Credit Hedge Fund Definition and Interviews

johnny_quest's picture
Rank: Baboon | 122

Guys - I'm at a BB in Lev Fin and recently have been called up for an interview at a credit hedge fund within a private equity fund: focused on distressed debt, special situations, long/short equity, etc.

I've been involved in several PE interviews but never interviewed with a credit hedge fund.

Here are my questions:

  1. What is the scope of the interview and how would it vary from a conventional PE interview (i.e. will they conduct a deep dive into my deals, etc.)?
  2. What sort of market knowlege would I be tested on? Pricing? Indices?
  3. If I get asked to pitch an investment idea, should I present a deep dive into the business (e.g. PE interview format)? If not, what should I hit on?
  4. What are some common q's that a credit HF would ask (im trying to get a sense of what the format is like)?

Any other tips you can share that are credit HF focused would be extremely helpful!

What is a Credit Hedge Fund?

A credit hedge fund is a fund that invests solely or primarily in debt instruments. Credit funds require a great deal of quantitative analysis as they look at the details of debt instruments and the likelihood of default for the underlying business. Their strategies can focus on distressed investing, credit long /short, and emerging market debt investing.

Preparing for Credit HF Interviews

As is the case for all HF interviews, credit hedge fund interviews require a great deal of preparation. According to our users, these interviews will focus somewhat on your deal experience as well as your understanding of the credit market and how to perform credit analysis.

andyinsandiego:

They're probably going to focus more on your knowledge of the debt side of the capital structure. A good source of information for this kind of thing is http://www.distressed-debt-investing.com/

User @ginNtonic shared answers to the OP's question:

ginNtonic:
  1. Typically surface level of deals. Not as deep as PE. But you should know the credit's strengths and weaknesses, covies, pricing, ratings and anything special about the deal. Know the main parts of the credit agreement as well
  2. Just as long as you're up to date on LCD and Goldsheets, you should be fine. You should probably generally know where the BAML HY Index, LCDX, LSTA 100 are.
  3. A dive into the business is important, but you should also hit on why else you think the credit is a good buy. (i.e. wide relative value between the first lien / second lien, relative value between peers, etc.)
  4. Nothing too much out of the ordinary that you wouldn't get from PE. Know your structuring (senior secured vs. high yield, second lien vs. mezz, important parts of the credit agreement, types of subordination, what makes a good credit).
Kenny_Powers_CFA - Hedge Fund Analyst:

In addition to what GinNTonic said, you should have some knowledge of synthetic credit products (CDS, LCDS, synthetic indices, TRS, etc) and ideally how you construct trades with them. Might want to read the latest default monitor as well.

Echoing the above on (3). Liking a business is great but unlike in PE, the whole business isn't for sale and you don't necessarily participate in the upside so liking the debt security in the context of a company's whole cap structure is key. I've been asked to give an example of both sides of that coin (tell me about a time you liked the company but not the security and vice versa).

User @Ricqles shared another detailed perspective:

Ricqles:
  1. What is the scope of the interview and how would it vary from a conventional PE interview (i.e. will they conduct a deep dive into my deals, etc.)?
  2. Yes they will talk to you about your deals. Since you have some relevant experience, you should know why certain companies do certain debt structures and what's the pros/cons of different structures. There should be some technicals as well.

  3. What sort of market knowledge would I be tested on? Pricing? Indices?
  4. Normally nothing. You should have a basic understanding of the market but it's more on the line of the market logic - why the spread is this high, what's going on generally but i doubt they will ask you anything about how to structure a CDS trade...

  5. If I get asked to pitch an investment idea, should I present a deep dive into the business (e.g. PE interview format)? If not, what should I hit on?
  6. Depends on the length of the interview. If it's the case study then you should treat it as a normal PE interview except you are not doing a LBO but you are just looking at which tranche of the security you should invest in.

    If it's just a quick question, then you should prepare some simple idea and dive into 1. business 2. why you think it's good

  7. What are some common q's that a credit HF would ask?
  8. Normal behavioral questions, why you wanna do a credit hedge fund, what do you see in the market that's interesting. Be sure to prepare for a lot technicals such as accounting, financial analysis about companies, what are PIKs, etc etc etc. I am sure you know all these since you worked in lev fin.

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Comments (110)

Apr 26, 2012

They're probably going to focus more on your knowledge of the debt side of the capital structure. A good source of information for this kind of thing is http://www.distressed-debt-investing.com/
He recently put up a great summary of Distressed Debt Investing Conference at Booth, which should give you some great insight into what the current concerns are on that side of the market.

Apr 26, 2012

(1) Typically surface level of deals. Not as deep as PE. But you should know the credit's strengths and weaknesses, covies, pricing, ratings and anything special about the deal. Know the main parts of the credit agreement as well

(2) Just as long as you're up to date on LCD and Goldsheets, you should be fine. You should probably generally know where the BAML HY Index, LCDX, LSTA 100 are.

(3) A dive into the business is important, but you should also hit on why else you think the credit is a good buy. (i.e. wide relative value between the first lien / second lien, relative value between peers, etc.)

(4) Nothing too much out of the ordinary that you wouldn't get from PE. Know your structuring (senior secured vs. high yield, second lien vs. mezz, important parts of the credit agreement, types of subordination, what makes a good credit).

Good luck

    • 2
Apr 26, 2012

In addition to what GinNTonic said, you should have some knowledge of synthetic credit products (CDS, LCDS, synthetic indices, TRS, etc) and ideally how you construct trades with them. Might want to read the latest default monitor as well.

Echoing the above on (3). Liking a business is great but unlike in PE, the whole business isn't for sale and you don't necessarily participate in the upside so liking the debt security in the context of a company's whole cap structure is key. I've been asked to give an example of both sides of that coin (tell me about a time you liked the company but not the security and vice versa).

I've always had a case study sooner or later, though the format varies and you're usually either given a take-home or alerted ahead of time.

    • 1
Apr 26, 2012

(1) What is the scope of the interview and how would it vary from a conventional PE interview (i.e. will they conduct a deep dive into my deals, etc.)?

Yes they will talk to you about your deals. Since you have some relevant experience, you should know why certain companies do certain debt structures and what's the pros/cons of different structures. There should be some technicals as well

(2) What sort of market knowlege would I be tested on? Pricing? Indices?

Normally nothing. You should have a basic understanding of the market but it's more on the line of the market logic - why the spread is this high, what's going on generally but i doubt they will ask you anything about how to structure a CDS trade...

(3) If I get asked to pitch an investment idea, should I present a deep dive into the business (e.g. PE interview format)? If not, what should I hit on?

Depends on the length of the interview. If it's the case study then you should treat it as a normal PE interview except you are not doing a LBO but you are just looking at which tranche of the security you should invest in

If it's just a quick question, then you should prepare some simple idea and dive into 1. busiiness 2. why you think it's good

(4) What are some common q's that a credit HF would ask (im trying to get a sense of what the format is like)?

normal behavioral questions, why you wanna do a credit hedge fund, what do you see in the market that's interesting. Be sure to prepare for a lot technicals such as accounting, financial analysis about companies , what are PIKs, etc etc etc. I am sure you know all these since you worked in lev fin.

Apr 27, 2012

Thanks a lot guys for the solid advice. Please keep them coming!

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Apr 27, 2012

Just wanted to get some more color on what specific areas of the credit agreement you think i should focus on? I understand the convenants but what else?

  • RP capacity? (if so, why would this be relevant for a hedge fund)
  • Incremental?
  • ECF sweeps?
Apr 27, 2012
johnny_quest:

Just wanted to get some more color on what specific areas of the credit agreement you think i should focus on? I understand the convenants but what else?

  • RP capacity? (if so, why would this be relevant for a hedge fund)
  • Incremental?
  • ECF sweeps?

Those are good ones. Some others would include junior liens, springing maturities, application of proceeds from asset sales/debt incurrence/equity raises and change of control clauses.

RP baskets are important because they control how much cash can exit the business to subordinated claimholders. All else equal, being able pay dividends or do buybacks without repaying debt is a negative for the credit.

Apr 27, 2012

The only things I would add to Ken's post is to know what is typically found in the Definitions section versus the rest of the credit agreement. Also what credit agreement amendments requires a 100% (RATS) vote, versus what requires just requisite / majority lenders. Incurrence vs. Maintenance Covenants.

Apr 28, 2012

in all honesty those are super detailed questions and i dont think you would be expected to know those kind of stuff...

a lot times we just call up covenant review or moody's for answers. It's very rare that you would understand everything in the legal doc unless you practice in the area for a long time. Those guys are in business for a reason lol...

what you should really focus on is what constitutes a good credit investment. you are still looking at companies and try to understand their positioning but it's a twist from looking at equities.

Apr 30, 2012
Ricqles:

in all honesty those are super detailed questions and i dont think you would be expected to know those kind of stuff...

a lot times we just call up covenant review or moody's for answers. It's very rare that you would understand everything in the legal doc unless you practice in the area for a long time. Those guys are in business for a reason lol...

what you should really focus on is what constitutes a good credit investment. you are still looking at companies and try to understand their positioning but it's a twist from looking at equities.

Just would like to get some clarification on what is considered a good credit investment?

I would think its very similar to what is considered a good LBO candidate (i.e., strong FCF, good market position, etc.) with some variation given this is a HF (probably more price senstive to the particular security?, yield?) - it would be great if you can highlight specifics.

Thanks!

Apr 30, 2012
johnny_quest:
Ricqles:

in all honesty those are super detailed questions and i dont think you would be expected to know those kind of stuff...

a lot times we just call up covenant review or moody's for answers. It's very rare that you would understand everything in the legal doc unless you practice in the area for a long time. Those guys are in business for a reason lol...

what you should really focus on is what constitutes a good credit investment. you are still looking at companies and try to understand their positioning but it's a twist from looking at equities.

Just would like to get some clarification on what is considered a good credit investment?

I would think its very similar to what is considered a good LBO candidate (i.e., strong FCF, good market position, etc.) with some variation given this is a HF (probably more price senstive to the particular security?, yield?) - it would be great if you can highlight specifics.

Thanks!

So to me a good par/stressed credit investment has two parts: a) being covered on a recovery basis through my tranche in a downside and b) given the level and sensitivity of coverage, getting paid an attractive yield.

In regards to a) you're on the right track with being similar to a good LBO candidate. You want businesses that can create cash flow, are resilient (have good market position/barriers to entry), etc. This part includes a lot of the traditional lending/underwriting credit-quality metrics like collateral and cash flow, but in the modern world of asset-lite businesses and the reality that most high-yield companies don't have the kind of FCF/debt to meaningfully de-lever via operating cash, getting comfortable with a downside enterprise value is pretty important.

On b), the difference between credit and an LBO is more significant because in credit you can pick your poison in terms of risk and return but you have to work within the existing capital structure. You might have a senior secured bond that you can't imagine losing money on, but it may be worth it to move into a bond with less cushion for a higher yield/spread. Like any investor you have to keep an eye on the broader markets as well-Bond A may be attractive relative to Bond B, but you might feel that the HY market is tight (either in absolute terms or as a spread).

There're also some other wrinkles to credit investing that have to do with the general structure of markets. For example, you might have a bond that's marginal in terms of coverage on a valuation basis, but is the next maturity coming due for a company that's not particularly distressed and has the ability to tap capital markets to take out the debt. If you feel that management has the ability and willingness to, say, issue sub notes at an eye-popping interest rate in order to kick the can down the road, that may create an opportunity.

    • 1
Apr 30, 2012

Lets say a Company has two different bonds.

Bond A has an implied YTM of 10% (8% coupon).

Bond B has an imlied YTM of 9.5% (9% coupon).

Why would Bond A trade differently than Bond B given their in the same cap structure? Lets assume they are at the same borrower and tranche so we exclude the effects of structural and contractual subordination.

Apr 30, 2012

Bond A may be further out on the maturity curve. Possibly less liquid as well. Convexity may make a difference too although that's de facto the same as the first answer. In stressed/distressed situations the idea of high-dollar value and low-dollar value becomes more important (because in a reorg claims are based on face so you might have a bias towards lower dollar-price bonds ceteris paribis) but that is probably outside the scope of an interview. I'm assuming neither bond has an embedded option or significant structural difference in the indenture.

Apr 30, 2012

Kenny - why would would one bond be materially less liquid than another?

Also, I agree with many of the points you highlighted above (dont really understand convexity, as i dont deal with this in banking) but lets assume there are structural differences in the indenture, what differences would influence how its traded the most?

I'll name a few that i think may be relevant:
1) Call protection
2) Covenants
3) Bond A is at HoldCo while Bond B is at OpCo

Please let me know what else comes to mind. Sorry if this is very rudimentary for you but you're really making a difference in teaching me the ropes online lol

Apr 30, 2012

$100MM issue will be less traded than a $1Bn issue.

Other things to add:
- Maturity
- Senior Uns vs. Senior Subs
- Security
- It's obviously reflected above, but Ratings as well
- Covenants, not so much. Kenny correct me if I'm wrong, but I haven't seen two sets of pari passu loans / notes with different covenant packages

Apr 30, 2012
ginNtonic:

$100MM issue will be less traded than a $1Bn issue.

Other things to add:
- Maturity
- Senior Uns vs. Senior Subs
- Security
- It's obviously reflected above, but Ratings as well
- Covenants, not so much. Kenny correct me if I'm wrong, but I haven't seen two sets of pari passu loans / notes with different covenant packages

It's rare but it can happen;; I can think of a few issues with 1st-lien notes with out covenants while the bank debt dies have them. In particular some deals have covenants that are only in effect if the revolver is drawn.

Apr 30, 2012

Issue size is the biggest driver of liquidity. That and the lessening of interest rate-related factors are a big part of why CDS are so important.

OpCo/HoldCo is a big one. Tough to say between that and call protection in a vacuum. Covenants matter but within a given class an issue without covenants can benefit from those with so long as they have cross-default provisions. For example if a company has a bank loan and a sr secured bond, the bond can benefit from the covenants on the loan if they are tripped (an exception being if the company does something rash to pay off the bank debt ahead of a breach).

Apr 30, 2012

They are looking for experience across HY / Distressed Credit in general. Doesn't really matter what background but if you can be conversant / expertised in Trading, HY/Distressed research, and Structured Credit - you would obviously be an asset. If you wanted to work for one of those large funds (which you could debate if you ever wanted to), best place to start would probably be in some kind of trading / analysis role in credit.

just my 2cents.

Apr 30, 2012

corporate bonds, medium-term notes, commercial papers; credit derivatives: corporate CDS, cross over and high yield, emerging market; structured credit: options on indices and single name CDS, correlation products; emerging market bonds, eurobonds...what else...la de la la

maybe ask them what kind of credit if there's a focus

Apr 30, 2012

prolly shouldn't be looking to break into a credit HF if you have no idea what kind of strategies they focus on

Apr 30, 2012

books such as hedge hunters or Inside the House of Money and then just read the interviews regarding credit focused strategies

I'm making it up as I go along.

Apr 30, 2012

Thanks Cornelius.

Apr 30, 2012

Would like to hear about this as well

Apr 30, 2012

Bump

Sep 20, 2018

Bump

Apr 30, 2012

others feel free to chime in, but i can provide a little perspective...

you say IG bonds, so i am assuming the fund is looking at 6-10% yield (why small guys do IG stuff puzzles me, but that's beside the point).

Debt, in all honesty, move kind of like an equity. I.e. if the company does well (beat earnings, etc), the bonds will trade up because of its "security". You will probably be looking at "good" companies with the IG type of return and won't get killed during the downturn (enough asset coverage, sponsor incentives to keep the company alive, good cash generation, etc). You can still value a bond like equity, in which case you can figure out what the company is trading at and see if your debt is "cover" by the multiple.

CDS is a tricky animal...you can win big or lose big in CDS and your downside is rather large for IG guys, so unless you are buying protection for yourself since selling the CDS on a IG company won't get you that much return with a lot downside

I don't work closely with IG stuff but this should be able to answer some of your questions

Apr 30, 2012

.

Best Response
Apr 30, 2012

I work entirely in high yield and mostly in fundamental/directional rather than what I would call "arbitrage" trading, but what I've seen the name of the game for IG is carry trades.

These can be put on a few ways:
1) Long One Credit, Short the Other in Cash: In your example, let's assume for a second that in addition to looking cheap relatively, the JPM bond also pays a higher YTM and has an identical, fairly near-term maturity. You go cash long the JPM bond and cash short the WFC bond, you receive/pay out the coupons along the way, and receive/pay out par at maturity. As long as there's no default and the spread doesn't blow out so much that you get a Margin Call, you've basically "locked in" your return as YTM(JPM)-YTM(WFC)-(Short Sale Costs)

2) Same as the above but synthetic: If you can sell protection one credit for a higher price than you pay for protection another credit you view as less or equally risky, you earn the "carry" between the two and as long as there's no default and the spread doesn't blow up, you win.

3) Long One Credit, Short Sovereign in Cash: Pretty basic, go long a corporate bond and short a treasury with similar maturity. You take mark-to-market spread risk but realistically minimal default risk.

4) Long a Credit's longer-dated paper, short the same credit's shorter-dated paper: Basically borrow short/lend long; you're making a bet that the company's yield curve stays upwards sloping. Each time the short-dated paper matures, you roll it into a new one (hopefully still at a YTM spread than you're earning on the long). You can do the same thing with CDS as well-If it costs 100bps to insure for a year and 150 for two years, you buy protection for one year, sell it for two, earn the 50 bps, and roll after one year.

These are basic examples but there're tons of variation on themes-for example using an IG index (cash or synthetic) rather than a specific name in #1. You can also put on trades with negative carry and bet that the spreads will move prior to maturity.

Anyway, sorry if any of that is overly basic since you already work in IG debt. The key points are this:
1) Carry trades are the name of the game, because you can "lock in" a return as long as there's no default and you can hold to maturity.

2) Your point about the analysis being open-ended is kind of the point: Your determination that the credit strength of one name versus the other isn't ever really tested unless there's a default-you're basically selling a way out-of-the-money put and earning the premium.

3) Carry trades can be leveraged to the hilt so you can magnify small, "safe" spreads to get an attractive return to equity. The risk then becomes market-based implosions that blow up spreads everywhere at once (ala LTCM) rather than default risk.

I'm not sure I agree with Ricqle's point on credit moving like equities, at least for IG. HY can definitely move like equities, especially in volatile times, which is part of why this kind of trade can be a lot tougher with a riskier credit-it's way more likely that the spread to treasuries on a B- bond blows up and you get hit with a margin call than with a A- bond.

    • 4
Apr 30, 2012
Kenny_Powers_CFA:

I work entirely in high yield and mostly in fundamental/directional rather than what I would call "arbitrage" trading, but what I've seen the name of the game for IG is carry trades.

These can be put on a few ways:
1) Long One Credit, Short the Other in Cash: In your example, let's assume for a second that in addition to looking cheap relatively, the JPM bond also pays a higher YTM and has an identical, fairly near-term maturity. You go cash long the JPM bond and cash short the WFC bond, you receive/pay out the coupons along the way, and receive/pay out par at maturity. As long as there's no default and the spread doesn't blow out so much that you get a margin call, you've basically "locked in" your return as YTM(JPM)-YTM(WFC)-(Short Sale Costs)

2) Same as the above but synthetic: If you can sell protection one credit for a higher price than you pay for protection another credit you view as less or equally risky, you earn the "carry" between the two and as long as there's no default and the spread doesn't blow up, you win.

3) Long One Credit, Short Sovereign in Cash: Pretty basic, go long a corporate bond and short a treasury with similar maturity. You take mark-to-market spread risk but realistically minimal default risk.

4) Long a Credit's longer-dated paper, short the same credit's shorter-dated paper: Basically borrow short/lend long; you're making a bet that the company's yield curve stays upwards sloping. Each time the short-dated paper matures, you roll it into a new one (hopefully still at a YTM spread than you're earning on the long). You can do the same thing with CDS as well-If it costs 100bps to insure for a year and 150 for two years, you buy protection for one year, sell it for two, earn the 50 bps, and roll after one year.

These are basic examples but there're tons of variation on themes-for example using an IG index (cash or synthetic) rather than a specific name in #1. You can also put on trades with negative carry and bet that the spreads will move prior to maturity.

Anyway, sorry if any of that is overly basic since you already work in IG debt. The key points are this:
1) Carry trades are the name of the game, because you can "lock in" a return as long as there's no default and you can hold to maturity.

2) Your point about the analysis being open-ended is kind of the point: Your determination that the credit strength of one name versus the other isn't ever really tested unless there's a default-you're basically selling a way out-of-the-money put and earning the premium.

3) Carry trades can be leveraged to the hilt so you can magnify small, "safe" spreads to get an attractive return to equity. The risk then becomes market-based implosions that blow up spreads everywhere at once (ala LTCM) rather than default risk.

I'm not sure I agree with Ricqle's point on credit moving like equities, at least for IG. HY can definitely move like equities, especially in volatile times, which is part of why this kind of trade can be a lot tougher with a riskier credit-it's way more likely that the spread to treasuries on a B- bond blows up and you get hit with a margin call than with a A- bond.

Would a strategy like this would require a fair bit of leverage to generate proper (>12%) annual returns?

Also point on credit analysis being similar to equity analysis is a little off....the focus is almost entirely on credit worthiness, rather than the strength of earnings growth (although obviously strong, unleveraged growth can improve credit quality).

Nov 3, 2017

Do you know what would be the main strategies in HY Credit??????

Apr 30, 2012

Excellent and very informative posts, Kenny... keep it up

Apr 30, 2012

These are basic examples but there're tons of variation on themes-for example using an IG index (cash or synthetic) rather than a specific name in #1. You can also put on trades with negative carry and bet that the spreads will move prior to maturity.

Apr 30, 2012

Honestly if they focused on distressed and you've worked in restructuring/distressed you should be pretty well prepared. DDIC has some stressed and par high-yield write-ups that may be worth reading.

Apr 30, 2012

A good friend of mine is in HY research. He has said that it is much closer to equities that distressed (at least with with regards to how you think about them). I wish I could offer more than that. The HY world is seemingly quite esoteric. I have yet to find a decent book on HY valuation. Fabozzi spends all of 3 pages on them, and his model is too basic to be that useful.

Apr 30, 2012

WOW. Distressed healthcare. what a strange combo.

Apr 30, 2012
couchy:

WOW. Distressed healthcare. what a strange combo.

Healthcare is generally quite highly leveraged.

Apr 30, 2012

There's a little fund called Oaktree in LA, I hear they are pretty good :)

if you like it then you shoulda put a banana on it

Apr 30, 2012

frgna, can you get online if you are around still? I have questions :(

CantDecide - refer to your other thread, I posted a quick reply there

Apr 30, 2012
Cries:

frgna, can you get online if you are around still? I have questions :(

CantDecide - refer to your other thread, I posted a quick reply there

Pm'd you buddy, hope all is well.

if you like it then you shoulda put a banana on it

Apr 30, 2012

there's a lot... watershed, crescent capital, and i'm sure funds like Farallon do credit as well.

Apr 30, 2012

thanks a lot guys

Apr 30, 2012

A lot of the big name hedge funds have a credit group

Apr 30, 2012

there are also guys like beach capital (?), post advisory, tennabaum (?) in LA, spelling were off for a couple ones...theyarent exactly hfs but they do sometimes do stuff related to it

Apr 30, 2012

Here are some funds you should look into for your search:

Deep Value and Distressed Funds:
http://www.hedgetracker.com/directory/Deep-Value
Distressed Debt Funds:
http://www.hedgetracker.com/directory/Fixed-Income

Apr 30, 2012

Another huge name beside Oaktree would be Avenue. You could look at mutual funds with high yield research teams as well (TCW comes to mind).

Apr 30, 2012

Armory Advisors
Armory Partners LLC
Beach Point Capital Management LP
Channel Island Partners LLC
Checchi Capital Advisers LLC
Colchis Capital Management LLC
Dalton Investments LLC
Eagle Lake Capital LLC
Helix Investment Partners
Outrider Management
Pacificor LLC
Post Advisory Group LLC
Prospero Capital Management LLC
RS Value Group
Turnaround Capital Management LLC

Apr 30, 2012

High yield debt funds/hybrids

BlackRock
Blackstone
Bloomfield Capital
Brookfield Asset Management
Capital Trust
Carlton Strategic Ventures
Cerberus Real Estate Capital
Colony Capital
Connaught Real Estate Finance
Contrarian Capital
Cornerstone Real Estate
Crossharbor Capital
Davis Cos.
De La Rosa Co., MJW Investments
Duet Private Equity
Emerald Creek Capital
Equibase Capital
Fir Tree Partners
Fortress Investments
Garrison Investment
GE Capital Real Estate
Goldman Sachs
H/2 Capital
Hudson Realty Capital
Invesco Real Estate
Investcorp
JCR Capital Investment
Latitude Management
LEM Partners
Lone Star Funds
Longbow Real Estate Capital
Madison Realty Capital
Malkin Properties
Marathon Asset Management
Mariner Real Estate
Mesa West Capital
Morrison Street Capital
Northlight Financial
Pearlmark Real Estate
PIMCO
PREI
Revere Capital
Talmage
Terra Capital
Tremont Realty Capital
Wrightwood Capital

    • 1
Apr 30, 2012
CantDecide:

I made a post asking about making a transition from commercial banking to PE.. and a forum member made the following suggestion:

"Alternatively, look into hedge funds with a focus on credit/distressed/leveraged securities and bank debt. Often these guys will buy bank debt (the stuff you have been originating for 2+ years now) of companies that go into workout. This is probably much more applicable, because they use fundamental credit analysis everyday - straight PE firms generally dont. Some examples: Ares Management, Apollo Global, etc"

I was hoping people here would be able to suggest some additional funds with that sort of focus.. preferably located in california...

There are a lot in LA. Milken used to run shit out there and a bunch of his people stayed and formed funds in the area. Do some google searches for Drexel alumni, Drexel Diaspora, Michael Milken and co-workers, etc. The two examples you mentioned, Ares and Apollo, are both examples of credit-focused funds started by Drexel alums. Those guys owned the leveraged finance market back in the day and they're still running lots of the best credit hedge funds.

Here's a place to start...has a list of prominent Drexel alumni: http://en.wikipedia.org/wiki/Drexel_Burnham_Lambert

Apr 30, 2012

bmp

Apr 30, 2012

with regard to CDS etc.. - lev fin by stephen j. antczak, douglas j. lucas ans frank (big dog) j. fabozzi

Apr 30, 2012

Don't think it's exactly what you're looking for but could be of help ... or could not.

http://www.opalesque.com/files/ManDistressed_inves...

The HBS guys have MAD SWAGGER. They frequently wear their class jackets to boston bars, strutting and acting like they own the joint. They just ooze success, confidence, swagger, basically attributes of alpha males.

Apr 30, 2012

Check out distressed debt investors club and the associated blog.

Apr 30, 2012
Apr 30, 2012

Thank you for those, gentlemen.

"...all truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident."

  • Schopenhauer
Apr 30, 2012

Asked the same question at work the other day, according to one of the PMs, there isn't anything like the 13-f for non-equity positions.

The HBS guys have MAD SWAGGER. They frequently wear their class jackets to boston bars, strutting and acting like they own the joint. They just ooze success, confidence, swagger, basically attributes of alpha males.

Apr 30, 2012
Anihilist:

Hello everyone,

I've been very interested in high yield/distressed credit for awhile now and want to start more seriously researching the topic. Now, it seems pretty straight forward to me to pitch a stock or a pair trade for a L/S equity fund, however trying to find a good place to start with fixed income is much harder to me. One way that I find that is easy to at least get a glimpse of L/S equity fund's strategies, is by looking at their 13(f) filings and being able to look at what that trade has done in recent months. I am pretty sure that HFs do not have to disclose trades in the bond market in 13(f)s, but am wondering if there is any way that I could dig up some of the recent trades that they have done in the market?

I constantly look at distresseddebtinvestorsclub (great website), however wanted to see if I could find any ancillary sources for this style of investing.

Any help would be greatly appreciated!

The easiest way to look for some undervalued security is paying attention to recent/upcoming catalyst. The best way I have found to look for ideas is to read the WSJ everyday (only finance-type sections) and circle anything that stands out. So, I'm usually looking for securities with any large movements, any M&A discussion, management shakeups, divestitures of business lines, sales of assets, etc. I keep a rolling list and will constantly look into each of these ideas.

I think the worst thing someone could pitch me is something that does not move and is fairly/over valued. The goal of a HF is to, sure, not lose money, but also make it quickly.

Apr 30, 2012

Blind leading the blind

Dec 23, 2017

@mrb87 Whats your take on this then???

Apr 30, 2012

@Hfer_wannabe: That doesn't really answer my question at all. I wanted to know if there is a way to see their actual holdings from some given period.

It seems that Sonnyzh gave me my answer for the most part.

Apr 30, 2012

High yield and distressed are two different things. You can search for a list of high yield mutual funds on bloomberg, google, yahoo, or whatever and usually that will help lead you to a their website where you can find a list of some or all of their holdings.

Distressed is a bit different since it's only hedge funds that play in that space. The site you mention, distresseddebtinvestorsclub, is good for finding individual ideas. You may also want to check out distressed-debt-investing.com. Otherwise, the best distressed ideas are going to be generated by following bankruptcies and reading their associated filings.

Apr 30, 2012

Distressed debt investors club has a new bankruptcy tracker that could be helpful. Debtwire isn't bad to see what's moving on the secondary side. Also check out the new issues calendar in high-yield, most people look at every primary in their space and if you can have a good conversation about something recent after reading a prospectus you should be set.

Apr 30, 2012

When interest rates go up, bond prices go down.

Based on your background, it sounds like you must have a pretty good understanding of how debt instruments work (covenants, etc), so I doubt the interviewer will peg you as an equity guy. I'd make sure you're brushed up on that side, and also understand how CDS instruments work.

In terms of pitches, if you have views on equity names that are big debt issuers, you should be able to convert a long equity idea into a long credit idea. Just remember that an LBO is a negative catalyst for credit. In fact, if you have any equity pitches that are based on a company being a good takeout candidate, you should think about them as short credit pitches.

Apr 30, 2012

Can you expand on what you mean by how an LBO is a negative credit catalyst? Assuming there is no provision in the docs that allows existing debt to be transferred into the LBO, it would serve as an exit event for lenders. If the debt on the LBO candidate is trading at a discount (for credit or yield reasons) an LBO would represent a par take-out, so why shouldn't you be longing those securities if you believe in an imminent LBO?

Apr 30, 2012

What kind of credit will you be covering and what's the fund strategy? L/S credit or more DD/SS stuff?

Apr 30, 2012

The firm itself does everything but the position I am interviewing for invests "across all credit asset classes, including convertibles, bank loans, and high yield products, both on the long and short side"

Apr 30, 2012

Please take what I say with a grain of salt, but I would suggest familiarizing yourself with the typical return profiles and seniority of different parts of the capital structure. Also, knowing general covenant terms and structures (positive/affirmative vs negative/restrictive) would likely be a must. There was a good write up on credit a little while ago by bigunit that I would suggest reading.

I would definitely have a credit pitch ready, even though they may give you a little leeway given your equity background. I recently interviewed and pitched a credit which I was instructed to choose from the sector that yielded more than 8% (typically considered HY threshold). Things I'd suggest being able to defend in your pitch from my own experience:
- Why this maturity? (There was a higher yielding issue another year out that I didn't choose)
- Do some comparable credit analysis (is this yield higher/lower than comparable issues at other companies and why?)
- Mainly, covering downside risks and being able to identify what yield you'd want from this type of issue given its risk profile.

Also perhaps useful; know YTW (I believe YTW=YTM if trading below par, YTW=YTFC if above par?) - should definitely double check that though.

Apr 30, 2012

Thanks to Anilhilist and everyone for the comments... I am very comfortable with covenant items and structure (seniority, holdco/opco, etc) so that should go smooth if/when pressed.

Anilhilist - Would you mind sharing the pitch? you can pm me if you prefer... Feel free to change the names and what not as well... not trying to steal it just trying to get a grasp on how you went about it.

would be much more comfortable if it was a distressed entity and you were trying to figure out the fulcrum.

Apr 30, 2012
Apr 30, 2012

I was a little too glib in saying that it's always a negative catalyst, but only around 1/3 of non-financial corporate bonds have change of control protection, and unless those covenants exist it's definitely a negative.

Apr 30, 2012
spmotor:

I was a little too glib in saying that it's always a negative catalyst, but only around 1/3 of non-financial corporate bonds have change of control protection, and unless those covenants exist it's definitely a negative.

An LBO is a credit negative event. It is by definition. Adding leverage is not good for credit.

For loans, they will get repaid at 101 since they are secured and always have covenants. Non event.

IG and HY companies with IG-style covenants are screwed because they typically don't have change of control or other covenants. The price will trade down to account for substantially more debt.

HY bonds trading under par will hit 101 change of control. FYI, change of control often is defined as change in majority of board, 50%+ ownership, AND usually both agencies must downgrade by 1 notch.

Any HY bonds that are trading high enough par that even accounting for a large amount of new debt don't quite dip to or below 101 are screwed. These tend to be the majority of the cap structure at the senior and sub level.

Interesting situations occur if you read convenants. Let's say all the debt is long maturity IG type bonds except for a recently issued bond with HY covenants. Say its a 8 year bond callable in 2 years at 105 and the coupon is 10% And it trades at 108. Recall LBOs increase leverage and often use large balance sheet cash to fund the LBO. If this bond in particular has a low incurrence covenant and/or a very restrictive Restricted Payments covenant, the sponsors will happily take the bond out to get the deal done and consider it "transaction expense". That means they need to tender at roughly 125, giving 15 points upside. If the bond trades down because of a LBO announcement, you should make sure they can't somehow structure around you and then start LOADING THE BOAT as it trades down.

So yes, Overall a LBO is credit negative and will hurt most of the bonds in the structure.

Apr 30, 2012

You don't have a single day buyside experience but think you are pegged as an equity guy?

Uhm ok.

Apr 30, 2012

My thoughts exactly.

Apr 30, 2012
leveredarb:

You don't have a single day buyside experience but think you are pegged as an equity guy?

Uhm ok.

I think your taking it too literally. I didn't say I am going to be pegged... My point was I am much better prepared for an equity interview than a credit one and have a much better understanding of what to expect and know for an equity interviews vs credit interview.

Apr 30, 2012

How did the interview go? I'm new to the site, but have seen some really useful suggestions and market dialogues that have been informative and useful. Anything you've learned since this post?

Apr 30, 2012

Margin of Safety
Distressed Debt Analysis
The Aggressive Conservative Investor (very timely lol)

Apr 30, 2012

Highly recommend the Vulture Investors by Hilary Rosen - I don't think its that well known but its a great book for anyone interested in credit, specifically distressed. It's basically a history of the distressed game told in story form, a la Michael Lewis.

Apr 30, 2012

I think Moyer's "Distressed Debt Analysis" would be a good read for you. There are definitely more general books that deal with credit, and other quality reads that others will surely chime in with, but it can give you a solid debt overview as well as provide some insight into potential strategies that the fund might employ, particularly if they deal in distressed at all.

Apr 30, 2012

read all of @"Kenny_Powers_CFA" posts

Apr 30, 2012

What type of credit funds?

Apr 30, 2012
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Apr 30, 2012
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Apr 30, 2012