Q&A: HY/Distressed Analyst at NYC based Mid-Sized Credit Hedge Fund

Hey all, long time lurker first time poster. Just wanted to share my background and answer questions for those interested. Background: 7 years of investment research experience prior to b-school, mostly in equities (some credit) with half of that on the buyside at a hedge fund; sectors covered included technology, specialty finance, insurance and CMBS. After b-school (2013) have been in a HY/Distressed analyst role covering the tech and telecom sectors at a credit hedge fund. Education wise, have a double major from a top tier/semi-target, MBA from a top 10 and the CFA designation. Given that its recruiting season, I am happy to share my thoughts and perspectives on the process including: 1) types of candidates, 2) networking, 3) interviewing, etc. As well as my experiences thus far and any other questions, etc. that I can hopefully shed some light on.

Hope everyone is well. Talk soon. Best, NM

 

Recruiting for hedge funds (either credit or equity) is very much self-directed. Even at HBS or Wharton there aren't a ton of funds/quality funds recruiting and most don't come to campus; Columbia's value investing program is bit better. I did not do a part time internship as I went to school out of NYC.

I already had a good amount of experience including on the buy side though not much in credit. But basically I came up with and put together a lot of investment pitches (credit and equity) that I would ask my network and people in the industry to look at. That build up a repoire with some and this led to some interviews.

Networking is the biggest key by far. Can't stress it enough. That and showing passion for the gig and original thought by putting together good pitches.

I interviewed as mostly long/short equity funds and a couple credit shops and landed at my current role due to fit/interest.

 

Could you go into a little more detail on what these investment pitches consisted of?

For example, did you create the equivalent of a research analyst report, financial model/spreadsheet of key metrics, or just a verbal summery of your pitch? I've heard of some MBA candidates pitching at hedge funds going to pretty obnoxious lengths to justify a pitch; do you see this is a necessary, and if so, any general ideas for how to go 'above and beyond' for a pitch?

On a personal note, I'm currently doing PE at a boutique firm, but would like to get into distressed investing/restructuring at a PE firm or specialist fund after an MBA. Do you see this as a natural transition, or foresee any difficulties in making that sort of transition?

Thanks.

"The power of accurate observation is commonly called cynicism by those who have not got it." - George Bernard Shaw
 

Thank you so much for doing this, really appreciate it.

  1. What are the more complicated forms of financial modeling you do in your role? In IG/HY research now, and its been purely 3-statement models. I have thought of teaching myself LBO modeling, as it seems like it'd be helpful when thinking about the debt loads of a newly merged entity once the deal is completed, and the coupons/yields bonds that comprise that load might generate.

  2. Did you have pre-MBA buyside experience? And if so...what motivated the return to b-school?

Thanks again.

 
  1. As far as modeling, its an important skill but one i spend the least time on at work. I don't so super complicated models and honestly its just not required. If you have a good sense of the numbers that's good and having a simple model to track stuff is helpful. Occasionally for complex companies/credits I will do a more complex model. I have never built a full blown lbo model and never will. I often will get a sell side model and tweak it as needed. People often get beholden to models as a crutch; its just part of the overall analysis

2.I did have pre-MBA experience. I went back to school b/c the fund I used to work at shut down and I had to go back to sell side, which is just not my thing, so I figured why not get my MBA and network for a 1.5 years, etc.

 

In my experience I haven't seen a lot of moves form risk mgmt to front office/investing in general. I imaging maybe at a pure fixed income shop, but its rare, especially if one has a few years in risk mgmt. In this case you will be pigeonheld in that role and its hard to jump to an investing role

Not to say it can't happen, bur its rare.

I'm sure there is some skill overlap, but remember buyside investing roles are few and thus competitive. Funds can hire exactly who they want

 

I was wondering the same thing because I'm working in credit risk management for a BB and I cover the Financial sector. We basically act as S&P/Moody's/Fitch for the bank's counterparties, and we do extensive research on each counterparty, focusing a lot on the balance sheet and cash flows. From your experience, do you really think this kind of experience has little to no relevance in credit investment research or credit funds?

Also you mentioned that transitiong from risk mgt to FO is rare but do you think that's due to a lack of relevant skillsets or due to people in risk mgt roles simply not wanting to leave? I can't speak for all risk mgt roles but in my office, a lot of people have settled down and raised families even at the Analyst/Associate level, and it's definitely feasible because the work hours are only 50-60 per week with very little weekend work, and the work itself is' still [presumably] interesting to them because even without client exposure, there's still amply opportunities to learn about the industries you cover. But again, this is only my observation and I've only just started. I don't plan on raising a family like my peers so early because I still want to explore other career opportunities a little while longer and probably have the chance to experience living in a different city.

 

Thanks for doing this.

Some of my q's have been discussed before, but would be interested to hear your take, especially coming from a mid-sized fund that may be looking for people from different disciplines to conserve resources.

Would a JD candidate with a business/finance background be well-served by pursuing the CFA while in school, in order to make the difficult jump from bankruptcy law to a distressed fund more doable? I'll be working for a small equity focused hedge fund during one of my legal summers. Would such a skill set/background be looked upon favorably by your group? Thanks again.

 

In this case, i think a CFA would be helpful. There are a ton of guys who do distressed that have a JD and were former bk attorneys. Know BK code/process is more important than the numbers often in a bk situation. While I know a bit and am learning I do rely heavily on legal counsel for advice.

Our group would def look upon such a combined skill favorably. A fund that's pure distressed/event-driven would value that skill set the most

 

Thanks man, appreciate it.

So all things considered---

How do you enjoy your position?

Are you seeing an uptick in distressed opportunities recently? Most of the distressed positions I see are either in the energy or healthcare industry, or are German-focused, given all of the recent macroeconomic factors. Are there any other industries/countries that the distressed sector/your fund has its eyes on? I see some positions that focus on private company investing as well, which seems interesting.

Hours/Comp across similar funds? (if comfortable sharing)

 
Best Response

Difference btw. Buyside and Sellside

  1. Hours: My first sellside gig was equities and I worked for a young but highly ranked team doing a ton of initiations and we covered some quirky stuff that was hedge fund heavy. So prob like 80-90hrs/week. My second sell side gig was much more chill BC I had covered the space for a long time and knew it rather well, so maybe like 60hrs/wk. My first buyside gig was prob like 90hrs/wk BC it was just a tow many team, I became a junior PM and out strategy was rather labor intensive. My current gig is quite manageablea t like 50-60hrs/wk and very rarely some weekend work. That being said I do a long of independeet reading/research, etc, that is always work related but I don't count as hours I guess.

  2. Compensation: Salaries are prob pretty similar once you reach a certain level in either sellside or buyside. Buyside analysts make anywhere from $120-200k (give or take). Sell side sr. associates are around $100-$140k and analysts are prob like $175+. Obviously the upside is much bigger on buyside. I think the avg (credit) mid level analyst is pulling in about $500k+ and senior guys are $1mn+. On sellside to pull down $1mn+ you need to be II ranked, etc. and the days of associates making mid six figures is long gone.

  3. Culture: All depends on your team and or fund, its hard to say. But on sellside its much more dictated by your senior analyst. IMO its much more fun on the buyside b/c I am free to do and look at what I want to, lot more autonomy. That being said your desk or team on the buyside will also dictate culture. Our shop is a really nice place to work, but its not like we all get drinks everyday; most people are married and live outside Manhattan. But i like everyone quite a bit and they are all smart, interesting people.

 

1) I am joining a BB (GS/JPM) in their Special Assets Group. This group is a distressed workout group which manages a portfolio loans for the firm. I am going to be covering ~20 names in a few industries to see which parts of the capital structure we like to be in and which parts we should buy CDS on. What type of exit opps does this bring and how can I think about moving to a credit fund? What if I get a CFA?

2) The group also manages a side book of pure investments. With this knowledge, how are my exit opps impacted?

3) What is expected value for base / bonus at a mid tier credit hedge fund?

 

i don't think you need an MBA to do this, especially sine you have buyside/investing experience. An MBA is not going to teach you fundamental research. you could try switching to sellside and building up the skillset there nd then jumping back to buyside. or hit up your network for potential opportunities. To learn modeling jsut dive in. there are books/courses/CFA that can help. Maybe hit up your sellside coverage to get some reports/models and see how its done for either equity or credit.

An MBA could help if you did i-banking post MBA and then fundamental research role. i just don't think its needed for someone in the industry already investing/trading

 

Great answers nm.

Sites mentioned previously on WSO which may be helpful in distressed-specific recruiting include Robinson Judson and Selby Jennings. That being said, some of the recruiters seem very focused on getting someone who has come from the traditional 2 yrs IB route. For someone looking to transition from the associate level (my case would be from Big Law/RX Advisory/DD Trade Desk), are there any other recruiting resources you'd suggest which may be helpful to someone trying to make the jump? The only others I can think of are Bloomberg, eFinancial careers, and LinkedIn.

 

In your case i would hit up the network you already have. in any of those associate roles you mentioned i imagine you work with credit investors regularly. As i mentioned before your skillset (law/RX advisory/DD desk) is definitely something distressed funds like, so try and network your way into the quality distressed shops, assuming that is what you want to do.

Recruiters in general are a waste. For them its very easy to get the 2yr banker-->PE/HF b/c the downside is small. Think about it from their perspective they can't be faulted for bringing some great BB analyst with pedigree. if that analyst fails it not the recruiter's fault b/c they were excellent on paper. And yes some firms only hire the typical background, but not all.

BBerg has some good jobs. i would use linkedin network, you alumni databases, etc.

 

What are the key differences b/w covering equity/credit?

I've really only done equities (somewhat similar to you pre-bschool experience wise) but I've turned down some credit opps that seemed otherwise amazing b/c I just had no clue (about work, compensation, etc) and wasn't ready to take the risk.

Tnx

 

in terms of analysis/work, its not worlds apart. As an equity guy you are more focused on growth and earnings acceleration and you tend to value off of P/E, etc. Credit guys are more focused on downside, asset value/ protection, cash flow stability, etc. Equity guys are much more P&L focused, while credit guys are more balance sheet and cash flow focused (at a very high level). But both do fundamental research. Also, especially for HY/distressed, credit document work (CA, covenant,s intercreditor, etc.) is very important.

to be honest, I think to be a good analyst (credit and equity), you should have a complete skill set. I know I'm way better "equity" analyst now that I know how to look at the entire capital structure and spot problems before equity guys usually can.

Hour and comp, especially on buyside, are not too dissimilar btw credit and equity, all depends on how your fund does.

 

Thanks for the insight.

Are returns relatively compressed in L/S credit b/c credit is less volatile? I was under the impression they are, though that could be offset by bigger funds. What would be a good year for a L/S credit fund?

 

Thanks nm, really appreciate your time. These are the highest ROI threads on WSO, no doubt. Congrats on your role as well – you are 100% where I want to be. Currently doing sell side research at a middle market shop (NY) with mostly unknown brands on my resume, but good GPA and measurable work performance. In my second year out of school, sitting for Level 3 this June.

A few questions: First, can you walk us through your current investment process and how it differs from your pre-MBA equities work? I understand you’re focusing on the balance sheet and cash generation now, but has anything changed in your tactical approach?

Second, I plan on doing the same thing you did – networking my way in – once I finish the CFA. What was the best advice you got from your network when you were sending out pitches?

Third, what is the structure/average tenure of analysts at your shop? Is it a pool of analysts working solo for a lone PM? Analyst/associate teams?

Thanks, much appreciated.

 

Thank you in advance for offering your insights. I plan to apply to MBA this year and just do a lot of readings and modeling myself, hoping to break in after 2 years of MBA.

Could you comment on which business school has a particular strong alumni base in mutual fund and hedge fund? My understanding so far is that Booth and Columbia are particular strong programs for buy-side recruiting.

 

Thanks for doing this! It looks like you are in a place that I am trying to get to.

Did you do CFA before MBA? If so, did that help you get in or get through?

I ask because I have just gotten CFA Charter, and want to work at a hedge fund (distressed, fundamental, whatever) but am at a much more basic level of finance (retail advisory) and don't really see a way into that world. Would an MBA help, or do the CFA credentials work well?

 

Thanks a lot . a question: I'm currently looking a intership because I just finished my master in a semitarget university. my aspiration is to work as equity research in a top Asset Management department in a a topbank. I have two choice one from a small unknown consulting firm in investments and the other as credit risk analysis and reporting in the largest Italian bank. which is the best to have the best exit opportunity for equity research ?? my blackground is: bachelor in banking, finance in a no target university with a low grade master in international management with a high grade in a target university in italy intership in middle office in London in asset management boutique a lot of passion for financial market, i have my market commentataries, i invest my family wealth in stock, bond , i have read a lot of financial book, i read seeking alpha,ft and other website and i do my personal equity research. Thank you very much

 

Hey, not sure which is better to break into equity research at a top firm w/o details but to be honest neither is going to be an easy path. I would recommend you try to break into a middle market/boutique firm and transition form there to a top shop if possible. There are many aspiring candidates coming form the mid/back-office and very few spots. An MBA at a top school could help you as well. I think the best path is either trying to get into a boutique or getting a top MBA

 

Always like hearing other perspectives on this stuff: a) How do you structure shorts/hedges? Indices, pair trades, alpha shorts, etc

b) How does your fund handles "low-volume" distressed environments like today's? Some drift towards performing/stressed, some drift to equities, etc...sounds like may be less relevant for you guys since you already have a HY mandate?

c) How are your funds structured (traditional evergreen vs drawdown etc)? Do you have separate vehicles for HY vs distressed?

There have been many great comebacks throughout history. Jesus was dead but then came back as an all-powerful God-Zombie.
 

1) What are your thoughts of joining a special situations team vs. a distressed debt HF post 2-years banking? I'm trying to gauge the difference in fundamental skill set acquired from either

2) What are your views on generating alpha from liquid vs more illiquid investments? I've always been under the impression that public equities is a really tough business with its extensive sell-side coverage. On the other hand, would you say its easier to generate alpha from distressed debt or less covered products?

3) I was also curious as to how important you think modeling is in an equity vs. a credit environment.

Thanks for the AMA!

 

this is a very broad question. Idea generation comes from everywhere personal experience, other buysiders, news, blogs, trade organizations, sell side, etc. Developing an idea/thesis has a lot to do with experience. But general I want to understand the industry and how this company fits within it. What are the business drivers. How in favor/out of favor the company and/or industry are. What will drive value (up or down), etc. Sorry there is no template and different ideas require different types of work/analysis

 

Thanks for doing this!

Why did you decide to move into a credit role from your previous (mostly) equity experience?

How did you spin your story during interviews to express the interest in this change?

I guess what I'm asking is, say I was a person with experience exclusively in equities - how can I best present myself and my reasons as to why I want to be a credit investor?

Thanks!

 

I was looking at both credit and equity roles. I made the move b/c I liked the people and the fund's strategy and i wanted to improve my capital structure skillset. Maybe I make the move back to equities down the road. I didn't real;ly need to "spin" a story, just was honest in that I was interest in HY and distressed and thought I could leverage my fundamental research skillset into the role.

Its going to depend on what fund and to whom you are pitching yourself. but in general most funds like "good athletes" that can pick up stuff. they will find a place for people if they are worthwhile

 

Are there any shops that your colleagues particularly respect in the distressed/HY space?

Ever consider going back into structures and specialty finance? I'm thinking of making the move and it seems like it's an exciting space with lots of growth potential.

Pennies from JcPenny
 

Ummmm I'd change your username dude.

"After you work on Wall Street it’s a choice, would you rather work at McDonalds or on the sell-side? I would choose McDonalds over the sell-side.” - David Tepper
 

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