Here is a recent article on annualized returns of some of the biggest hedge funds in the world today. going through the list in detail, it dawned on me that for fundamental investors, the ones with annualized returns north of 18% per annum AND being around for at least 10 years are funds that have predominant flavor in distressed investing (mostly debt).
In fact, other than Berkshire, I am not aware of any equity hedge funds that has been around for longer than 15 years and annualized greater than 20%. Yet there are such funds for macro, multi-strats and distressed debt shops.
... Just food for thought. Most people, especially the young and inspired ones, are always focused on equities, it profound to realized that the highest potential returns asset class/strategy isn't even equity long short, instead its distressed, even macro, although the latter has performed poorly over the past few years.
Cool story bro
There's a lot of value funds out there with a 15 year track record and annualized returns >20%.
I think Icahn did something like ~35% annualized returns for one 40 year period. The difference between him and Buffett, is that Buffett did it with a lot more capital under management and was way more tax efficient.
that's not true. Name any public equity-only value fund that has annualized 20% over 15 years. (with at least $500 million in AUM)
Icahn's annual return over the past 15 years is 21%, Proof: http://www.octafinance.com/hedge-funds/hedge-fund-returns/
he is also an activist who, unbeknownst to most, made alot of money in distressed debt. Proof: https://www8.gsb.columbia.edu/valueinvesting/sites/valueinvesting/files…
That's not really a fair comparison. The last 15 years he's had tens of billions under management, whereas his first 30 years, he had a lot less. It's much easier to produce market crushing returns with
Distressed space getting killed this year. Every strategy has its ups and downs.
Am I reading a different list than everyone else? The only pure distressed funds I see in the first five pages are Marathon, Anchorage and King Street. Everything else is really just value investing. I wouldn't call Appaloosa, Icahn or Greenlight, for example, "distressed funds." The fact is most of these guys are simply good value or event-driven investors and shift their strategy/asset allocation to the most attractive opportunities. Sometimes that's distressed debt, sometimes it's equity.
Not to mention this thread is fundamentally flawed...more than a few managers on it run several different funds, some of which may be debt and some of which may be equity...
After this year Greenlight will not be annualizing 20%.
Looking at Appaloosa's 2014 OM, it is clearly stated that the flagship fund (Appaloosa Investment LP) invests in distressed securities. The fund allocates no more than 30% to equities as a mandate.
Again, I invite anybody to name ANY value funds (with predominant focus in publicly listed equities) with $1 billion AUM that's at least 15 years old, and annualized greater than 20%.
HSBC Hedge Weekly, albeit not a complete list of hedge funds, should give a sense of equity funds performance vs credit fund performance.
I started this thread to raise people's general awareness that there is more investment opportunities out there than just equities. I believe if one understand what he/she is doing, he/she can probably make more money in distressed debt than long/short equity markets of north america, which is already bloated.
So far, I still have no seen any empirical evidence in the posts that suggests my very basic claims, that there are higher return opportunities in distressed debt than public equities, is wrong
No real surprise here. Many of the top 'value' investors (Klarman, Abrams, Marks/Karsh, Icahn/Tepper if you consider them value guys, etc.) have always had a heavy distressed tilt, even if one wouldn't consider them as distressed managers per say. For example, Baupost has only approximately $6B of its >$20B invested in equities.
Personally, I think the distressed credit market has all of the hallmarks of an inefficient market: low liquidity, high transaction costs, downtrodden/out-of-favor securities, and significant complexity. The distressed credit market probably is one of the few markets where risk/return profiles can be significantly out of sync compared to other markets. As such, there's a greater probability that a truly successful manager can really outperform at equity level returns (as we can see with the above link) at potentially lower risk. So top value investors' taking heavy distressed credit positions really shouldn't be a surprise--true value investors in broad strokes take contrarian positions where price significantly diverges from business value, and these scenarios have a higher chance of playing out in the distressed credit market due to the market's structural inefficiencies.
My one caveat off the top of my head is the potential for the distressed market becoming more saturated as people catch on to the attractiveness of the risk-adjusted return of distressed credit. And as we've seen in strategies like private equity buyouts, convertible arbitrage, etc. in the past, more capital inflows usually drive down returns. Still, I highly doubt the distressed credit market will ever be as efficient as the large cap equity market due to its structural differences and inefficiencies. Returns may be driven down, but the possibility of long term outperformance still seems probable.
Side note: I'm really surprised by Centerbridge's (relatively) poor performance. Have heard they've been returning 20+% IRR from a few of their funds. Anyone have insight on this? Maybe the list is pretty flawed as mrb87 points out?
HF manager strategy:
1) start small firm, do deep diligence, have a concentrated portfolio, make market realistic/manageable trades -> crush your returns. Make money off performance fees.
2) take track record, raise a shit load of money, have returns drop but who cares because you relax and get rich off management fees.
3) retire
Would echo the comments above.
There's hope for the LevFin analysts after all!!
Is there money to be made in distressed bank loan debt investing? (Originally Posted: 08/25/2011)
Will distressed debt / bank loan investing make one wealthy?
Asked another way, what are the all-in margins in this business?
There are credit hedge funds/special situations funds that invest in nonperforming loans. It takes a combination of great sourcing and savvy to do well, but can be very profitable.
how much do you have, starting out?
I would think you'd have to start with a good amount of capital and have access to the right deals. If you have capital and the ability to source the deals then you can make good $.
The capital size varies a lot - doesn't require much to get started. Distressed loan sales and loan portfolio sales come in all different sizes - from single loans of $1m-$2m to large FDIC portfolio sales of $1bn+ (although those are less frequent these days).
If you are able to source investments that you can negotiate directly, you are obviously much better off, although most banks looking to get rid of the bad loans know that their best option is to go through a broker and bidding process.
Ultimately whether it makes you wealthy or not depends on how well you do it. The actual evaluation and pricing of the loans is primarily based on real estate valuation and maybe some portfolio statistical analysis for the larger pool acquisitions.
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EDIT: Double Post
Sorry. Yes. What I get for not double checking.
Monarch Capital does this
Thanks for the answers everyone. I have accepted an offer (start in a couple weeks) and I am really looking for additional insight into the LT career viability.
I am wayyyy nontarget and in the middle of nowhere, so i have to always be considering the LT options.
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