Top Players in the Value/Distressed HF Space

Kind of untrue. Distessed credit has had some of its best years in a while in 23/4/5. Bunch of funds that have done well over 25%-40% annualized (gross of fees) from 23 to now. Even this year a ton of guys are up 20%+ from sats, sfr, comm stock, even random tariff trades like Michaels which has gone from 35 in April to 90 now on the unsecured notes. And lots of smart shorts where guys made great money.

Yield does not and should not be the main factor in driving  credit hedge fund returns — this isn’t private credit / direct lending. Spread dispersion and convexity are the main driver of returns. The latter us admittedly down, but the former isn’t.

Now that said the larger funds you’ve mentioned have in some instances underperformed. Reason why is simple — mkt is illiquid, small at only $3-4 trillion in HY/loans, so have to allocate across entire mkt and therefore look too much like long only going with over/under weights. Sometimes also underperformance is because of low vol / net target when being 150% net long over last three years was clearly best. 

Steercos are good to be on from a network/relationship building and general learning for juniors. But the extra 5-10pts of steerco fees isn’t worth it: being restricted for months and losing time when you could be focusing on new ideas. And steerco cost basis (even excl par holders) is almost always materially higher than nimbler guys right below steerco size who can buy when steerco buyers get restricted and there is (for sellers) a liquidity abyss. 

Put it all together and a $1-3 billion fund can crush it; much much tougher when you’re $8-15 billion m.