Mistake to join a Distressed HF now?
Seeing how limited the opportunity set has been over the past few years and how a lot of large distressed funds have been performing poorly, would it be a poor decision to recruit for a distressed debt hedge fund? I always thought the space was pretty fascinating, but reading WSO threads on it (such as the anchorage thread) is disheartening. Do you think there's a future for distressed debt investing, or is it permanently shrinking? is there a case for survival for more private facing distressed roles?
Separately, are M&A banking backgrounds looked down on by distressed shops?
Take what you read on WSO with a grain of salt.
No offense but you’re full of shit and have no idea what you’re talking about. Anchorage isn't what you just described it to be and the people on this forum have 5-10 years of experience in the industry and provide real life commentary on their careers.
If you don't know something don't throw out useless comments. You sound like a bulge bracket S&T intern answering "why are you interested in joining the distressed sales team" with your answer you conveniently just deleted.
Personally I would look to join an "event driven" fund that runs multiple strategies like merger arb, special sits and credit. That way you have a more diversified fee pool to feed all the hungry mouths come year end. Typically the CIO will allocate capital across the 3 strategies depending on the opportunity set and in leaner teams you may get a chance to do some work on an arb deal or a short-equity opportunity when credit markets are trading too tight. The main issue I have with pure distressed debt players is that you can't raise capital and sit on it and tell your investors that you don't see attractive opportunities, so you end up looking at the same crappy names over and over and trying to come up with reasons to buy stuff that no one really has any conviction in.
The big multi-strat funds are organized in teams and you need to become a subject matter expert in specialties like merger arb and distressed. The distressed skill set transfers to a lot more types of investing than a merger arb does in my opinion.
Most distressed funds have the majority of their capital is in stressed and cuspy performing credit, not just bankruptcy and deep distressed, and you are also speculating on various “event driven@ situations, as well as mundane flipping new issue and finding shorts.
The returns for hedge funds overall (distressed/event/multi strat) averaged mid single digits over 3,5,10 year periods especially with 2009 now dropping out of trailing 10-yr performance and the exceptions prove the rule. 95% cannot compete with public market returns, especially FAANG. PE has raised so much money and they compete for so many of the same deals that the large funds will be lucky if the return 1.8x over 7-10 years. But that doesn’t mean you won’t learn a lot there either and that it’s not a good career path, it’s about building your experience and expertise.
It’s all about learning a skill set as a junior person and there is an enormous amount of debt out that requires investors to follow it and there will always be a portion in distress no matter what the economy is doing, and in a recession there will be even more. You’ll learn a lot of skills in distressed and can easily transition to most other types of investing outside of maybe VC/quant/. .
As Muad'dib said, most distressed shops aren't doing pure play distressed for control. There is a lot of stressed names out there still and opportunities.
Also, your career, to an extent, shouldn't be managed by what is in vogue at any given point in time as things shift. So if you enjoy distressed then go for it. To answer your other question, M&A will not be looked down upon.
Definitely think that one shouldn't pull all their baskets into what's vogue in a current environment, but I think the concern of people like OP and myself is that the problems with distressed are structural and not cyclical. I'd imagine what got a lot of people initially considering rx/distressed in the first place (before realizing an interest in legal angle and all that comes with it) is that, compared to vanilla L/S equity, it couldn't be disrupted by passive investing/computers can't really trade credit/it was pitched as an inefficient space in Moyer or distressed manager interviews so ample room to generate alpha and have a more positive career outlook (to the extent possible in public mkts) relative to the quickly shrinking L/S seats. So the reality that distressed has a similar magnitude, if not more, of structural issues has probably caused many to pause before moving forward regardless of whatever interest level was developed reading about the space.
If you define structural as there is more money/aum/funds today than in the past then I agree. Too many people chasing the same opportunity set. But apart from that, similar dynamics are at play in terms of it being an inefficient space that lacks liquidity and can be process driven.