Mistake to join a Distressed HF now?

Seeing how limited the opportunity set has been over the past few years and how a lot of large distressed funds have been performing poorly, would it be a poor decision to recruit for a distressed debt hedge fund? I always thought the space was pretty fascinating, but reading WSO threads on it (such as the anchorage thread) is disheartening. Do you think there's a future for distressed debt investing, or is it permanently shrinking? is there a case for survival for more private facing distressed roles?

Separately, are M&A banking backgrounds looked down on by distressed shops?

Comments (60)

 
  • Associate 1 in PE - LBOs
Nov 26, 2020 - 8:14pm

I would be very interested in hearing some experienced thoughts on this.

I imagine the old tactics don't work anymore and you have a few firms being rooted out. The strong will prosper, but want to hear what others think

 
Nov 29, 2020 - 12:45pm

Strong = fund is big enough to the point that your fund is invested in everything which by mathematical principles should minimally guarantee a market rate return or your fund is filled with a bunch of psychos that live, breath, and shit the market and manage to beat the market year after year because they're gamblers who want to win the betting game and they focus on a niche area of investing that no one else can do as well as them. It's really that simple. HFs are filled with nothing but survivor ship bias and the only reason they're able to make such whopping returns on capital is because of just how much capital they have to play with. Shit you can probably even argue that the latter group in strong is just a bunch of autists with controlled autism power levels in investing, think toned down wall street bets autism.

 
  • Analyst 2 in S&T - FI
Nov 26, 2020 - 8:21pm

Take what you read on WSO with a grain of salt.

 
Funniest
  • Research Associate in HF - Event
Nov 26, 2020 - 8:48pm

No offense but you're full of shit and have no idea what you're talking about. Anchorage isn't what you just described it to be and the people on this forum have 5-10 years of experience in the industry and provide real life commentary on their careers.

If you don't know something don't throw out useless comments. You sound like a bulge bracket S&T intern answering "why are you interested in joining the distressed sales team" with your answer you conveniently just deleted.

 
  • Analyst 1 in S&T - FI
Nov 27, 2020 - 12:49am

it's a tough market, lot of the opportunities that ppl expected in the covid backdrop just aren't there given the gov't backstops in the market. more traditional loan to own less common now and distressed guys find themselves reaching into adjacent situations up the curve looking for returns. industry future exists for sure, just a question of what it looks like - if you're interested in it, by all means. tough to break into but rewarding and if you're interested, you'll be learning for many yrs. won't get into anchorage but there's definitely some funds that are crushing it. 

 
Nov 27, 2020 - 9:15am

Personally I would look to join an "event driven" fund that runs multiple strategies like merger arb, special sits and credit. That way you have a more diversified fee pool to feed all the hungry mouths come year end. Typically the CIO will allocate capital across the 3 strategies depending on the opportunity set and in leaner teams you may get a chance to do some work on an arb deal or a short-equity opportunity when credit markets are trading too tight. The main issue I have with pure distressed debt players is that you can't raise capital and sit on it and tell your investors that you don't see attractive opportunities, so you end up looking at the same crappy names over and over and trying to come up with reasons to buy stuff that no one really has any conviction in.  

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  • Prospect in Research - Other
Nov 28, 2020 - 12:25pm

Would you consider Brigade Capital to be an example of one of these multi-strategy funds that would be an enticing opportunity as a junior?

 
  • Research Associate in HF - Event
Nov 28, 2020 - 3:02pm

They're more pure multi-strat credit, they don't do merger arb or carry a diversified equities book (looks like a bunch of shitty post reorgs).

I'd consider Canyon more diversified but coincidentally my friend got fired this year for a few investments that traded down in March (and subsequently are now at or above February pricing...funny how that works).

 
Nov 29, 2020 - 5:42pm

Brigade's largest business is CLOs. CLOs are great for the manager (locked up capital and get 5% of equity plus fees) but not great for a junior person to learn in. If you are in their hedge fund side, then it's great spot for a junior. Yes returns haven't been great but you are there to learn and get experience, your not joining as a partner with carry so don't worry so much about a funds returns.

 
Most Helpful
Nov 27, 2020 - 12:37pm

The big multi-strat funds are organized in teams and you need to become a subject matter expert in specialties like merger arb and distressed. The distressed skill set transfers to a lot more types of investing than a merger arb does in my opinion.

Most distressed funds have the majority of their capital is in stressed and cuspy performing credit, not just bankruptcy and deep distressed, and you are also speculating on various "event [email protected] situations, as well as mundane flipping new issue and finding shorts.

The returns for hedge funds overall (distressed/event/multi strat) averaged mid single digits over 3,5,10 year periods especially with 2009 now dropping out of trailing 10-yr performance and the exceptions prove the rule. 95% cannot compete with public market returns, especially FAANG. PE has raised so much money and they compete for so many of the same deals that the large funds will be lucky if the return 1.8x over 7-10 years. But that doesn't mean you won't learn a lot there either and that it's not a good career path, it's about building your experience and expertise.

It's all about learning a skill set as a junior person and there is an enormous amount of debt out that requires investors to follow it and there will always be a portion in distress no matter what the economy is doing, and in a recession there will be even more. You'll learn a lot of skills in distressed and can easily transition to most other types of investing outside of maybe VC/quant/.
.

 
Nov 28, 2020 - 12:57pm

As Muad'dib said, most distressed shops aren't doing pure play distressed for control. There is a lot of stressed names out there still and opportunities. 

Also, your career, to an extent, shouldn't be managed by what is in vogue at any given point in time as things shift. So if you enjoy distressed then go for it. To answer your other question, M&A will not be looked down upon.  

 
  • Analyst 1 in IB - Restr
Dec 10, 2020 - 4:19pm

Definitely think that one shouldn't pull all their baskets into what's vogue in a current environment, but I think the concern of people like OP and myself is that the problems with distressed are structural and not cyclical. I'd imagine what got a lot of people initially considering rx/distressed in the first place (before realizing an interest in legal angle and all that comes with it) is that, compared to vanilla L/S equity, it couldn't be disrupted by passive investing/computers can't really trade credit/it was pitched as an inefficient space in Moyer or distressed manager interviews so ample room to generate alpha and have a more positive career outlook (to the extent possible in public mkts) relative to the quickly shrinking L/S seats. So the reality that distressed has a similar magnitude, if not more, of structural issues has probably caused many to pause before moving forward regardless of whatever interest level was developed reading about the space. 

 
  • Analyst 1 in HF - Other
Dec 10, 2020 - 4:31pm

What structural issues are you referring to? Besides CLOs loosening up rules and being able to inject new money, not much about this market has changed from a structural perspective. There are cyclical issues in that low interest rates and a long bull run has really limited the number of distressed opportunities relative to the amount of money chasing those ops, but by and large this is still an illiquid market that offers potential for outperformance through traditional, fundamental, margin-of-value focused investing. There's definitely an argument to be made that there is too much distressed dry powder relative to the number of opportunities available, but that's where flexibility in being able to deploy to less stressed stuff, and stuff across the capital structure comes in handy. To the extent that these types of funds are indexed to high yield, returns will be depressed in a low rate environment going forward, but I think saying there are just as many structural issues as in long/short is simply not accurate.     

 
Nov 29, 2020 - 2:24am

Can't speak to the first part of your question, but to the point w/r/t the M&A candidates, I wouldn't say you're looked down upon. Recruiters will give you the opportunities if you express specific interest into the distressed side but if you're coming from M&A IB, the actual guys at the fund may drill down as to why you have an interest in distressed work despite working on "vanilla" M&A deals. Important to keep your fingers on the pulse on the distressed space as a result but yes, you can get looks from M&A but will be treated with a degree of skepticism potentially when talking to actual professionals.

 

I did go through this when I was in banking so my experience above is predicated on only my experience but I can't see why it would be super different elsewhere. 

 
  • Associate 2 in HF - Other
Dec 19, 2020 - 2:04am

Alright I'll bite. Distressed is dying, but credit isn't.

Pure-play distressed for control strategies straight up suck these days. Any company that isn't in secular decline can access incredibly cheap financing (at least relative to their circumstances). As an example, look at the cruise lines. In March/April, the market assumed these businesses wouldn't be able to generate revenue for 12-18 months and they were still able to raise (relatively attractive) financing. The businesses that are going bankrupt are in industries that are "fucked" - oil and gas, low quality retail, etc. Basically the universe of companies in the distressed universe has shrunk dramatically, leaving only the worst businesses. There's plenty of capital in direct lending, rescue financing, and opportunistic credit to help companies that might have otherwise gone bankrupt. 

As a result, most of the distressed funds that see where the ball is going have started dipping their toes into performing credit, primarily through CLO platforms. This shift has been great for DL and opportunistic credit type strategies - but keep in mind the return profile of these funds is lower than what the distressed folks were aiming for. Plus, the management fees are generally lower. While a distressed fund might have charged 1 and 15 (or thereabouts), CLOs only offer 40bps management fees. Serious fee compression. All in, significantly lower fee revenue, and downward pressure on comp. 

If CLOs / performing credit are interesting to you down the road, go for it. Otherwise, run for the hills.

 
  • Analyst 1 in IB-M&A
Dec 19, 2020 - 10:02am

so you think there is no future for distressed at all? I definitely do not want to do CLOs / performing, but are there other platforms for distressed investing (e.g. private side) outside of public? do you think there's a future and would it be dumb to still try for a distressed HF?

 
Dec 20, 2020 - 9:57am

On your fee point, I'm not so sure if CLO/BDC are low fee products. You have to look at fee as a % of NAV since these are highly levered vehicles. Said another way, the hard part of your job is raising equity, not the debt portion of these funds. A typical CLO is 9:1 levered, so a 50 bps fee on GAV equates to 5% fee on NAV. A typical BDC is 1.5-2:1 levered, so a 100 bps fee on GAV equates to 2.5-3% fee on NAV.

In many ways, these are higher margin vehicles vs. your typical 1 & 15 drawdown fund structure. Once you see the real fee dynamic beneath the surface layer, it makes a ton of sense why multi strat platforms are focusing on this type of AUM (and drawdowns) vs. quarterly liquidity hedge fund structure - which I think will pretty much go extinct in our market in the next 5 years or so.

Ugh the FBI still quotes the Dow... -Matt Levine
 
  • Associate 2 in HF - Other
Dec 20, 2020 - 12:59pm

Not really - ignore the underlying liability structure for a moment. The amount of work required to manage a CLO platform scales with total AUM, not with CLO equity AUM. As you grow total assets, you have to monitor more and more positions. This is due to both CLO diversity requirements as well as practical limits about how large you can get in any given syndicated loan. Your average position size even at a huge CLO platform is probably at most $50-75mm. 

Obviously it's easier to manage a given performing CLO position vs. a distressed position, but an analyst still can't cover 100+ names. CLOs simply don't scale as easily.

 
  • Analyst 1 in IB - Restr
Dec 22, 2020 - 12:53am

Do you mean down the line someone would solely be working in clo/performing credit or splitting responsibilities between that and the more stressed opportunities? It'd be hard for a single person to do both I'd imagine given how many names they'd be responsible for on the clo in addition to the time spent doing diligence for distressed stuff. 

 
  • Associate 2 in HF - Other
Dec 22, 2020 - 1:30am

It will depend on the fund you're working at. Some funds have dedicated restructuring teams, and some funds bifurcate between CLO/performing credit focused employees and the legacy hedge fund / distressed side. What I'm saying is that, over time, the real growth is in CLOs and performing credit. Eventually, the distressed portion of any given hedge fund will slowly fade away in terms of firm profitability. 

 
  • Associate 2 in HF - Other
Dec 19, 2020 - 1:52pm

I think distressed is just going to be materially smaller going forward. Look at where funds are raising capital - it's all in private credit and CLO strategies. There was a window in March-June where firms were able to raise stressed/distressed capital to take advantage of the dislocation in the credit markets, but now that everything is trading so tight you're going to be hard pressed to deploy the remainder of those funds. There are definitely still opportunities in private credit / rescue financing, but keep in mind a lot of this is very much sponsor relationship driven. If you have no interest in working in performing credit, I would stay away from distressed.

 
Dec 22, 2020 - 8:37am

Can I speak to someone who works in this space:
Im creating an online course in Lev Fin - but also brainstorming ideas to add an Appendix / Sub-section something helpful in Restructuring / Bankruptcy / SS / Distressed (or even its own standalone course).

Looking to talk to someone in Restructuring / Distressed / Special Situations to understand what they do and what materials they create thru the "life cycle of a deal". Including legal docs and which sections of those are important

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