Capital Structure Arbitrage Hedge Fund Opportunity

PeterClemenza's picture
Rank: Orangutan | 315

For background, I'm a junior corporate credit analyst at a large traditional long only asset manager. I've been in the seat for ~2.5 years and joined my current team right out of undergrad. I work with 5 senior analyst covering various corporate and financial sectors across investment grade and performing HY debt (we are mainly a BB shop). In my opinion, I have a decent background in covering performing credits, understanding/covering sectors and investing in corporate bonds and term loans. As I look at a ton of different stuff, I am constantly getting up to speed on names and generally blocking and tackling. To my disadvantage, I can't build models like an investment banker and I don't have a whole ton of experience with CDS.

I have been been looking to jump ship to a more alternative manager. I've been in talks with other firms and recruiters for research roles at credit hedge funds, CLO managers and family offices. Recently, I have been talking to a very interesting startup hedge fund that can invests in special situations across the capital structure, The fund's seed investor is a highly reputable shop. Both senior members of the fund come from legal backgrounds and have worked around the street for years. This fund targets corporate situations where there are legal/structural inefficiencies and try to profit off of them using securities including bonds/loans/CDS/equity. I spoke with one of the senior analysts and then a few days later he reached out with an ongoing situation and asked me to come in later that afternoon with to present a trade. That night, I met with the CIO and I think I was able to give a good overview of the situation and present a trade that made sense given the recent rally in the company in questions securities. I used my access to a plethora of sell side research to get up to speed on the situation and was fully transparent with the team that I did so. I think this worked to in my favor as this team relies heavily on the street to get up to speed on names/situations. The CIO said he wanted to continue our conversation and chat in the next few weeks.

Anyway, does anyone have experience working at a shop like this if so what should I expect. The opportunity seems too good to be true as the firm has a broad investment mandate and the team seemed like good guys. In the past, I have interviewed at more litigious funds in the past, and more or less gotten destroyed. Any advice/comments would be much appreciated.

Comments (10)

  • Research Analyst in HF - RelVal
Feb 13, 2020

Big questions:

  1. How much AUM?
  2. How many people do they have at the moment on both investment team + back office?
  3. How long have they been around ?
Feb 13, 2020
  1. <$500mm
  2. 6
  3. ~2 years
    • 1
  • Research Analyst in HF - RelVal
Feb 13, 2020
  1. <$500m is tough - are we sub $200m? $300m? Or $400-500 (which I think is fine).
  2. How many front office vs back office ?
  3. ~What is their record like thus far? 3Y record matters going into fundraising.

I personally think it's a tough strategy given the way the credit markets are, but you would learn a lot. You are taking a lot of career risk though, and I would hold off personally.

Feb 14, 2020
  1. AUM is around $300mm
  2. 3 investments folks, 1 business/marketing guy, 2 back office
  3. double digit returns in 2019, and slightly positive in 2018

It's definitely, a ton of career risk. However, at this early point in my career I feel like its a risk worth taking.

Most Helpful
Feb 14, 2020

You're basically looking at an event-driven credit role. Your job will be to generate trading ideas and come up with a view (quickly!) on any ideas that your PM's ask you to look at. Unlike a traditional long-only seat, you won't cover a set group of names or sectors but will look at each situation as it comes. One day you could be looking at the bonds of a distressed telco and the next day buying/selling CDS on an O&G company with liquidity issues. The position suits people who like to (i) work as a generalist and, (ii) who like catalyst driven investing, and (iii) feel comfortable getting off the fence and making a call without all the information. You won't become an expert in any of the companies that you invest in, you are just focused on identifying the best risk/reward trade for each event and the best security in the capital stack to play that situation. You will learn a lot about covenants and procedures but not a lot about industries. The job can be incredibly rewarding but also stressful. It's not a place for the "play-it-safe" guy who needs to spend a week on each name before coming up with a neutral view.

Feb 14, 2020

Seconded. I am pretty sure I know what shop this is. If you want to break into the distressed / event driven space, then this might be good as a stepping stone. Personally I find this stuff interesting, but it is definitely a risk. It is difficult to scale those strategies, as others have said (unless you are Elliott).

  • Analyst 3+ in HF - RelVal
Feb 14, 2020

I work at a shop not dissimilar to this, although its 50/50 private vs public investments and firm has been around for over a decade. It is going to be all about idea generation, especially in a crowded space where there is so much capital chasing deals. Expect to be doing a ton of reading and there is a focus on being detail oriented as the value-add at shops like this is understanding every nuance of the capital structure (covenants, amendments, deal documents, etc). Also I would not expect a rocket ship trajectory in terms of AUM, for the reason stated above regarding limited HY dealflow and inability to responsibly deploy huge slugs of capital. I have found my shop to be a good place to be, if you can stomach the risk tolerance of a small fund.

    • 2
Feb 14, 2020

Thanks, this is all very helpful. A big part of the role will be sourcing/generating ideas and then seeing if they fit in the funds investment framework. From there, its all going through the covenants and credit agreements. Also sounds like while I won't be an expert on an entire industry or peer group I will have to know a ton on the company/situation the fund is involved in.

  • Research Associate in HF - Event
Feb 18, 2020

while I would agree would all the positives mentioned re: experience / opportunity, I would also point out that average distressed returns over last 3-5 years are in the sub 4% range which is not a great indicator for firm economics (or even if it should exist) no matter how fantastic the PM's background is. It's an unfortunate truth about this cycle that LP's are dictating terms especially when they have negotiating leverage as a key anchor to an underperforming HF

Mar 24, 2020
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