure comp that has minimal track record finding investment ideas in the public space.

Transition wise, your biggest hurdle when you move into the HF-type mandate is a) building coverage and b) understanding public market dynamics. So frankly, from a PM’s perspective, you are useless for the first 6-12 months but most already know that when they hire you. They’re hiring you because they see potential. How do you prove that potential? At the very least, you should be able to show that you have great underwriting skills through talking about the deals you worked on in depth and being able to articulate what makes a good/bad trade, whether that’s for the deals you underwrote at your current shop, or a credit pitch that you think is interesting in the current market context.

You will be competing against other guys who might have more relevant experience, but if you are really at a shop that is well regarded and is a relevant player in the special situations space, I would guess you will at the very least get interviews. From there it’s all on you. I would prepare at least one credit pitch (long or short) that you think is actionable today in the public markets in addition to knowing your deals cold. Good luck.

Event driven with a bias for credit. Often neans distressed or stressed credits with a dash of equities when it is the right oppty. Tactical around the headline distressed names as those are better for drawdown money managers ie need a lot of time for thesis to play out

I will take the liberty of not mentioning the shops. I think the ones that are notorious for “screwing” creditors are well known lol. With that said, PortCo’s owned by those said sponsors have to generally issue at higher spreads vs. comps for the same reason…which is why lately they have attracted savvier HY / distressed investors, which means the covenants will be scrutinized heavily. My personal opinion is that those said credit funds that softly blacklist those sponsors are generally the same ones that weren’t careful enough when buying the debt at par or close to par and just want someone to blame. The game has changed so that every sponsor in the space thinks part of their job is to create enough flex in the docs to be able to have a seat at the table if something goes sour during their ownership of the PortCo. Just be smarter than others, is my advice.

Had carry in my prior shop. Comp progression at current place is more tied to attributable P&L (e.g., if I worked on names that generated XYZ dollars my bonus should be a formula based on that on any given year).

Comp progression was indeed one of the key factors in making the move. The prior shop was definitely more “stable” as it had longer term capital, but I found the trajectory was too dependent on future fundraising. If you can’t raise your next fund / meet a target, not only will your future carry awards be worth less but your reputation is at risk (i.e., clients quickly find out that XYZ manager didnt meet target - becomes gossip of the town). It’s also no secret that the LPs are increasingly decreasing their allocation to drawdown credit vehicles (primarily due to the lackluster returns across the space) so I found the “TAM” for long only distressed shops to only shrink and become more competitive. Current place’s capital base is more liquid which poses different risks as well, but I took a chance based on the existing scale they have and their reputation.

Sourcing channels are varied - good old screening, relationships with desks, advisors, other buyside friends. 

How detailed my DD is dependent on my assessment of how much P&L potential there is in the situation and also on the relevant catalysts. This means size of capital structure, trading volumes, relevant events and how near/far are they from today’s time etc. Most names go into my monitor list after I spend half a day to a day on it. Casting a wide net and dedicating time correctly on the most actionable ideas is one of the most important things you need to master in this game. 

Short summary of day in the life - day starts anytime between 7:30-8:30 depending on what’s on my plate. I also look at Europe so sometimes I will need to get up earlier to get on management team’s calendars on that side of the pond. I try to digest the basic news flow on my way into the office (macro news, relevant political headlines, name-specific headlines relevant in my coverage). After I settle in, I’ll work on whatever I was working on the day before. That could mean finishing up a model on a name I have been DDing, reading docs, marking up a term sheet to give to lawyers or just reading up on a new name that I am just initiating coverage on. Lunch is usually at the desk after I go pick something up with colleagues. After lunch, it’s usually a mix of calls, internal/external meetings or just more excel. Afternoons are generally better to grab my PM’s attention as he’s busy talking to traders/the street in the morning so if I want to discuss a trade/do something with an existing position, I try to reserve that for the afternoon closer to market close or after. After work, it’s usually gym then dinner. What I do after is a function of how behind work I am or how motivated I feel. Same goes for weekends.

I would say at any given point in time I know 10-15 names very well and “lightly” cover additional 10-15 names. Anything more than that I think I sacrifice accuracy in my analysis or sanity. More isn’t better IMHO…better to get a few right almost all the time versus being the guy who knows a lot of names but lack depth in coverage. 

My view is that the better ones are the ones that have showed consistently strong returns. Doesn’t mean up 30% one year, down 5% next and up 5% next year. Now some of this could also depend on your mandate as for example, if you just got money for a drawdown fund, your returns in the first 12-18 months will look weird as you are deploying capital with stuff that is underwritten with > 2-5 year horizons, which could imply you are catching falling knives as you build positions. But in general for a “hedge fund” mandate, I would argue the ones that time and time again successfully raise capital are ones that don’t have large drawdowns and show consistency in returns and managing risk (volatility).

In terms of names, I would ask around for the HSBC HF report and look for funds that exhibited similar qualities as I laid out above. Some will be ones you heard of and are not surprised by, and some will be ones you never heard of, and some will be ones you hear a lot about in this forum but are underwhelmed by. I’m intentionally being cagey as I think people who read this forum need to stop obsessing about names and understand how this industry works to be able to set aside the noise.

If your goal is to land and stay in the credit HF/investing world, I would prioritize finding ways to break into the buyside first. CFAs and MBAs are not valued that highly by PMs (remember, the guy you need to convince is the PM/PMs). I’ve only seen CFAs or MBAs be valued by equity long only PMs who also come from those backgrounds. 

Try to use your network, whether that’s developed from your day job or through friends. Find their email addresses through bloomberg search function and send them a note that you are interested in breaking in and seek advice. Ask if they are hiring. Be willing to take a demotion (if you are willing to). Starting as an “associate year 1” at a credit fund you like isn’t the worst thing as a 2nd or 3rd year associate in lev fin. Your career is long. Taking 2 years back won’t kill you, especially if that means you break into the industry. Imagine the 2 years spent on CFA or MBA. Probably a better trade off long-term.

If you want the CFA or MBA for different purposes and trying to transition is one of the use cases, then sure, pursue it. Purely pursuing it for the goal of breaking into buyside doesn’t seem like a good return on time. I would spend that time working on your credit investment pitches. 

Depends on the strategy. Your background would be well received by long only / mutual fund credit research roles (think Fidelity, T Rowe, BlackRock etc) as the job is similar. You will be covering a ton of names with not too much depth, which is similar to the sell side credit research role. Now, keep in mind, breaking into buyside HY seats as a IG analyst is going to be tough. The way credits are invested / analyzed in the IG world is very different vs. HY world. 

Special situations, Distressed, Direct Lending seats will be harder to land with your current role. Why? Simply because the skillset you bring is not as applicable. Never say never, but even if you were to land those gigs, you will struggle in the beginning overcoming the steep learning curve. And guys who interview you will know that.

Assuming you arent a 100% sure where you want to end up, probably a couple years at a large DL platform. Small funds are prone to fail unless the founder has strong backing (but then they wouldnt be really “small” would they?). Smaller funds require a lot of DD on the founer. Hard to do that if you dont have many contacts to ask around about said CIO.

Sorry about typos. Cant see text when i type in the app.

No. You need to know finance first

Tough imo. Theres more technical nuances behind credit trades than equity rades for that switch to be smooth…

You can understand docs as well as rx guys. The difference is that a rx guy soends his or her day thinking more about the practical implications of the doc loopholes and how that might impact bk recoveries or ltv for a specific secuirty in a sepcial sits context. If you are in lev fin try to find resources to improve your understanding of the various capital structure themes relevant in today’s credit investing landscape. I heard that book written by Gatto is good at this, as an example.

I think the answer to your q is it depends on what you want to pursue. Pursuing RX advisory might pigeonhold you to credit or value oriented or event driven HFs. M&A coverage or industry cov will most likely pigeonhold you to PE roles. With that said…I havent x’ed a IB coverage resume when recruiting juniors for a credit role if I thought his resume had enough credit exp (deals).

What kind of HF? Too many different strategies…would help if you specify which you want my take on.

After a certain exp level, you should reach out to your contacts at the buyside. HHs will turn you away. For LT career prospects, feel like credible arguments can be made for both. You might be a good senior banker once you make it past the grueling first ten years. Maybe you like the fact that you dont take much underwriting risk. Or maybe you just like being more on the principal side where you call the shots on what the deal should look like. Going to the buyside just bc is “easier” i think is a common mistake.

I got the advice from my older friends that it is harder to learn credit than it is equities (in general). So I started out in credit in IB thinking it will give me the best learning exp. At the time, the shop I was at also sent some kids to regular PE so i wasnt too concerned about being “stuck in vredit” if i ended up. Ot liking rx/special sits. Fortunately I liked it and wantes to become good at it. I also thought credit provides a more stable career path although your good years wont be nothing like what a. Eauity PM/analyst makes. I also like the aspext of being able to structure creativity behind trades in credit due to the legal aspects that can be as important as the fundamentals.