coming up with actionable credit ideas ?? - Acumen ?
Hello everyone,
As the title suggests, I have been struggling with coming up with credit ideas. I am still a student, but I try to work on investment theses to improve my way of thinking. What I am trying to do is more along the lines of capital structure arbitrage investing rather than constructing a whole credit portfolio.
- For those who take a bottom-up approach, isn’t it inefficient to study so many companies’ business models only to find, in the end, that there’s no arbitrage opportunity? How does it work in this context ?
- For those who use a top-down approach, once you decide, for example, to avoid sectors that export to the US such as autos and beverages in case Donald Trump makes it to the White House, what’s the next step ? Do you go local and opt for sectors like FIG with no US exposure (speaking about european markets here) ? If so, how do you generate ideas from there ?
I’m struggling to understand how people come up with actionable investment ideas. Obviously, I’m not asking you to reveal your edge, but any pointers would be much appreciated. Thank you !!
Cheers
Based on the most helpful WSO content, here are some insights on coming up with actionable credit ideas:
Bottom-Up Approach:
Top-Down Approach:
General Tips:
Additional Resources:
By following these steps and focusing on the most impactful information, you can improve your ability to generate actionable credit ideas.
Sources: What is the secret sauce? Feel like I don't know anything, Idea Generation... and Why Wall Street Sucks at It, Why is everyone obsessed with equity L/S, How to better understand businesses and articulate investment ideas?, I want to get into investing.
Don’t really understand your question - what do you mean capital structure arbitrage? It’s not really a term I’ve come across.
Are you talking about spreads tightening/widening in the same cap stack between secured/unsecured? Or duration, ie curves flattening/steepening? Your question seems to suggest you’re referring to portfolio construction rather than single name
I don’t think OP understands their own question, which is why they are rattling off buzz words they probably read off a primer or research piece.
What I meant is finding mispricings in the capital structure of one single company. For instance, an unsecured bond trading higher than the secured and where you short the first and long the second so that you benefit from the correction. Or for instance shorting the company's stock and longing it's ITM Convertible bond as a hedging strategy.
I do understand my own question. You could have just asked me to rephrase in a better way rather than being a douche about it. I have asked so many questions here and nobody was disrespectful. Even analysts at HFs such as P72 or Millennium were more down to earth and didn't mind correcting respectfully ... See, this is in itself an arbitrage were I'd short you since you clearly the type of jerk that would go nowhere in their career
The way you come up with ideas/finding opportunities is by staying in touch with the sectors/names you find interesting.
For example if you are running a distressed debt strategy you will naturally be analyzing names that are trading at severe discounts to par. By doing the analysis youll hopefully find a reasonable range of what fair value could be and then following up on any changes in the market/company specific news/events/price movements your trade ideas should come naturally.
Yes this will take a lot of time and effort and is a bottom up approach where every single name is rigourously analyzed in detail. But thats how the smart guys on the street do it.
About your cap stack arbitrage. Id recommend to start "easy". Figure out why company X senior secured is trading at 80c and see if you agree. You cant run before you can walk.
Thank you for your input. I will start from there
No worries! Let me know if any questions.
Also recommend reading The Credit Investors Handbook by Michael Gatto. Distressed debt by Moyer is also a good read.
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