Rising 1st yr analyst at a levfin/rx/dcm. End goal is credit HF. Talked to someone at redwood/diameter/similar who actually said they look a ton at "value" and "paying the right price" which is not what I thought they did. Thought it was more about docs and legal consideration
any insight?
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Credit hedge funds, especially those like Redwood or Diameter, often focus on a blend of factors, including "value" and "paying the right price." While legal considerations and documentation are critical in credit investing, the emphasis on value is equally important. Here's why:
Value and Pricing Discipline:
Many credit hedge funds prioritize identifying mispriced securities or situations where the risk-return profile is favorable. This involves assessing whether the price of a bond, loan, or other credit instrument reflects its true underlying value, considering factors like credit risk, recovery potential, and market conditions.
Legal and Documentation Considerations:
While legal considerations (e.g., covenants, structural protections) are crucial, they are part of the broader diligence process. These factors help determine the downside protection and recovery scenarios but are not the sole focus.
Blending Strategies:
Funds like Redwood or Diameter often operate across various strategies, including distressed debt, high-yield bonds, and leveraged loans. In these cases, understanding value becomes critical to ensure they are not overpaying for risk or entering positions with limited upside.
Market Dynamics:
Credit hedge funds also consider market dynamics, such as liquidity, supply-demand imbalances, and macroeconomic factors, which can influence the perceived value of a credit instrument.
In summary, while legal and documentation considerations are essential, the focus on "value" and "paying the right price" is a core part of the investment process for credit hedge funds. This ensures they achieve attractive risk-adjusted returns while managing downside risks effectively.
Sources: Credit - Pod Shop/MM vs. Distressed/Special Sits HF, 1st Year Macro HF Analyst: My Macro Framework, Q&A: Credit Analyst (Multi-Strat Credit Fund) >$5bn Fund, Q&A: HF Analyst @ $5bn+ Fund - Breaking In and Transition to Risk-Taking Role
Yoyos who own a credit on a cool guy LME / structure trade get blown out 30pts down because they didn’t realize they owned a POS business and are out of the money when it goes sideways
Some guy once told me his cool guy LME is going to take ACProducts to “mid to high 90s”. Lmao Okay bro
I do mostly illiquid / privates - buying secondary at sufficient discount, its effectively creating the loan at low LTV / leverage which provides downside protection. If its pure secondary (ie. not restructured into new loan), have to buy at right price for returns to work
Understanding realistic value / recovery, end buyers, timeline / process to sale are all critical from downside protection.
Many distressed investors grew up as generalists and don’t actually understand the value of a company, these types always struggle in their career. If you see someone whose thesis is just LTM Ebitda x multiple means certain tranches of debt is covered and its trading below hence a good investment, well…..
What‘s some better theses that you have been successful with then?
To answer OP‘s question - I find credit investing tends to be more value oriented because there are actual catalysts (maturities) and you‘re either liquid or not.
In equities on the other hand you have value traps with no catalysts as well as firms like tesla that seem to defy valuation forever. And you have situations like the spacex ipo where there‘s forced index buyers (but let‘s see how that shakes out).
Humans can amend docs but can't amend the business. Pricing risk correctly is more important than reading a doc that almost definitively has a lot of holes even excluding amendments
Anyone open to a referral? Credit experienced in BB. Happy to provide more info as needed
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