Interesting juncture: L/S Hedge Fund or MM Private Credit?
Dear Monkeys, I have an interesting opportunity to enter either the equities hedge fund space (long/short or long only) or the middle markets private credit world. While my background is in Equity Research, I have the skillsets and knowledge to perform skillfully in both.
As I evaluate my options, I am debating between the future of both markets. Public equities is becoming increasingly efficient (yet not really) and automated, although it is more intellectual and scalable. On the other hand, private credit funds are raising record amounts to deploy over the coming years as the mantra of higher for longer rates moderates.
As such, what would you guys shoot for in my seat? I like both equally as much, though MM PC is a bit of a gamble given my background and I am not too sure about the long-term durability of the industry.
Lifestyle vs. comp breakdown? I don't have too much color just yet -- though I understand lower hours and higher comp is generally the norm for PC at the more junior level depending on fund size, the sky is the limit for seniors.
Thanks for the thoughts and comments in advance -- noting that comp is the priority.
Based on the most helpful WSO content, here are some insights to help you evaluate your options between entering the equities hedge fund space (long/short or long only) and the middle markets private credit world:
Equities Hedge Fund (L/S or Long Only)
Pros: - Intellectual and Scalable: Public equities can be more intellectually stimulating and scalable due to the vast amount of data and the ability to leverage technology and automation. - Flexibility: In a multi-manager hedge fund (MM HF), you can buy and sell anything (not on the restricted list) and hold onto them for any timeframe, providing significant flexibility. - Meritocracy: Compensation can be highly meritocratic, especially in MM HFs where you "eat what you kill." In a good year, significant earnings are possible based on your AUM and returns.
Cons: - Market Efficiency: Public equities are becoming increasingly efficient, which can make it harder to find alpha. - Volatility: The hedge fund industry can be volatile, with significant fluctuations in job security and compensation.
Middle Markets Private Credit (MM PC)
Pros: - Raising Capital: Private credit funds are raising record amounts to deploy, which can provide ample opportunities for growth and investment. - Work-Life Balance: Generally, MM private credit roles offer a better work-life balance compared to hedge funds, especially at the junior level. - Compensation: While junior roles may have lower hours and competitive compensation, senior roles can offer substantial earnings potential.
Cons: - Background Fit: Given your background in Equity Research, transitioning to private credit might be more of a gamble and could require additional learning and adaptation. - Industry Durability: There is some uncertainty about the long-term durability of the private credit industry, especially as interest rates and economic conditions fluctuate.
Lifestyle vs. Compensation Breakdown
Conclusion
Given that compensation is your priority, and considering your background in Equity Research, the hedge fund route might align more closely with your existing skill set and offer higher immediate compensation potential. However, if you value work-life balance and are willing to adapt to a new industry, MM private credit could be a rewarding long-term option.
For more detailed discussions and personal experiences, you might find the following WSO threads helpful: - Why do people choose megafunds over MM? - Credit Hedge Fund opportunities
Feel free to explore these threads for additional insights and community advice.
Sources: MM pe vs MF, Credit Hedge Fund opportunities, Why do people choose megafunds over MM?, LO to MM HF?, HF Distribution of outcomes - by mid-30s
You picked two things that are quite different from each other! I am in illiquid credit, and have two good friends in equity (LO, not L/S). I am based in Europe. PC is a lot of project management, not as desperate as PE, but still. The bigger the shop the more it’s project management once the model is done and IC approved the memo. You don’t go and invest where you like but you invest in what sponsors or advisors offer to you. The more senior you are the more you need to have connections and relationships with banks and PE sponsor to source stuff. It is getting crazily competitive in US (spreads ridiculously low, OID too) while in Europe it has turned in that direction in the last few weeks but there are still better terms than US. It’s more cyclical as depends a lot of interest rates. I think returns will come down in the future due to competition and AUM raised, but overall still a decent place to be. I prefer not to comment on comp as it depends on the places you are. I think a career here can get you well compensated and the risk is relatively low (within alt investment space) If you really like investing (which means you invest already with your pa) then equity LS would be much more fun. You can pitch something and if you convince the seniors you invest and you have responsibility straight away. I think you will have more upside and more downside than PC, you (or your pod/SM fund) can easily go in trouble as soon as you don’t perform well. But if things go well you get pay straight away, while PC might have longer term incentives or carry which is extremely annoying because locks you up for 5 years and as soon as you leave you typically loose last 3 years of these incentives. Long story short I can’t give you a suggestion but I tried to give my two cents.
Let us know what you go for!
Thanks for the color, great insight. Interestingly enough, my wish to pivot away from public equities (still think it's cool af) partially stems from me spending nearly a decade in the family business before Equity Research. With that said I want to get more hands and directly impact the company as per the direct lending side, so I pretty much keep the operational hat on.
Mind if I DM you to hop on a call? Thanks!
I think there are plenty of things to like about private credit (I started my career off there). However "directly impacting the company" and "keeping your operational hat on" are not two of them.
One thing that's important first is to understand the different types of PC. I am reading your post as thinking about a fund primarily doing run of the mill sponsor backed LBO 1l/2L/Uni financing. This is generally very different than PC funds that either focus on non-sponsored transactions or provide more structured/yieldy solutions (think "lender of last resort" type stuff).
The truth is if you are doing these performing secured sponsor backed credits you are generally a terms taker. Your deal flow depends on PE relationships, or worse, levfin syndicate desks. If PE relationships then you need to keep them happy or no longer receive deal flow. If levfin syndicate desks everyone in the credit world sees these opportunities and its a race to the bottom on terms.
Keep in mind that "terms" doesn't just mean the spread and covenants. It also means timeline and depth of diligence. If your diligence takes too long and is too intrusive, sponsors will look for faster financing elsewhere.
In terms of portfolio monitoring you will get quarterly updates and the opportunity to ask questions. But no one will want to hear your operational opinions on how to improve the company - that is for management and the sponsor to handle.
Note: some of this stuff may change if I am reading incorrectly into what sort of PC fund you're discussing. If you are a lender of last resort to a non-sponsored providing very highly structured capital in a way where you are effectively the sponsor, then you may get operational input. But this won't be as an industry generalist, this will be at, for example, a structured equity energy specific fund.
Again just because on re-reading this all sounds very negative, I do think there are many positives to PC. Generally a good WLB, unlikely to suffer very poor performance if you are close to competent, plenty of demand for the capital. I firmly believe that PC is one of the easiest, safest, most pleasurable ways to clip a high and steady paycheck. You also see a lot of deals, and for me what I love about investing is learning about new markets and companies - all things you can do in a PC seat. I have worked in PC, PE, and HF. I honestly wouldn't be opposed to going back to PC someday.
drop a dm
Won’t let me - since it’s anonymous, can you DM me at the username “superanalyst” thanks a lot!
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