Lots of distressed are avoiding large cap structure, moving to private credit in small crappy companies, or playing loan to own in middle market. Structure is like draw-down fund, which offers stability but pay out will take much longer, almost like middle market PE. L/S credit historically underperformed and still underperforms distressed. How would you choose between the two? And what are some top L/S credit managers?
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neither. 10 yrs ago, i'd pick distressed bc it's more opportunistic, fun, interesting, and you'll find more compelling ideas there vs in l/s credit. today, credit is hard. not too much distressed and you rlly have to A. put thinking cap on and B. often times roll up sleeves where it gets ugly. all to make not much $. l/s credit...like why? if u wanna do l/s something, just do equities. skip credit. comp is way better in equities, the ceiling is way higher. performance is way better. i see no reason to pick credit unless you're like some weirdo obsessed with obscure credit math quant shit and are obsessed with protecting the downside. pick equities, sir. if credit background, maybe try distressed / special sits pe (it's not even credit lmao), event driven / equity special sits HF, direct lending (eh........), or i've seen plenty make the jump to equities. it can be done.
Thanks for the insight - any thoughts on aum outflows from active equity strategies while there's significant inflows into active credit? I know it may not necessarily be the value prop of equity HFs to beat the S&P, but it seems as if many institutional investors view the broad underperformance of equity HFs as a reason to move capital away to other strategies e.g. credit exposure that is harder to replicate through a passively managed index for many reasons? From your perspective, what would you advise a senior in college who is worried about making a 20 year career in equity L/S because the strategy is much more susceptible to passive outflows vs credit? Are the outflows overblown and there's still many seats to make a long career from? Or are you advocating one would make enough money to cover the shorter career you would have in equity vs credit?
my advice -- assuming you're heading into ib? would do my best to get into mf pe. from there, u should look to exit to like 1 of 10-15 l/s funds (u know the type). these funds aren't going anywhere any time soon, have billions under mgmt w/ low headcount, great performance, great comp, solid culture -- great place to spend your career. now if u cant break into those 10 funds, i would stay in pe; you will print money at the sr level. this is what i did and i have zero regrets
from speaking to credit friends, it seems like they're kinda jelly of the equity guys. the best shops won't see many outflows imo. the game is land a seat at one of those top l/s shops, manage to stay for 10 yrs, then either retire or start ur own shop. like i wouldn't have exited mf pe for silver point or DK, or even baupost. u have to ask urself what kind of investor u wanna be. do u wanna find 30 cent dollars and try to flip for a dollar? or do u wanna find $1.10 dollars and sell for $2 or $4. latter sounds a lot more compelling to me. ALSO, it's not like distressed has much of a future. So that leaves us primarily with either vanilla l/s credit, direct lending, or CLOs...i wouldn't wanna do any of those. Now, maybe a great combo could be event equity, where u get a little bit of both. leave APO for xyz $3bn event driv shop? no. but leave APO for 5bn+ event equity shop w/ 5-7 guys and sweet returns? yes.
PE bros in HFs are so funny. The IB/PE crowd are truly insufferable people.
There's not a whole lot of truly good L/S hedged credit funds today - Diameter and Goldentree Master Fund may be some of the last truly hedged vehicles of size. Lot of others have disappeared or massively scaled back and operate as "multi-strategy credit" with pockets of long-capital for the most part. One of the many issues I've seen with shorting HY/distressed credit has been the significant negative carry alongside a market that has kept bad issuers afloat for longer. L/S credit is also a strategy that doesn't scale terribly well with AUM - there's an even more limited universe of good credit shorts out there vs. universe of good equity shorts. Credit market broadly have moved into non-securities (loans vs. bonds) for a long time too; which reduces the investable universe (you can't really short loans). So you fall into the trap of becoming a long-biased, high net fund charging fees for underperforming many long-only benchmarks or just normal long-biased opportunistic credit vehicles as you scale. As an LP, you can also get exposure to hedged credit vehicles with leverage far cheaper through synthetic (structured credit funds) vs. cash.
Distressed has been a shrinking market - but mostly macro driven. The funds that are able to tap LPs for capital to be deployed in sell-offs have been some of the best performing vehicles out there. Going to a platform that you think can take advantage of raising money through cycles (hint - we aren't just going to see equities 4x everyday) is most important, as well as a platform that does a bit of everything as you need to remain flexible allocating across the various pockets of credit.
A job at a Goldentree / Diameter type place can easily land you the pay you'd be more than happy with, so I definitely wouldn't try choose a career based on where you think you can earn 8 figure paycheck. Don't listen to the idiot above.
Why would someone pick equities when it’s a dying industry, active management no longer exists in equities and if it does it’s very little. Credit however still has active management.
The top credit managers flex between l/s and distressed based on op set while running a higher sharp and lower vol than their equity bretherend. With global yields set to rise there is growing demand from lp’s for l/s credit (frankly right now there isn’t much quality supply as the best funds are closed/size constrained). The vol and continued mediocre equity l/s returns are leading to money leaving that asset class for credit - private credit or l/s or drawdown.
Can someone point to what are the top performers in L/S credit? Also is this differentiated into quant vs discretionary? I've spoken to some purely quant shops that run credit strategies but these are usually much shorter time horizon.
Speaking purely about long/short credit the top two consistently over the past five years have been the Apollo HF arm and Diameter - they will both also do distressed when it's interesting. Expanding to more long biased managers who occasionally short, Goldentree as mentioned above, has been the top performer. Ten years ago the answer would have been Anchorage, Claren, and King St. The guys who drove the Anchorage returns left to start Diameter which led to that HF eventually shutting down, Claren blew up due to a lack of research and a mis - sized bet on GSE prefs and is now reborn with an IG only focus under the Compass Rose banner, while King St lost its key PM in 2010 and had a very mediocre ten years but is now experiencing something of a renaissance under new leadership. There are few smaller/younger funds in the space with potential and good returns like Sona, 463, Centiva (primarily IG). At this point all of the MM's have variety credit pods which have had varying degrees of success and failure. That's on the fundamental side. There are quant/model driven managers in the space but they really suffer from scalability issues given the constant liquidity demanded by the quant strategy doesn't really exist across a large enough universe of credits to scale the alpha.
very helpful. do you know how diameter recruit? would assume silver point, oaktree, SVP are typically distressed funds that don't have long short? oaktree has a performing credit team that seems like a traditional way HY. thank you!
What were their returns for 2021?
This is a great podcast from one of the founders of Diameter, he discusses (among many other things) how they think about distressed vs. traditional l/s credit. Worth a listen for anyone interested in credit, IMO
which one? What's the name?
https://capitalallocators.com/podcast/diameter-capital-partners/
Forgot link, here it is (also on Spotify and probably other podcast platforms as well): https://capitalallocators.com/podcast/diameter-capital-partners/
thanks, like that a lot. is there any funds similar to diameter?
today? Not really actually.
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