Does equity and credit HF pods have the same drawdown limits?
Does equity L/S and credit HF pods tend to have the same drawdown limits? Seems quite BS given equity daily volatility is 5-10% and you can hit drawdown on a very bad day, whereas credit tends to move only a few bps if at all with almost zero volatility in principal. Is it that much easier being a credit PM than an equity L/S one these days?
Based on the most helpful WSO content, drawdown limits for equity L/S and credit hedge fund pods can differ significantly due to the inherent differences in volatility and risk profiles of the asset classes they manage.
Equity L/S strategies typically face higher daily volatility, often in the range of 5-10%, which can lead to hitting drawdown limits more quickly during adverse market conditions. On the other hand, credit strategies generally experience much lower volatility, with movements often limited to a few basis points, making it less likely for credit PMs to hit drawdown limits as quickly as their equity counterparts.
This disparity in volatility does suggest that managing a credit book might be "easier" in terms of avoiding drawdowns, but it doesn't necessarily mean the role is less challenging. Credit PMs often deal with complexities like bespoke deal structures, liquidity constraints, and the need for deep credit analysis. Additionally, credit PMs may have to navigate longer investment horizons and less frequent trading opportunities compared to equity L/S PMs.
In summary, while credit PMs might have an advantage in terms of lower volatility and reduced risk of hitting drawdown limits, the challenges in credit investing are different and require a distinct skill set.
Sources: Credit - Pod Shop/MM vs. Distressed/Special Sits HF, Q&A: Equity Analyst & Trader (VP level) at $12+ bn Hedge Fund, Credit Hedge Fund opportunities, Hedge fund volatility strategy PM returns and drawdowns, Credit Hedge Fund opportunities
drawdown limit is given in $. A rates/MBS/etc pod can easily have ten billion on in size at at given time ("GMV" in L/S equity would be the best comparison) and individual trades can be several hundred million (that's not even a "huge" pod) to get to a normal target VaR given the smaller % moves you describe.
You can easily see multi-mm daily swings in credit pods. Something you buy at 10c can go to par, and something you buy at 90c can file for bankruptcy. Given worse liquidity you can also see pretty wild gaps in spicier names, and as the above comment mentioned trade sizing is generally not small. To say bonds move a few bps a day is a gross misstatement…
This cannot be a serious post, bonds at 10c do not suddenly go to par and bonds trading at 90c do not suddenly go to 0. Of course this has happened but to use this as an example of “volatility” in credit is absurd.
IG, on a typically volatile day, might move 10bps, max, with generic HY moving maybe a point.
The volatility in credit is nowhere near the vol in equity. The volatility comes from the leverage being used in credit.
Jump risk. Also illiquidity. Risk limits are arguably harder for non-IG credit.
The "volatility" of high-yield/IG credit is a JOKE compared to the volatility in equities. HY bonds maybe dip 3-5% (300-500 bps) on a black swan event like tariff wars (April) or COVID (2020), while equities (L/S) basically can move 10%+ up or down in a day with almost ZERO news. When black swan macro event hits, equities routinely crack 30% or more in a single session. The difficulty of L/S equity is FAR higher than credit and there is no exaggeration here.
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