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Comments (51)

  • Research Associate in HF - Event
Oct 12, 2020 - 9:51am

It's funny how Lionsgate trades at $8, down from $40 when merger talks were the bee knees a few years ago, meanwhile MGM EBITDA has gone from $420mm in 2017 to $200mm in 2019 and a sale hasn't happened for more than 7+ years since the original equity was expecting to cash out.

I wouldn't be surprised if Ulrich feels the pressure to step down or sell quick given how much shareholder value has been destroyed and the potential flop of all 2020 movies coming out in a packed 2021 calendar. Waiting for someone else to bid $9 billion meanwhile every buyer knows they have a potentially liquidating forced seller HF on the other side is a bad recipe for driving up M&A value.

Having such a huge piece of NAV tied up in a single private equity investment in a HF vehicle means once that sale does happen, clients will be redeeming out at least that portion of proceeds if not, likely more (no one wants that sloshed back into a HF for them to mismanage in crap return product over last 1/3/5 years).

Oct 12, 2020 - 1:17pm

I'm curious as to how this has changed the experience for junior analysts at Anchorage. It obviously used to be viewed as a top tier exit opp from RX (and may still be viewed this way) but given that they've lost over 50% of opportunistic/hedge fund AUM and replaced it with CLOs, it seems as though the learning experience for junior analysts (who I'm assuming are more likely to work on performing credits) must have drastically changed? There are also other factors like comp, prestige, etc. Would be interesting to hear from someone who has insight.

  • Investment Analyst in HF - RelVal
Oct 12, 2020 - 10:38pm

Barely hear about Anchorage nowadays. Silver Point is all the buzz

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  • Research Associate in HF - Event
Oct 13, 2020 - 7:20pm

laka

Barely hear about Anchorage nowadays. Silver Point is all the buzz

Why is a kid, who a few weeks ago was asking about if capex should be high or low for an LBO target, opining on who he recently searched on LinkedIn?

  • Research Associate in HF - Event
Oct 12, 2020 - 6:14pm

Yikes. Don't forget the wonder of an anomalous 8% return driven by marking 14% of your book +30% on a deal "in its late stages". Pretty sure Anchorage has also had a hefty equity book historically even outside the reorg equities (which themselves should technically benchmark to equity indices), which makes their return profile comical when you overlay any mix of a credit/equity benchmark. They supposedly had a huge CMBX short for a long-time that hasn't saved them from negative returns this year while others with the same trade are up nearly 20% this year (Apollo's internal HF; Mudrick also is up on some well-timed shorts). It somewhat doesn't make sense when you pull it all together as they also are a large investor in structured credit which has been a bonkers asset class pre-2020 so something in their portfolio must have huge negative attribution to get to their final #s (poor hedges? terrible distressed bets that go to zero? high concentration outside of MGM with poor performance?)

ICE BofA HY Index

2015: -4.6%

2016: 17.5%

2017: 7.5%

2018: -2.3%

2019: 14.4%

2020 YTD: -0.3%

SPX TR

2015: 1.4%

2016: 12.0%

2017: 21.8%

2018: -4.4%

2019: 31.5%

2020 YTD: 11.0%

  • Intern in IB - Gen
Oct 14, 2020 - 11:52am

Not to hijack, but do people in the industry see this as indicative of the future return profile for distressed debt / Reorg equity type strategies? Or is it more a function of Anchorage making poor investments for whatever reason (MGM seems like it had ulterior motives as an example). See names like Mudrick get tossed around when it comes to better performance

  • Research Associate in HF - Event
Oct 14, 2020 - 12:36pm

For most part, yes (for your typical set of 20-30 large credit funds that play in distressed). You can't buy in huge size when the price finally craters (meaning you buy much higher and the average down effect is less pronounced) and a few concentrated large bets gone wrong in most distressed portfolios drags down the return profile significantly. There will always be great one-off investments (many made this year) but at portfolio level broadly across various industries has been difficult. Someone, somewhere in a firm always gets ultra-bullish on a shit company that ends up losing a ton of money and you can't make up for the loss with a half a dozen positions that trade up 20 pts.

There are a few cases advancing through NY court that show how basically all covenants are fleeting when any set of majority lenders can amend and prime at will to the detriment of any set of 49.9% minority lenders. It isn't as simple as the old mantra of "hedge funds can write equity checks so let's stuff the CLOs through a forced cash-out since they can't participate in rights offerings" (note - now a lot of new CLOs are now gaining flexibility especially CLOs managed by traditional large investors in distressed like Anchorage). You're seeing mutual funds get more aggressive (see the spectacular fuck-up of Apollo and Angelo Gordon in Serta Simmons). The cov-lite nature of first lien loans has come to roost combined with excess capital and bad (not good) companies with bad capital structures, which all has served to lower excess return potential across the space.

  • Analyst 1 in IB - Restr
Oct 14, 2020 - 1:40pm

That articulates what I've been hearing about the space very well. So do you think it is all doom and gloom going forward for distressed (particularly the larger firms like Anchorage)? The "good company with a bad balance sheet" seems to be very elusive in the economic environment of the past decade and there doesn't seem to be any indication of that changing in the next few years. Paired with the fleeting covenants and cases like Serta that you mentioned, I find it hard to see if this trend can invert at all. I guess what I'm curious about is if you were to know what you know now then would you still choose to work in distressed going forward from today? The return profile doesn't exactly seem attractive at the LP level and that does hurt career prospects for analysts fresh out of banking/undergrad regardless of how interesting the space may be.

  • Research Associate in HF - Event
Oct 14, 2020 - 1:03pm

Mudrick has also hugely been driven by returns of their own version of MGMB (NJOY, which grew from like a 50mm post-reorg to valuations floated as high as 5bn+). Mudrick has also generated a lot of returns actually being short what others were long but their standalone distressed long book hasn't been awfully spectacular (but who cares to parse that level of detail when your headline +20-30% gets a Bloomberg interview).

Not to say they aren't good, they certainly are outperforming the standard credit/distressed fund but a bit exaggerated by NJOY which rode the coattails of at one point JUUL being the highest valued private company in the US (and clearly not anymore).

Nov 24, 2020 - 1:40pm

Recently saw an interview with Mudrick where they mentioned smaller fund size (allowing them to play more in mid-market) and ability to take an active role as drivers behind their relatively stronger performance. How difficult is it to get an analyst seat at a fund more structured like this in relation to the bigger names?

  • Research Associate in HF - Event
Nov 24, 2020 - 2:16pm

They had opportunistic short heading into March and then majority of performance driven by a small e-cig investment probably worth many many hundreds of millions marked on their book. Their long-distressed book excluding such PE-type marks is probably not that far apart from other long-distressed books but they've made better money short side.

Their point is just that middle market distress has been a better opportunity where meaningful appreciation in bonds like 20-30-40 points drives much larger return % to their funds vs. Angelo buying those same bonds is just not going to be meaningful (and maybe Angelo thus doesn't buy that leaving the buyer universe a little bit more limited), and large cap distressed situations often involves many constituents losing money in recent years.

Mudrick is approaching the size now where it will be very hard to manage such a book in extreme low interest rate environment and Fed pumping every asset except for shitty distressed assets up. Like any other business, you have a cycle of growth, maturity then decline. Distressed hedge funds as an entire industry are in in the decline phase which is funny because if you think about the most "distressed businesses", you think of retail or oil & gas etc., not the management companies of distressed hedge funds themselves.

Nov 24, 2020 - 8:25pm

So if the trajectory is generally seen as pretty poor, are there any suggestions for what type of fund might be able to do well with some of the characteristics that make a distressed fund interesting? What about funds which have the ability to invest "across the capital structure" (with just stressed bonds or even normal undervalued equity) so as to not solely be fishing out of this tough opportunity set?

  • Analyst 1 in HF - Other
Nov 25, 2020 - 2:03pm

Flex mandate seems like the move at this point. Anyone pursuing a distressed-only fund strategy is just not going to have enough quality opportunities to pick from

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