Why is everyone obsessed with equity L/S
Hi,
I work at a multi-manager and I genuinely wonder why students or IB associates who want to go the HF way are obsessed with equity L/S whereas credit is much better, on almost every metric.
I've been working at a MM for a few years and to be honnest equity L/S is clearly one of the worst strategy one could want to learn. Equity is overcrowded so you have to work like crazy to deliver consistent pnl. You have kids coming from IB or PE who have been used to have no life out of work, with IQ > 130 and you're supposed to compete with these guys. In my fund people in credit leave between 30 min (for PMs) and 1 hour (for analysts) after market closure. I've never seen people from equity leave as I leave much before them..
Sharpe ratio for equity L/S is low unless you're a genius so personally I would not be able to cope with the pressure. I see people on various credit strategies including myself with sharpe consistently >4 and it's much much easier to sleep at night.
Credit is less liquid, has a bid ask so you're not seriously competting against algos yet. The market is much bigger so there are more opportunities and you're able to put bigger sizes on your bets.
Some might argue that credit is boring. That's true, but after a few years working in an HF, you don't care how fascinating valuing a financial product or a business is, you just want to find good opportunities quickly, and make money. Pricing a fixed income product is much easier and quicker than equity. Also most equity people in MMs are just guessing quarters, don't tell me this is interesting...
In the end you got 2 products and one has more mispricing opportunities, is easier and quicker to price, you need to work less as you don't compete with work freaks and algos and if you're good you have a better sharpe so you sleep at night. SO WHY WOULD YOU GO INTO EQUITY L/S?
FYI I was doing equities and moved to credit: less hours, less stress, easier job, easier money.
Completely agree. And in terms of career standpoint, you have a much greater and niche skill-set in credit, with greater opportunities for advancement as you progress and refine your skill set. . Credit is also better in terms of a career standpoint since it has greater barriers to entry since it requires greater mental horsepower and critical thinking, while Equity can literally be learned by anyone.
Absolutely agree on the barriers to entry point. One thing a lot of people don't realize with credit funds is that 'investing across the structure' almost always includes equity. I work at a credit fund and a lot of the most interesting things we look at are pure L/S equity investments. We just also have more toys to play with on the debt side if we want to.
It would be relatively straightforward for anyone on my team to move to an equity strategy because each of us has essentially been spending 30-50% of our time doing L/S equity. I'm not sure that same optionality is there in the other direction.
Why am I getting MS on this?!?! Guess the L/S equity tardos are in full blast today
Think people are just letting you know you’re factually wrong.
Just because something is a more technically complicated product doesn’t in itself make it more or less complicated to successfully extract alpha from. We can debate about rules of thumb.
I focus mostly on liquid credit and also “opportunistic credit” HF strategies (alternative credit) and I have asked myself the same question. I think - and this is obviously a generalization - that part of the answer is a) equities are sexier and everyone understands them; easier to talk and think about and b) credit is hard, complex, and vast. People’s eyes often glaze over when I am talking about special situations, structured credit, CDS, CDX, crossover, converts, distressed, direct lending, or the nascent quant credit space. It can be frustrating. It’s just so much easier and more fun to talk about what you do as a L/S equity HF than credit (until the credit guy/girl drops a story about how they had to take over an EM company and their CEO was being hunted by a gang and the CFO got shot so you had to blade the f*ck out of the province to the nearest airstrip and peace home).
Most equity L/S has very little alpha left. Credit, while less sexy, has more - it’s simply, on average, a much less efficient space.
I've worked on the quantitative side of equities, and in credit from a corporate finance perspective (both bulge bracket). Tons that could be said.
But to keep it short:
Financial theory is much better applied to fixed income than equities (precisely because the cashflows are known, so dissecting the discount rate makes much more sense). Finance just hasn't figured out a truly defensible way to value assets with variable cash flows, so everyone keeps using the same bogus methods, with tweaks and second-guessing.
Options on fixed income assets are much more complicated than on equity underlyings due to the added dimension of time
Fundamental analysis on companies should, in theory, be similar, but in practice, credit analysis requires a truly different mentality.
I interviewed for a buyside credit opportunity once. Some aspects were interesting, but fundamentally, buying corporate bonds is a fucking sleepy industry. It became clear to everyone that I wanted something more engaging, and they wanted someone more complacent.
That said, yes, it would have been a fairly chill 0830 - 1830, Monday thru Friday kind of job.