Most Active / Top Distressed Hedge Funds

Did you actually enjoy working across from Aurelius? Everyone I knew hated it when them/Elliott were in the cap structure, because you could never trust them/never knew what they were going to do.

DistressedFund123 , thanks for the great thread - I'm just curious - I read the letter by BlueMountain on PG&E but I just don't see how this can help them achieve anything? What real pressure does the letter give to PG&E - the company can just ignore it, no? How does this affect the process in BlueMountain's favor?

Thanks!

DistressedFund123:

Some observations from my side and commentary in just the top 20 listed:

1. Aurelius Capital - been across room with Brodsky and he's a beast. this is probably the most controversial fund on the list - a lot of people dislike them and recently gone through hardship (lost tons of AUM / a key MD / Internal strife). They focus on holdup value and credit document analysis (you probably would do well to get yourself a JD to add value as analyst here).
2. Oaktree Capital - OG distressed debt fund. By virtue of their size, they will be in almost every situation whether they want to or not
3. Elliott Associates - seems to be one of the best funds on this list, constantly smartest in room and have firepower to control processes
4. Centerbridge - friends have gone here, seems to be a very large firm (their investment team is huge for their AUM base) and focused on both PE as well as distressed through junior tranches. Some of their portcos are distressed issuers themselves
5. White Box – somewhat surprised by how high they are ranked, never heard them speak in any conference calls where they were supposedly holders. Also who wants to move to Minneapolis lmao
6. Solus Alternative - solid fund and record, met them in a meeting once and they seemed pretty sharp (they were in a group alongside heavy weights like Angelo)
7. Brigade Capital - not too familiar but from briefly glancing at their Reorg mentions they seem to be in a variety of situations with controlling stakes in classes
8. Marathon - well-known credit hedge fund though not sure how big their distressed capital pool is but they seem to be involved across the board in variety of situations. Not to be confused with Marathon Asset Management LLP in London that manages over $50bn in equities
9. Angelo Gordon - another top distressed fund, I worked with them on a few deals and liked that they tend to get big in positions and control committees
10. BlueMountain - very solid fund, PG&E letter they came out with gives you an idea of how they try to be proactive
11. Cerberus - more PE than distressed but seem to be good shop. They are similar to Apollo (didn't bother searching Apollo because they are too often the sponsor in distressed deals)
12. GoldenTree - haven't run into these guys, I thought they were more of a high yield shop but seem to be pretty active
13. GSO Capital Partners - solid shop similar to Oaktree
14. Silver Point Capital - also OG distressed investors. Greenwich sucks
15. Highland - general credit fund – seems their distressed funds does get pretty active in a variety of situations (mostly E&P, makes sense given Texas location)
16. Contrarian Capital - see above, Greenwich sucks...but mudrick who spun out of them apparently killing it
17. Fortress Investment - big firm so not sure how distressed only group works
18. York Capital - I've heard York is really a high yield manager that gets away with hedge fund fees. They are involved in certain situations pretty heavily though, and one person I know there is pretty sharp
19. Davidson Kempner – top distressed hedge fund with nearly 30bn in AUM, put them in similar league to Monarch, BlueMountain, Angelo etc.
20. Och Ziff – they are a traditional multi-strat publicly traded with a well-built out credit team. While they've had outflows from other products, I believe their credit team has performed decently well. I worked with them in a DIP structure and the two MDs were quite aggressive (which is what you like to see in distressed)
    

larryclarkson:

Did you actually enjoy working across from Aurelius? Everyone I knew hated it when them/Elliott were in the cap structure, because you could never trust them/never knew what they were going to do.

My interaction with Brodsky was characterized as someone who really understood the pain and pressing points for another creditor group, which I appreciated when I was only a few months into the job.

It helped me get a sense of those who "get it" and those who follow the heard and are passive distressed folks.

In terms of hating it - yes they take the approach of how do I take a bigger chunk of the pie given this piece I'm entitled to and then the next step, how do I take a bigger chunk of this pie that I'm entitled to from others who also are entitled to that same slice (let me get preferential backstop treatment vs. other small guys who should get similar economics. I'm sure when I join my fund the people will have opinions on whether they like to get involved alongside or against Aurelius/Elliott or not.

Lmao2018:

Do you have any idea what the returns for these funds are?

Most of the funds above, especially the large ones will have returns somewhere in the 8-12% net range. Some funds up there have really outstanding returns such as Elliott, Baupost etc. but that's not what this list is about. Some funds have mediocre returns but have grown assets to become behemoth credit managers.

larryclarkson:

Honestly dude, your commentary is great but I would just get rid of the list part. You know some student is going to read this and start telling everyone in college that Aurelius>>>>Baupost. At the end of the day, everything just depends on what you value in terms of strategy. If you're really into creativity/litigation/overall aggressiveness, places like Aurelius, Elliott, and GSO would all fit the bill. That doesn't mean Baupost, DK, York, Marathon etc. are any worse places to work/worse for your career development. In fact, Baupost and Silverpoint are probably two of the most sought after HF exits for all banking analysts (as well as pre-MBA PE associates).

I completely agree - fund strategy will be dictated by the PM and Klarman will have a different approach from Brodsky who will have a different approach from Dinan. End of the day, I think very much every fund listed above is are great funds but the above could be helpful to find out who actually digs deep into distress and who may be more selective about situations (i.e. "we don't do retail restructurings" meanwhile Angelo or Solus don't mind getting their hands dirty) or who are more passive distressed investors (i.e. they will let the big guys dictate outcomes). Important to note that the big and small guys all interact with each as restructuring is very much a community driven space where it helps to align yourself with lawyers, bankers, other funds and importantly, company management.

This isn't a ranking in that X mentions is better than Y fund. This is strictly who is publicly going out there and getting coverage and getting involved in bankruptcy processes. I mentioned it above but strictly speaking, a fund in the top 20-30 for example would be a good chance for a junior person to get upfront distressed experience if that's what you're looking for.

Any college student / junior banker will be lucky to get interiews or work at any fund above. Some of them like Redwood or Third Point are arguably some of the most desirable funds to work at on the list.

Performance varies tremendously. Solus supposedly got smoked this year. Baupost hasn't actually had good returns in a long time. Elliot crushes it still.

Being active in distressed situations isn't necessarily a great proxy for being good at investing or generating returns. I'd imagine the correlation between performance and the rankings in this list is close to 0.

Spot on, excellent commentary. Public distressed has struggled. The fund I'm going to, I think the last five year return is like sub 8% net / ~10% gross.

2019 could be more accurate and I thought about that first, but my personal experience has been that lots of lawyers find ways around that public disclosure (i.e. no need to disclose if you are not presenting before a judge...in the meantime the holdings of the class have churned through multiple different funds. I saw this first hand with SVP and OAK and how they traded in and out of positions, making money and never were disclosed).

To sum it up - all of this has a large degree of inaccuracy but directionally gives you a sense. Reorg already reports nearly every 2019 holding update and then depends on its bankruptcy journalists (Debtwire is also good at this) who live and die by calling up bankers / lawyers / funds to try see what personal insight they can gather in a situation. One of the key questions they always ask is - "do you know who is in the structure?"

Thanks, that is consistent with what I've heard on Aurelius.

Any insights (from you, or anyone else) on the main reasons why Mudrick has been successful these last few years? I know they did reasonably well in coal and E&P, but was wondering if people knew of other successes they had. Seems like Verso was another success for them.

Can you comment as to which firms you'd see as the top firms taking lead positions in creditor committees?

This is right - in addition would say that the distressed community is small so everyone knows each other and building a negative reputation for being a pain isn't the best long term strategy

Paulson and Third Point probably involved in more one off situations and moreso, those funds do participate in distressed but also have a big focus on public equities / merger arb. And anecdotally (ignores leverage), both of Paulson and Third Points 13F filings show that a majority of their discretionary reported AUM is reported in their 13F holdings (which for most part, discloses public equity + calls + puts). A typical distressed-focused fund meanwhile will have a much lower % of their reported AUM found in 13F due to majority of their assets being invested in credit and credit-derivative (CDS) related assets, which aren't required to be disclosed in 13Fs.

Like someone else said above - if your strategy involved distressed credit you will likely be looking at / researching the same names as others but your PM / firm strategy may preclude you from going "deep" into either (i) multiple restructurings at the same time (it's incredibly time intensive form of investing) or (ii) you have strict risk parameters that don't let you touch certain distressed securities, for better or for worse (retail, power, O&G, muni bankruptcies etc.)

It was linked above.

Of note, last few months has seen Aurelius have some big wins via CDS (see WIN & NMG) as an example of "smaller funds" being able to aggressively tackle a target / force hand in restructuring negotiations.

Agreed

Consensus used to be that you wanted to be at the largest AUM single manager HF with the smallest investment team (ideally 10-20 max with significant lawyer expertise).

In today's world with 1) utterly crap investment returns among big and small players (excluding Mudrick's ecig investment), 2) performance fees basically getting lost amid renegotiated side letters and new 8% pref drawdown structures replacing liquid-redeemable HF allocation and 3) management fee only being able to trend downwards; I'd say there's a very important and maybe not even risk-averse but longer term more rewarding career to be had going to a place with scale, staying power and AUM growth to offset the above mentioned issues (i.e. being one of the 80-90 investment members at an Elliott vs. on a team of 10 at Marble Ridge etc.).

I think it's also an unfortunate truth that most people don't realize is that being subscale in this industry really precludes you from participating in a lot of the most profitable trades in today's age which typically involve fucking over smaller holders in the same class / non-ad hoc members who don't get their pro rata economics like the big guys (Elliott is very good at doing this to box the small guys out). You don't want to wake up tomorrow as a very insignificant tranche holder of debt getting primed by large guys you thought you were pari with taking a lion's share of value away from your guarantors or altering the waterfall priority in your own intercreditor.

At what level of seniority?