Ask a credit H/F analyst anything, just trying to help

This was actually a bit of a hard choice, as many tend to view l/s equities as the "end goal" of finance, and the equity space is generally more popular. It's also definitely true that the top HFs in equities that recruit undergrad have really good brand names (like citadel, pt72, etc), whereas the credit ones are probably a little bit more under the radar even if they're similar calibre. I think my decision came down to a few points:

1. I thought that the credit markets had more room for true analysis as opposed to speculation. The stock market is interesting: while there's definitely work that one can do to predict a stock's future, you'll notice that even firms like Citadel are only right something like 55% of the time, and the reason is because there are so many speculators in the market that luck plays a huge role. I hated the idea that I could spend hours/days on a single pitch, ace everything from an analytical perspective, and still have the stock go down because some jackasses got scared. Comparatively, fixed income research and analysis is more grounded and mathematical, and it really does feel like if you have a better strategy/algorithm/analysis, then you will outperform the market.

2. I'm also really interested in the distressed space. I recruited for rx primarily when I was still applying for banking, and had offers from EBs doing rx (not PJT/HL unfortunately, I prob would've chosen these two over any other offer). This really got me into the distressed space, where you probably need a bit more of a background in debt to do well in. Why am I interested in this? One, because I felt that the distressed space had inherently more inefficiencies, and so it gave the skilled investor even more chances to succeed. Two, because I found the work to be more dynamic and variable (this is actually only partially true given benefit of hindsight, but still much better than equities or vanilla credit); in equities, you're learning about different companies, but the process is very similar and there is very rarely anything interesting. Distressed space paves way for more possibilities because each situation is super different. Three, it also gave me a more differentiated skill set than my peers--doing credit (particularly distressed) also allows me to do well in equities I think, because I still have to learn all the components of what makes a good company. 

3. There's definitely an element of job security to be said--I think while equity HFs can have really high upper limits in terms of comp, the expected value/average is prob slightly lower than FI just because underperformance in equity can really damage you, whereas credit is much more secure. Of course, this doesn't mean that you can fuck up in credit and still get paid a shit ton--I just think that since probably 50-60% of the work I do is modelling and math/algorithms, it's generally harder to be that wrong.

Interested as well! (Ignore title)

I’ll keep this one a bit vague for anonymity. I’ve done work in vanilla credit (long/short), distressed (both corporate and sovereign), and structured products like RMBS and CMBS.

In general, from what I’ve heard from my friends at places like Millenium/Citadel/Pt72, credit is surprisingly similar to equities with the exception that you focus a lot more on downside risk as opposed to upside potential (as expected). There’s also probably less work with understanding the core business and more with just the raw cash flow generation potential. Not sure if my firm is unique in this respect, but we do a lot more data analysis and algorithmic work even though we’re not strictly a quant shop; this is the type of stuff that you would probably rarely do in equities. Credit has much more mathematical analysis involved—think things like convexity, duration, risk analysis, even black-scholes in distressed situations. Put simply, we employ more numerical methods when evaluating investments.

In terms of how we originate deals, I can really only speak for the distressed space. In a very very simplified description, we’ll have maybe a few hundred/thousand companies/situations on a watchlist, and we’ll constantly be refreshing them to check on maturity walls, waterfalls, sudden events, etc. When we come across an opportunity that we feel has potential, we’ll look into it more using the methods above.

One thing I’ll say in regards to PC is that the work is very different than at an HF since you’re not loaning the money; you’re just repurchasing debt (generally speaking). I have quite a few friends who came from MF PC (Bain/KKR/BX), and they all commented that the work feels very different, and frankly is probably more interesting from a HF view. Part of this is because of the pacing, and part of it is the level or risk-taking. Even as a junior in an HF, you’re still taking much larger risks, and your PM generally trusts your analysis, whereas in MF PC, you’re a cog in a machine, so you actually have very little impact in any investments made beyond due diligence.

I will also warn you that you should only do credit immediately out of undergrad (whether PC or FI HF) if you are ABSOLUTELY SURE that this is what you want to do. It’s quite hard to lateral into equity HFs at this stage, and it’s pretty difficult to go to business school to get a reset (might be easier for MF PC). It’s generally a little bit easier to go the other way around, for some reason. I think the work in credit 

So I never actually did Rx—I joined this group immediately out of undergrad because I knew distressed was what I wanted to do. Frankly, aside from PJT/HL, none of the other EBs would place into better distressed funds than where I’m at. I do have a few friends in Rx, and I have to say that the modeling work has quite a bit of overlap with distressed credit. We all look at waterfalls/cap tables, we still use Comps and DCFs at times for valuation, and of course there’s a lot of bond/loan yield-related valuation work that’s also modeling-intensive. My firm feels a little more quantitative than other hedge funds even though we’re not a quant shop by any means, so some of the modeling is different too.

-What are your hours like and how do they compare to Equities?

For most HFs, regardless of equities or credit, I’d say the hours are around the same since they’re market-facing. I walk into the office around 7-8am, though I’m definitely already reading through previous-night news at 7:00 no matter if I’m at home or in the office, and I leave around 5:30-6pm. The caveat is that after I get home, I still have to do some final work wrapping up a model, pitch, or just reviewing the news for around 1-2 hours. I’ve only had weekend work once, and it was for a sovereign debt situation, which you just gotta deal with sometimes. It rounds to about 50-60 hours a week if you’re efficient and can get your work done, which is pretty nice I’d say, much better than IB or PE.

-Would also be interested to hear your thoughts on AI and how it impacts HFs?- do you think it impacts the Equities or Credit space more, based on your previous comment on there being more inefficiencies in credit?

haha I don’t think AI will be taking over our jobs anytime soon, if that’s what your asking. We do a bit of programming at the firm, and I’d be lying if I said I never use chatGPT to help with that. In terms of which space AI affects more, I’d probably say credit just because there’s more analytical, mathematical work that AI can probably do as well. That isn’t to say our work is unnecessary, just that we’re constantly developing newer ways to capitalize on inefficiencies, and AI is one of those steps.

-Do you think credit could evenutally have the higher earnings ceiling that equities have in the future?

I can make a case for distressed credit investing as being even more lucrative than equities: we’ve had some crazy returns of 100%+ IRR in this space, though of course it’s rare. Vanilla credit and structured products? No way those returns are going to be higher than a skilled equities investor. The whole idea of these things is that it’s lower risk, and thus lower reward. Distressed debt is probably equal if not higher risk than equities, so it also has the potential for higher earnings ceilings.

-Is credit at a top 3 BB a good starting point to get into the distressed debt space?

Depends on the group, obviously. I’d say the preference probably goes special sits groups (like Apollo HV) > PJT/HL Rx or MF PC firms > other EB Rx or junior-level at vanilla l/s equities/credit  > BB LevFin >> DCM. I’ve also seen former BB S&T folks at the firm, but I don’t think they’re actually in the distressed debt arm of the fund. Basically, unless you’re in buyside, you’d want a seat in restructuring at an EB. Otherwise you’re gonna have to go to a pretty shitty fund and make your way up there

-Appreciate it is varied and performance dependant, but do you have a rough indication of how the salary compares for credit vs equities at the junior level?

Well, I think it’s pretty pointless to ask about HF comp because it’s so variable. It’ll be enough to keep you well fed and happy. Bases are prob 110-150k outta undergrad, with bonuses ranging from 70-250k for the first 2-3 years.

As I mentioned, I think that in general, equities has higher earning potential but also much higher risk. Credit is more stable, but it’s also very lucrative so I personally think that the average comp (including bonus) at credit shops are probably slightly higher than the average equities shop. Distressed space behavior is probably more similar to equities comp distribution—risk usually correlates with how high the ceiling is as well.

Aside from risk, I think it’s also important to note that another useful metric is AUM : investment professional (IP) ratio. Obviously a $2bn fund with 2IPs is going to have a higher payout than a MM.

Hmm I’d say that EB Rx is a really good spot to be in just in terms of optionality, but if you’re certain about wanting to do investment-side special sits-type work, then I’d fully support ASOF, BCC, Oak Hill, etc. Only caveat is that with Rx, you get access to both debtor and creditor side work, so you might have a better appreciation of distressed situations after that background. I decided that I wasn’t too interested in the debtor side anyways, so I decided to skip it.

Honestly I’m not too sure about on-cycle process, as I haven’t gone through it myself. I do know that if you don’t go to a firm where the target firm recruits heavily from, it’ll probably require extensive networking. In general, HFs are super unstructured with recruiting, so probably best if anyone else on this forum with first-hand experience can comment some more

I’d say it’s more inefficient because there’s less liquidity and less information going around about the space. There are also many more unskilled investors who didn’t plan on being “investors” but just happened to have made a bad loan, or banks that have to sell their ownership of bonds not because they’re invaluable, but because they’re too risky. All of this means that the pricing you see in distressed credit markets is probably inaccurate. Keep in mind this is all relative to equity markets, of course. The sheer number of investors active in the public equities + the easy transparency and access to information about pricing and company specifics makes it more efficient than distressed markets, I think.

I also don’t think you’re being too fair when you say most distressed opportunities are bad businesses—a lot of them got fucked because of market conditions, like unforeseen interest rate spikes, temporary COVID-related supply chain and sales issues (like China’s lockdowns), poor management despite strong products, etc. There are a million reasons why perfectly good companies still go into bankruptcy—it’s why firms even employ loan-to-own tactics right? The best distressed opportunities (and the only ones that investors actually invest in) are ones with high potential to turn around, or ones with high potential for us to exploit in the future. Nobody’s going to buy up debt of an actually dead company even if it’s trading at a cent on the dollar.

Bump

Interview process is probably going to be different between FT and SA, so take what I say with a grain of salt. There's much less focus on networking imo (as is characteristic of the HF industry), and more about teasing out how your brain works. I'm assuming you're a junior in uni right now, so basically all you can bring to the table is a smart and curious mind. For the credit HFs, I was asked maybe 1-2 technicals about credit, and the rest was a mix of brainteasers and behaviorals. The technicals asked weren't even that hard--it was mainly just to gauge if you're actually interested in the field to have done a bit of research yourself. I remember I was also asked to just talk about an interesting distressed situation that I was following, so maybe prepare one or two of those as well. Best book to read (and the only one I read) is Moyer's Distressed Debt Analysis--that's pretty standard in the field. I think having a summer in liquid credit would be great for FT credit HF recruiting, but I'd also make sure that you give your firm a shot first. Lots of my friends who came from MF credit spots don't regret having spent some time there, so that's just something to think about too

1) recruiting for the space wasn't really intentional--I'd been interested in credit but I wasn't exclusively focusing on this. In terms of advice, I'd say honestly that HFs are different than IB/PE firms--much harder to prepare for these beyond your basic investment acumen questions and pitches, it's more about them seeing how you think about issues

2) I don't have a CFA right now, but will be getting one. It's not a requirement at my firm, but a lot of people get it just to learn about things and/or open up more opportunities

3) We do a lot of the things you mention here, I'd say I probably do a bit more stuff related to structured debt solutions and undervalued recovery. Sorry for the vagueness

4) Varies wildly and up to discretion of PM + how well the firm does. Base for analyst out of undergrad is around $110-150, and this scales pretty slowly. It's mainly about the bonus + PnL linkage that can build up. If you're in the HF industry, you're going to be well paid for sure.

1) Wanted to ask what firms did you recruit at or have u seen that take undergrads (looking to break in for a ft role).

Just do a quick search on WSO and you’ll see some names pop up. Outside of that, since HF recruiting (for the most part) isn’t as structured as IB or PE, you’ll also do well by searching up the HFs themselves and maybe cold-emailing HR or people at the firm to look for openings. I did this a bit and actually got an interview at a firm that doesn’t strictly run undergrad recruiting.

2) I was also curious if you see yourself doing this for the rest of your life.

Haha not too sure about this, I’m still pretty early in my career. I definitely want to stay in this industry for a while and work my way up—I genuinely find the work to be pretty interesting, and comp and WLB aren’t too bad in my seat. Not really sure what the next step would be, and that’s something I’m tryna figure out too.

3) Are there many opportunities to move into bigger HFs especially since distressed investing is more of a niche field. 

I think so—I’ve gotten chances to move to “bigger” HFs like the well-known MMs, both in distressed and just regular FI. I think if you’re already in the HF field, and you have a proven record of success, it won’t be too difficult to lateral to a different firm.

4) What has the traditional background look like for someone breaking into Credit/Distressed Credit out of undergrad?

It’s generally people who have a passion for investing across the capital structure (which is super broad, I know). I think it’s fair to say that people who go into distressed are more hardo than those who go into vanilla PE/equities, just because the technical skill set requirement is probably slightly higher. You might also see more mathematically-inclined people go into credit, though this is probably a generalization

By any chance are you open to talking about your path? I can’t find Credit HF that take Out of undergrad. How did u compile the list? 

If this is your first FT role you have no catching up to do. At this level of seniority they might know a few things more here and there but means nothing in the grand scheme of things. The best advantage you can get is being a good credit analyst, so if you wanna prep ahead of time focus on that. The rest will come, it's not rocket science and it's a pool in which you'll quickly learn how to swim in.

Echoing what Associate 1 in AM - FI says, the people in your class have very little edge over you. You’re overestimating the amount that you learn from just a summer job (think about how much you’ll forget after a full year of partying), and also underestimating how much everyone needs to learn on the FT job. There’s usually some training program, and the EB Rx kids may have a slight edge in the first week or two, but then it generally disappears after that. 

Turnover's a pretty big issue, but I don't think I've ever found myself worrying that I'll be out of a job soon. I'm actually not sure how hard it would be to find a new job if I get fired from my current one, but I think if you can still demonstrate your ability (which is of course difficult, as you getting fired probably means you messed up) in interviews, that you'll have a good shot. If you go to a firm with a good enough brand name, I'd say you'll also get a decent chance at picking yourself up

Personally believe that smaller HFs are better to join out of undergrad. It's pretty easy to feel overwhelmed at the large MMs, and leaner ones give you a better opportunity to 1) learn and 2) make an actual impact

I know nothing about Europe, but I'd say your profile seems pretty decent since you're also very early in the career. HFs look mostly for 1) passion in investing and 2) strong analytical skills, so if you've got that, I'd say you're in a good spot. Don't think you'd need a MSc unless you want to go into a very technical role

There's this site called Cov Review that basically summarizes the covenants in a credit doc and shortens 100 pages of shit into 2-3 easily digestible content that's actually important. Frankly, I can't imagine sitting at my desk just reading a detailed credit doc--it's just a big waste of time. Also we work with lawyers so a lot of the info goes through them first

Hmm sorry I'm not sure about how the whole sponsoring situation is. I do think Citadel also sponsors but don't quote me on that, best to just dig around on your own. Also look at the PE firms--I know many of them sponsor

Super variable. At that level of experience, your base will prob be around 180-300 with a bonus that involves carry (which is even harder to estimate, could be 0 could be 100%, could be 200%). Of course, these numbers are just estimates based off my friends and me. You're going to hear the same thing over and over again for HF comp--it's performance dependent, but it's going to be pretty high and you'll eat good, don't worry