L/S Credit vs. L/S Equity

I am a current IB analyst (boutique) looking at the path of MF Credit (let's assume it's either Private Credit or HY / Distressed) --> L/S Credit HF vs. right to a L/S Equity HF. Curious what the differences would be in risk tolerance at both shops on the HF side of the equation, which I view as the ultimate point of comparison. Also, have you seen people go from L/S Credit to L/S Equity on HF side?

Summary of my thoughts on both, please correct me if I'm wrong but this is what I've gathered to date:

L/S Equity HF (assume longer term hold period - so not MM pods)

  • Unlimited upside to longs (i.e. buy at $100, upside is infinite, downside is -$100 to $0)
  • Purely intellectual investing - looking at companies & what makes them attractive investments for the long term (or not), then making bets
    • Have heard L/S Equity HFs are between a library and a locker-room, would probably shoot for something in-between the two settings

L/S Credit HF (after MF Credit)

  • Limited upside (i.e buy when at 50 and hope returns to par or 105)
  • More focused on downside protection / risk
  • But, have the ability to exert your opinion across a much broader range of products, from bonds to CDS to aircraft leasing, and equity if you like it and mandate allows for it
    • Also can pick where you want to be in capital structure, including being in a tranche that you think gets turned into equity through restructuring (so some scenario analysis)

TLDR: difference between career in L/S credit and L/S equity HF in terms of investment philosophy & flexibility in terms of mandate

Thanks very much for any input

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Comments (6)

Dec 28, 2020 - 10:31am

Credit has some natural structural inefficiencies that the equity market doesn't

-otc vs listed - so non linear vs linear price discovery
-many different securities in same cap structure w different seniority, duration, docs vs 1 stock
-private and public issuers
-liability structure differences amongst investors
-backward looking average investor in credit vs forward looking in equities
-far less competitor in credit l/s space than in equities

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Dec 28, 2020 - 10:56am

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