Equity vs. Credit funds?
How average, who usually makes more? Analyst at L/S credit or equity funds? Thoughts?
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This is a ridiculous question. It depends on the fund (size, performance, headcount, structure) and the analyst (personal performance, seniority, etc).
very, very generally, for a similar size fund with similar outperformance for both the fund and the analyst, the l/s equity guy will make more than the non-SSG/distressed credit guy. however, credit funds tend to be larger than a similarly staffed equity fund and have lower benchmarks so that's not really a fair comparison. obviously asset class performance matters year to year, one of the reasons most of the alternative asset manager have both equity and credit funds is diversification for the GPs, who have most of their net worth in the funds their company runs.
I don't understand why this would be the case. If both funds are the same size, charge 2/20 and have the same absolute performance why would the l/s equity guy make more than the l/s credit guy if they both had the same size book?
The answer is they wouldn't under that scenario, and for reasons to do with the immense variations in strategy, fund structure (both as it relates to fee loads and how P&L is attributed/paid out), and a million other factors, any trend that did exist would be functionally worthless for a given individual.
So generally SSG/distressed guys make more than equity guys?
I feel that it is harder to return 20% or so in a credit fund, so in order to have the same bonus pool, you need more AUM.
Also, I also feel that at a equity fund, if you survive how long enough, eventually the market will return 10%+ and you will get paid on pure beta (even you had closed your eyes and picked stocks), whereas at a credit fund you work harder (understanding the capital structure, going through legal docs, understanding the fundamentals of the business) to generate a lower return.
Would you guys agree/disagree with my statements? Thoughts?
I don't feel that it's inherently "harder" to return x% at a credit fund versus an equity fund. Don't confuse returns of "the stock market" or "the bond market" with returns of actively managed investment portfolios, especially alternative credit strategies. Unless you're just passively investing in some theoretical capital structure the idea that debt has an inherently lower return than equity is just not really the case. Also, the breadth of the "credit" markets (cash, synthetic, structured, HY, IG, mortgages, sov/gov, distressed, etc) is so diverse that you can't generalize "credit" as one thing.
Some reasons include: 1) Leverage: Many/most hedge funds use leverage in one form or another (either embedded into the products they trade or via margin leverage) and credit products can often be levered more than equities. A simple example: Equity Fund Management LLC buys the stock market and returns 10% annualized over three years. Credit Fund Management LLC buys the leveraged loan market which returns L+350 over three years. CFM borrows 3x times their capital at L+100. The return to their capital is L+1100.
2) The difference between interest rates and fixed income returns: If I tell you that the CDX.IG (synthetic investment grade index) pays 98bps, does that mean that my return from buying the index and holding it for a year will be 98 bps? No! (Plus if I'm doing that, you shouldn't be paying me to manage your money).
3) Carry trades and how they impact capital deployment: I was recently looking at a trade recommendation from a sell-side analyst that was essentially self-financing. It was a CDS curve trade. The fund putting on the trade received (imaginary numbers) 25 pts up front to buy 5 year protection and paid 10 pts upfront to buy 2 year protection. Assuming that the trade doesn't go against me and prompt a margin call I now have additional cash to invest in anything my prime broker will give me credit for.
4) Many funds (credit or equity) try to be market neutral, or at the very least least are not 100% long the market. Here is an example of what I mean: Let's say that the stock market returns 12% next year and the HY bond market returns 7%. There are two funds that are both 100% long and 100% short. If neither fund's longs or shorts outperform, then both funds return zero. If both fund's longs outperform the market by 2% and their shorts match the market, they both return 2%, etc. This is an extreme example, most funds aren't actually at net-0% exposure, but part of the thesis behind going both long and short is that it removes beta and emphasizes the impact actual investment-selection.
As another point, two of the three things you list here (understanding the capital structure, going through legal docs, understanding the fundamentals of the business) are absolutely crucial to equity investing as well as debt. It's true that some fundamental credit strategies involve a lot of reading (bankruptcy filings and credit agreements etc) but so do fundamental equity strategies (industry research, channel checks, etc).
Equity vs Credit Funds (Originally Posted: 12/07/2013)
Starting a career as investor, I know some funds allow you the opportunity to work on both credit and equity investments, but if you had to decide to focus on one - which would you rather start at? My thought is that starting at a credit fund would give you a more technical/solid foundation than you would get at a l/s equity fund but not sure if that's necessarily true.
As a follow-up, is it easier to move from credit to equity or equity to credit? For the reason I mentioned above, intuitively I think it'd probably be easier to go from credit to equity but would love to hear some thoughts on this.
Both are similar as they involve case building and tons of research so it really depends on your interests. As a debater in high school who minored in philosophy for 2 years before switching, I love Equity Analysis because its qualitative, subjective, research driven, and each investment idea is structure identical to a debate. Hell, I enjoy it so much, I started my own boutique equity research firm. I love taking a stance that opposes the consensus opinions regarding a company, finding evidence and analytics defending my stance while detailing flaws in the public's logic, and building a sound investment thesis highlighting my case. The value oriented equity funds I've worked with all build investment cases focused on discovering what's known as "a variant perception" or a perception that differs from the opinion of the masses. This takes higher level analytical reasoning coupled with lots of research to support your arguments. Go with equity if you enjoy analytics and researching a broader array of topics. (I say broader because "fundamental analysis" encompasses any micro/macro/industry-related variable/factor that affect a company and every company is different. ex. one day you'll be researching the expected interest rate in Egypt, and another you be researching renewable identification numbers)
To my knowledge, as opposed to equity, credit investing involves lots of concentrated research focused towards the debt side of the capital structure, risk management, valuing assets on the balance sheet, and legal matters pertaining to bankruptcy. So if you enjoy research that's a bit more concentrated, go with credit.
The skills and knowledge you will acquire in credit will carry over over quite nicely to an event-driven equity or LS fund. For example, if you are skilled at valuing assets, your PM may assign you to find BV plays. As far as moving from credit to equity and vice versa goes, despite being an equity guy, I would have to say credit may better be suited if you intend to make a switch because I don't see how the majority of the knowledge acquired in equity research can carryover to distressed debt seeing how concentrated dynamics of debt investing are.
Thanks for the thoughtful response, Dave. I feel I'd enjoy equity investing a lot more than focusing on the credit side but am still undecided for some of the reasons you mentioned. Personally, I think it's good to have that technical side so I'm considering credit but I don't really want to have to sit around all day reading legal docs so that prob isn't the best idea for me. If anyone has other thoughts to share, that'd be great
Credit L/S vs Equity L/S (Originally Posted: 05/18/2015)
Hi guys:
Can someone comment on the difference between credit L/S and equity L/S hedge funds in terms of thought process please? I understand that they look at different parts of capital structure, and I guess credit L/S funds also look at duration, convexity etc to make money. Are there any other differences in terms of how they analyse opportunities and how they make money? Are the skillets in both similar? If you work in either space, why did you choose one over the other?
Thanks!
Credit = What can go wrong?
Equity = What is my upside?
Thanks SonnyZH. Would you say that equity analysts always look at a name more closely than a credit analyst would then? In which cases are credit analysts looking at a name in a more detailed way? Thanks!
Probably going to catch some flack for this since im a credit guy, but from my experience (and my friends experiences) is the opposite. Credit teams tend to be more in the weeds of the cost structures / operations of the business. Also there is an added level of complexity when you throw in understanding indentures and credit docs or if youre doing distressed and need to deal with contention among different parties.
I am not saying equity is easier or harder, its just different. But, from my experience a lot of equity guys think more top-down when credit teams I have had experience with are more bottoms-up types if that makes sense.
What would make credit l/s a more interesting strategy than equity l/s?
This is sort of just asking what's more interesting: fixed income or equity. You might find looking at 'distressed' situations more interesting than just equities at a l/s fund, but other than that this is kind of just an age old question. Different strokes for different folks
If you short equity, you can get really fucked if it moves against you (to infinity fucked). You short credit, you're pretty capped as to how fucked you can get.
^ It can be VERY expensive to short credit. There is significant negative carry and there might not be CDS trading for every bond you want to short. Shorting bonds in general require way more attention to excution.
With equity, you just call up people to borrow the stock or see if there is a liquid options market. It's just way easier to do long/short equities. Paulson actually had to work with BB's to create products through which he could short his targeted mortgages.
To put things in perspective, it might cost 30 bps to short a liquid stock. It might cost 300 bps to short a bond.
Credit vs. Equity Funds (Originally Posted: 01/28/2012)
What are hours like at credit vs. equity funds? Similar to PE at credit funds? Also, is it difficult for lev fin analysts to break into L/S equity funds?
the first question is way too broad. What kind of credit funds? What kind of equity funds?
Moving to the equity side is an uphill battle from lev fin, though as always, not entirely out of the question.
Is Credit less respected than Equity? (Originally Posted: 11/17/2014)
Somebody recently suggested to me that credit analysis is less respected than equity analysis. I am relatively new, is this common knowledge?
You were speaking to an equity analyst, and they're spreading shiiiieeet
I've done both, didn't get much respect in either.
The people who tend to get the most respect are usually those who make the most money (even if they make it via dumb luck).
The nature of equity vs debt often means the P&L upside in equity deals is higher, at least if you've playing with balance sheet.
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