Credit trading vs. Long short credit hedge fund
Please explain main differences between fixed income credit trading at a good buyside firm vs. long/short credit hedge fund.
Credit trading seems more attractive b.c. you get to learn more risk mgmt rather than being heavily research-focused, but can someone confirm / breakdown how each day in the life is different for an associate?
How much more mathy is credit trading? What are the relative pluses / minuses of each? Are sellable skillsets wider for the trader?
I am tempted to enter sell-side credit trading to try to get into buyside later instead of pursuing long/short credit fund now b.c. I want the trading skillsets but just wanted to make sure that you actually don't already get this from going long/short?
Thanks!
I've noticed that many of the top credit funds (York, Paulson, Oak Hill etc) tend to have analysts from an IBD background, as opposed to a HY/IG S&T background...these funds are heavily research focused, as opposed to some other credit funds like Saba capital, (run by former DB credit trader Boaz Weinstein) which is more trading focused...from what I can tell (i work at a hedge fund of funds), most credit funds tend to be heavily research focused...
How's your experience been at the HFoF?
Agreed but can someone explain the difference in terms of skillsets / pluses / minuses? Trying to understand how much less research does the buyside credit trader do and how much more complex his strategies are.
I'm not purely interested in being buried in research as a jr w/o learning how to manage the portfolio. And last I checked, most of the research focused credit funds are still run by former traders even if research guys can rise up the ranks - can they ever run a porfolio better?
high yield research, high yield trading, and leveraged finance are the primary ways to get your skillset ready for a credit hedge fund - you'll have to work at learning risk mgmt or L/S fundamental analysis depending on what your experience focused on.
Given a lot of L/S credit guys recruit out of banking / PE to be analysts, will guys entering this path not get exposed to the risk mgmt skillsets after starting?
I wanted to know what the difference is between credit hedge funds that are fundamental based (long/short) vs. buyside credit trading funds. How much more mathy and ST time horizon are the trading ones? Do the L/S credit guys entering from PE really get to learn portfolio mgmt / risk mgmt skills that traders do or are they just research junkies?
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as I mentioned three years ago on this same thread, long/short credit investing is based on fundamentals/balance sheet, whereas pure credit trading focuses much more on the market side (supply/demand, rates pressure, etc). You learn about fundamentals and market technicals in both trading and investing, but you focus much more on one side of the spectrum depending on what role you are in.
Background: former credit rsch/trading at a BB, now at credit hedge fund
Thank you big unit for emphasising this. I personally was wondering about the quantitative aspect of credit trading - how quantitative do you have to be to do it (e.g. do you do Matlab programming/excel vba/use and price complex derivatives)? I don't know personally anyone in credit trading and I am considering getting some W/E in this area.
Also - would credit (HY) trading be on par with lev fin background when looking to move to a HY/Long-short HF?
Market makers in credit will usually trade the cash bonds and CDS. Nothing too quantitatively complex but obviously CDS is slightly more quant than trading cash bonds. Then if you move up another level of complexity you have options on CDS/CDX. On an options desk you may use some VBA to automate your spreadsheets but usually you are using the pricers built by your in-house quants. No MatLab that I ever heard of in trading.
Can't tell you about credit trading vs. lev fin IBD for buyside, but am interested to hear from big unit. Also curious about whether a pure research analyst that came from a lev fin background could acquire the skills to become PM at a credit fund.
I don't particularly like credit (even trading) because even though you have responsibility for your own PnL you are still sort of beholden to the analysis of your desk strats/research people that have way more time to dig into the credits. It's very much a "team sport" where you are really dependent on other people having good analysis in order for you to do well. Not so much in something like FX options where a single guy can be a star rainmaker.
probably don't say that in interviews, regardless of if they're for FX etc.
“Can't tell you about credit trading vs. lev fin IBD for buyside, but am interested to hear from big unit. Also curious about whether a pure research analyst that came from a lev fin background could acquire the skills to become PM at a credit fund.” (rolandtide; sorry but somehow I can’t post with quotes)
rolandtide - thanks for advising on credit trading; I'm also very curious about the lev fin -> credit PM transition - can anyone advise on this?
Pro-bro: Some credit can be extremely quantitative - specifically, the credit derivative index products (CDX) which are very liquid. There you use some programming stuff probably - I actually don't know, because those guys are generally not part of the HY/distressed pod, but generally they used a lot of proprietary technology within the BB i worked at, and I'm certain that VBA speeds things up for some of the more automated trade booking/P&L tasks.
As a general rule, the less liquid a product, the less technical and more fundamental the product. So naturally, HY and Distressed are much more fundamental - as in, they react a lot to earnings and corporate news, as opposed to rates movements.
The buyside does NOT want to hire pure traders for investment research roles in general - they want research analysts who have studied a market sector at a fundamental corporate level and can read credit docs/earnings reports and understand industry trends and drivers. Or the buyside likes lev fin analysts who understand credit as a product and can learn the market fairly quickly. I was an exception because I worked as a desk analyst on a HY/distressed trading desk before becoming a trader (where I backed up on a very fundamentally driven sector). But to be honest, I got poached by one of our major HF clients who I worked with closely, as opposed to getting recruited by a headhunter. I'm still close friends with all my old team as a result, because my current PM is close friends with the head trader at my old firm (they both started in a lev fin program together ironically like 75 years ago in the early 90s, one transitioned into sellside trading, the other moved to distressed investing and now is a PM at our current HY/distressed fund which is part of one of the 5-6 large Mega PE funds).
Most PMs come from an investment analyst background within the fund. So you start off on sellside doing something, then transition to a research role on the buyside, then work your way up to PM. What you START your career with doesn't matter so much as how you succeed in your time as an investment analyst. I also want to make the comment that sellside traders GIVES the buyside market color - you are there client, and so that negates some of the needs to understand the technicals for every line item on your portfolio. Also of note: at a credit fund such as mine, the products are generally not extremely liquid. Everything I'm saying is probably not correct for a rates/macro shop obviously, but in HY/distressed the moves are generally fundamental and you hedge out market risk (using the CDX products or rates stuff). I consider the hedging aspect of it more middle office - my focus, and the focus of my PM, is identifying the credits with the biggest fundamental upside or downside, whether its an outright long or a pair trade, or a low yielding credit we can lever up due to its high credit quality.
Also keep in mind, most of the guys at top tier buyside shops are really freaking smart. Just because they never worked as a trader doesn't mean they don't understand all of the concepts it takes to balance a portfolio/size positions/etc. The PMs on the buyside are getting taught by more senior PMs on the buyside, and so you don't need to have a packaged skillset from the sellside. Instead, when you hit the buyside you have to show you can analyze an invsetment well at the fundamental level first, and then the technicals come into play as you rise up within the firm. At least thats my perspective as someone with 4 years of experience on the street with 1 of those on the buyside.
Does thhat help?
Basically my takeaway: do research/lev fin, move to investment analyst role on buyside, then thats where your transition to PM starts. Sellside credit trading is not an ideal way to get into the buyside, unless you are a desk analyst or have some investment analysis experience. And I myself am an exception to this rule since i was technically a trader before I made the move (at least thats what my business card said...even though when I was at the office at 9:30pm looking at a credit agreement, I certainly didn't feel like a trader).
1) Why'd I move from research to trading? I moved to trader role after being in research for a few years - we all had a close relationship on the desk, and it was pretty fluid, with even senior traders actually peeling back credit docs and talking to the research analysts at a pretty detailed level, and research analysts knowing who the big PMs involved in the topical stories were.
I would like to note: a fixed income HY/distressed desk has a research team that is MUCH more closely integrated with the sales/traders than on the equity side. We were all friends, we were one team, did the same client events, joined the same fantasy football leagues, etc. In equities and most other product categories, the research teams sit on a separate floor. In HY credit, the research teams sit by the traders/sales force.
I was impressed with both the traders and sales people alike - these guys were literally going over corporate org charts and such. I was the only junior on the team, and so I thought being in trading would be an awesome experience, particularly sending out runs and making markets on topical stories. It was also a 'cooler' job in the sense that I got to go out with clients and use the corporate card more often.
I was also getting bored of certain mundane aspects of the research role - specifically going through covenants and writing them up, and answering repetitive industry color questions from many clients which we didn't transact with. I guess I just wanted to do something different. I had bids from some smaller funds and ended up staying in trading since I liked the people, the atmosphere at my BB, and I had a lot of internal social capital that I ended up benefiting from later on.
2) Initially, I worked extremely closely on a few situations with my current employer, mostly in the sector I was in. I was not super smart on it, or had some unique perspective. Instead, I was helpful and my bosses told them I was a hard worker/smart and at the time, I actually had my own coverage of some other sectors. I ended up talking about these sectors with them, and I benefited from the fact that as a market maker, you have a lot of market color on top of what is available to everyone. So when they were searching for a new resource, they inquired about me, knowing I was BS about my experience - I literally worked with the people I was interviewing with, they were on my trading runs, and they literally knew everything about me given their close relationship with my firm. That actually ended up being a good thing I guess.
3) The fund within my firm is only liquid traded loans/bonds/derivatives (although we do limited CDS now). The loan-to-own part of our firm is seated on a different floor, though we are all close. However, they work more closely with the PE team than us, given we are on opposite sides of the Chinese wall. Personally, I don't think my PM would be too happy if any of our ideas ended up turning into a prolonged workout situation, given thats not our core competency.
Another +1. I will note though that some banks have their traders do a rotation with the desk analysts first. So you are technically not hopeless as a sell-side credit trader if you have that stint under your belt. Of course it would be preferable if you were able to stay as a desk analyst.
Is there a reason why your fund never moved into doing workouts and bankruptcies in addition to your bread and butter high yield/distressed strategy? I'm sure you could acquire the expertise externally if you really wanted to - is it just not worth the return on effort compared to your core competency?
Understand if you don't do this, but can you sketch out your general process for generating trade ideas on the long and short side?
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