1. Make a lot of money or gain power/prestige.
2. Take little-to-no risk.
3. And work normal, stable hours.

If you’ve read this site before, you know this set of goals is impossible for most finance careers: you take a lot of risk, work long/stressful hours, or both.

But one possible exception lies in sovereign wealth funds (SWFs), which are similar to funds of funds in some ways.

The pitch is that you do a mix of high-level “macro” work and occasional “micro” work, such as direct investments, you may get to live in exotic locations and pay less in taxes, and you work much more normal hours than in other finance jobs.

And while the pay ceiling is lower, it’s not that big a difference until you reach the top levels – especially after factoring in the lower taxes.

I’ll address all these points here and cover the advantages and disadvantages of SWFs, but let’s start with the definitions and overview:

What Are Sovereign Wealth Funds?

Sovereign Wealth Funds Definition: Sovereign wealth funds (SWFs) are state-owned vehicles that invest significant reserves from commodities or foreign exchange assets in various sectors to build up savings, stabilize the government’s revenue during downturns, and diversify wealth and income.

Sovereign wealth funds are the most common in countries with one or more of the following:

1. Commodity Wealth – Oil-producing countries tend to have cash surpluses, especially when oil and gas prices are high.
2. Trade Surpluses – Some countries, like Singapore, are not rich in commodities but serve as trade hubs and generate significant revenue from these activities.
3. Tax Revenues and Pension Contributions – In places like Canada and Australia, the pension or “superannuation” system generates significant funds to invest (but some would call the investment firms there “pension funds” or “superannuation funds” rather than SWFs).

SWFs in places like the Middle East, Norway, and Russia are heavily linked to commodities, while the ones in places like China, Hong Kong, and Singapore have more diversified reserves.

Commodity-linked funds want to diversify and avoid complete dependency on oil, gas, or lithium prices, while other funds are motivated by some combination of diversification and “saving for future generations.”

Sovereign Wealth Fund Strategies

Sovereign wealth funds can invest in almost anything, from equities to fixed income to real estate, infrastructure, private equity, hedge funds, and more.

Some SWFs operate like long-only asset managers (i.e., mutual funds) that allocate their assets top-down and then pick specific indices, companies, and securities that meet their criteria.

Others operate more like funds of funds and delegate much of the investing process to private equity firms, hedge funds, and other asset managers.

More recently, many SWFs have built direct investing teams to pursue minority-stake deals, credit deals, and even control deals for > 50% stakes in companies.

Examples in this last category include GIC and Temasek in Singapore and Mubadala in Abu Dhabi.

Also, many SWFs without official direct investment teams still co-invest with PE firms they’ve invested in, like the private equity fund of funds model.

Some sovereign wealth funds also pursue unconventional strategies.

One good example is the NZ Super Fund in New Zealand, which invests based on “diversifying risk” rather than a traditional asset allocation.

The firm uses passive and active strategies, often deviating from its reference portfolio based on the macro environment.

Sovereign wealth funds have much longer time horizons and more “permanent capital” than traditional PE firms, hedge funds, and funds of funds, and these points create differences in timing, strategy, and willingness to pay.

For example, many SWFs take their time making decisions and are sometimes willing to outbid traditional investment firms in areas like infrastructure assets.

They do not “need” to exit their investments within a specific time frame because they have no Limited Partners, so they can do things that traditional firms cannot.

The Top Sovereign Wealth Funds

You can easily find a list of the “biggest” sovereign wealth funds online: the Government Pension Fund (GPF) of Norway, the China Investment Corporation (CIC), the Abu Dhabi Investment Authority (ADIA), the Kuwait Investment Authority, GIC in Singapore, the Public Investment Fund (PIF) in Saudi Arabia, the Hong Kong Monetary Authority Investment Portfolio, Temasek, the Qatar Investment Authority (QIA), Mubadala, and so on.

Some people would also put CPPIB in Canada (and other Canadian funds) on this list, but these firms are usually classified as pension funds rather than sovereign wealth funds.

But the more relevant question is: “Which of these funds would you want to work at?”

And the short answer is: “Some of the Middle Eastern ones, plus GIC and Temasek.”

These tend to be the funds that pay better, actively recruit new entry-level hires, and do at least some direct investing.

Funds like Mubadala, GIC, and Temasek are good for direct investing work, and ones like ADAI, PIF, and QIA offer competitive pay, even if there’s less direct investing.

Some other large funds might also qualify; unfortunately, there’s little information available on most of them.

I assume you probably need to be a Chinese or Hong Kong national to have a good chance at anything based in China or HK, but I’m not 100% certain of that (feel free to clarify in the comments).

On the Job at a Sovereign Wealth Fund

To understand the nature of the job, you should know what PE Analysts, PE Associates, and HF Analysts do because much of it is similar.

If you compare a junior role at a sovereign wealth fund to these jobs, the work tends to be broader and shallower:

For example:

• Time – Traditional PE: You might dig into 2-3 potential deals each week, build models, and conduct market research. You’ll also spend time supporting existing portfolio companies and reviewing their results. Almost everything you do at the junior level is “micro” in nature.
• Time – SWF: You might spend 50% of your time looking at specific deals and the other 50% on higher-level asset allocation decisions (sectors, strategies, funds, etc.) and supporting your Portfolio Manager’s ideas and requests.
• Presentations – Traditional PE: The “deal review” pace above means that you could make several presentations to the investment committee or Board each month. And each one will take a fair amount of time and effort.
• Presentations – SWF: You will not make nearly as many presentations to the committee or Board; it might be closer to one per month, depending on the number of direct investments you work on.
• Deal Approval – Traditional PE/HF: To win approval for an investment, you don’t necessarily need to please “everyone” – just the key decision-makers. But they will dig into your work and ask detailed questions.
• Deal Approval – SWF: More people will review your process and recommendations, but they won’t go into as much detail as much as a traditional PE Partner. The approval process might take longer (say, 2-3 months rather than 1 month) because more people need to weigh in.
• Depth of Work – Traditional PE/HF: You’ll spend time doing market research, meeting management teams/customers/competitors, and building detailed financial models for any deal that moves past your quick screening.
• Depth of Work – SWF: You’ll still complete many of these tasks, but not to the depth that you would in most PE/HF roles. For example, you might focus on the model’s 2-3 key points that will drive returns rather than getting all 273 line items correct.
• Returns – Traditional PE: The targets vary by fund type and strategy, but traditional buyout funds usually achieve IRRs in the 15 – 20% range.
• Returns – SWF: Targets are often 3 – 5% lower, whether directly stated or implicitly acknowledged. This might not sound like much, but it could be the difference between a 2.0x and 1.6x multiple over 5 years (for example).

If you do direct investing, you’ll be closer to the “PE/HF” side of the spectrum, but there will still be some differences.

For example, minority-stake investments, credit deals, and co-investments in leveraged buyouts are all common.

But control transactions where your fund acquires over 50% of a company are less common, partly because of rules restricting foreign investment ownership in many countries.

Sovereign Wealth Funds: Salaries, Bonuses, and… Carried Interest (???)

You should expect pre-tax compensation that’s ~25% lower than pay at large PE firms at the junior levels.

So, expect something in-line with pay at middle-market firms, such as $200 – $250K rather than $300K+ total.

As you move up, the pay differential increases because base salaries and bonuses increase more slowly, and carried interest is much lower or non-existent; at the Director level, it might be more like a 40-50% difference.

At the senior levels (MD or Partner), earning $1 million or more is still possible, but it’s less common or “expected” than in traditional PE.

But the biggest difference relates to carried interest.

The “Limited Partner” of any sovereign wealth fund is the government, and the government does not like to pay high fees on its investments.

So, carried interest either does not exist or is greatly diminished at most of these funds, which means that the potential upside at the senior levels is much lower than in traditional PE.

Some places offer “shadow carry” or other vesting compensation that’s linked to performance, but the total amount is much lower than in direct investing roles.

That said, there is a tax advantage if you work in the main office of a sovereign wealth fund because the personal income tax rate is 0% in many Middle Eastern countries and only 22% in Singapore.

If you’re a non-U.S. citizen, these rates make a $200K total compensation package go much further than in other countries.

If you are a U.S. citizen, you still must pay U.S. taxes, but you’ll pay a significantly lower rate due to the foreign earned income exclusion.

So, you could easily earn more after taxes than in a traditional PE job in the U.S. or Europe – at least up to a certain level.

Lifestyle, Hours, and Promotions

The good news is that you also work much less in exchange for the reduced compensation.

At the junior level, you might work anywhere from 40 to 60 hours per week (the upper end of the range is more likely for direct teams), which is much less than most IB and PE groups.

Also, taking time off, planning vacations, and having a real life outside work are much easier.

The general attitude is that you’re in the office to work, but you’re not “on call” 24/7.

The bad news is that it can be quite difficult to get promoted, partially because working at a SWF is much more political than most PE firms and hedge funds.

Completely unqualified people sometimes get hired just because they’re connected to Powerful Politician X or Oil Baron Y, and hardly anyone at the top ever wants to leave.

Another issue is that many SWFs only hire local candidates, greatly prefer local candidates, or promote local candidates more quickly.

The classic example is Singapore, where you’ll get promoted more quickly as a Singaporean citizen at funds like GIC.

But it also happens at many Middle Eastern funds, so it’s not Singapore-specific.

If you’re in a SWF satellite office in the U.S. or Europe, this is less of an issue, but promotion there could also be tricky because these offices are smaller.

How to Recruit at Sovereign Wealth Funds and Win Offers

As mentioned above, in some cases, you need to be a citizen of the SWF’s country to have a good shot at winning a job in the fund’s main office.

This varies by fund and region and changes over time, but it is something to consider before you apply for these roles.

Most SWFs do not recruit undergraduates, with some exceptions, such as GIC and Temasek (if you fit their profile).

So, your best option in most cases is to gain traditional investment banking or private equity experience and use that to move in.

It is possible to move in from backgrounds like equity research, hedge funds, or asset management, but you should target groups that do asset allocation and public-market investments rather than deals.

Some larger funds use headhunters, but networking is essential to win these roles because the process is more like off-cycle private equity recruiting.

If you are a U.S. or European citizen with experience at a large bank, you probably have the best shot at Middle Eastern SWF roles at firms like ADIA, QIA, PIF, and Mubadala.

For more about this one, see our coverage of investment banking in Dubai.

Interviews and Case Studies

Just as the investment process is broader and shallower at SWFs, so is recruiting.

A typical process might look like this:

• Round 1: You might speak with HR or investment staff about very standard questions (“Why the buy-side?” “How would you invest in Industry X?” “Why this firm?” “Why this country?”). They might ask you to pitch a stock, but it will be less formal than in ER and HF interviews.
• Round 2: You answer other fit/behavioral questions about your leadership experience, strengths and weaknesses, and so on.
• Round 3: You might have to prepare and present a short case study or investment pitch in this round (~60 minutes). For example, they could give you information about two similar companies (Visa and Mastercard, Google and Facebook, etc.), ask you to recommend investing in one, and have you answer questions from the PMs about your decision.

You are unlikely to get a traditional LBO modeling test, a growth equity modeling test, or even a simple 3-statement modeling test – but there may be exceptions for teams that focus on direct investments.

Unlike the private equity funds of funds process, you are also unlikely to get a “fund evaluation” case study where you recommend investing in a specific PE fund.

Sovereign wealth funds do more than just PE fund investing, so this task might be too niche for many teams.

The technical questions are similar to the standard ones in any IB or PE interview, but you should also expect broader questions about markets and the economy, similar to an asset management interview.

The best way to prepare for the case study or stock pitch is to practice reading about different companies and making decisions quickly.

You won’t have time to build a simple DCF model or do more than look at multiples and qualitative descriptions, so you must think and act quickly based on limited information.

Sovereign Wealth Fund Exit Opportunities

The good news is that at the junior levels, plenty of people at sovereign wealth funds move around to other buy-side roles.

For example, it’s possible to win offers at middle-market private equity firms, funds of funds, family offices, and even venture capital and growth equity firms if you have tech investing experience.

You can also potentially join a portfolio company if you’ve worked in a group that does direct or co-investments.

On the other hand, it is extremely unlikely that you will go from a SWF to a PE mega-fund because they tend to “discount” SWF experience and prefer candidates from the top bulge-bracket banks.

You can get into good business schools in the U.S. and Europe from SWFs, but your chances at the top 2-3 schools are slightly lower because they also tend to discount SWF experience, especially in the Middle East.

That said, if you do IB/PE first and then work at a sovereign wealth fund for 2-3 years, your exit opportunities will be only marginally diminished.

Your chances at hedge funds depend heavily on what you did at your fund.

You can move to strategies like long/short equity if you have experience there, but if you’ve only done high-level asset allocation, you won’t be competitive.

The bad news is that the exit opportunities get much more limited as you move up the ladder to the VP/Principal/Director level.

Most traditional PE firms will not hire SWF professionals who lack normal PE experience at this level, so many people end up “stuck” at SWFs.

They don’t want to leave and take a big pay cut, but they also can’t easily move to other roles that offer similar pay.

Do Sovereign Wealth Funds Live Up to the Hype?

While sovereign wealth funds have their downsides, I would argue that they come close to offering the perfect mix of high compensation and relatively normal hours.

They are especially good in two specific situations:

1. IB/PE Burnout – Maybe you’ve worked in deal-based roles for a few years and enjoyed some of the work but want more of a life and a slower pace. In this case, joining a SWF for 2-3 years can be an interesting option that will set you apart from others without limiting your exit opportunities too much.
2. Long-Term “Buy and Chill” Career – If you do not care about advancing to the MD/Partner level in traditional PE or starting your own PE fund, and you’d be perfectly happy earning $500K – $1 million while working relatively normal hours, senior-level jobs at SWFs can be quite cushy.

The main problem with sovereign wealth funds is that everything between these two career positions is tricky.

Getting promoted can be very difficult and political, you’ll deal with a lot of bureaucracy, and if you stay too long, you’ll likely take a big pay cut if you decide to leave.

So, I’m not sure I would recommend SWFs over traditional PE/HF/VC/GE roles if your main goal is career advancement.

But if you’re willing to make a side trip to the desert for a few years, you might find a few diamonds in the rough right next to the oil wells.

The post Sovereign Wealth Funds: The Full Guide to the Industry, Recruiting, Careers, and Exits appeared first on Mergers & Inquisitions.

You would schedule a few days in a major financial center, such as New York, London, or Hong Kong, and you’d aim to meet a dozen or two bankers in that short period.

Ideally, you would have spoken with these bankers on the phone first to get better response rates.

If you came across as personable and knowledgeable in these meetings, you would gain an advantage in winning interviews and job offers – and you might even get to visit the bank’s office briefly.

I am using words like “was” and “would” and “would have” in this description because weekend trips have become less useful over time.

You can still get results with them, but they represent a more specialized networking strategy that works well mostly for certain types of candidates:

Why Are Weekend Trips Useful? And What Are They?

Investment Banking Weekend Trip Definition: In an IB weekend trip, you visit a major city and meet in-person with many bankers within a few days to build stronger connections, get referrals to colleagues, and gain an advantage in winning interviews.

Despite the name, a “weekend trip” does not necessarily take place on the weekend.

For example, you could visit a big city on Wednesday – Friday and meet with bankers on those days.

In practice, though, it’s often best to include one weekend day in your trip because you’ll need to step away from work/school for only 1-2 days in that case.

Weekend trips are useful because you can build stronger connections in real life than through email, the phone, or even Zoom.

Also, since you’ll meet many bankers within a short period, you could potentially get interviews on the spot – depending on the timing of your trip.

Weekend trips tend to be the most helpful for candidates who do not look good “on paper” but are enthusiastic, driven, and outgoing:

• Students at non-target schools.
• Anyone trying to win a job offer at the last minute (example).
• Anyone with an unconventional background (example).

Why Are Weekend Trips NOT That Useful?

On the other hand, there are many reasons why we recommend networking strategies such as informational interviews, cold emails, LinkedIn, and even cold calls over weekend trips.

Here are some of the problems:

1. Weekend Trips Require a Good Amount of Networking Before You Arrive – For example, if you haven’t conducted ~15-20 informational interviews with bankers or gotten a good number of referrals, it’s pointless to visit in-person.
2. Recruiting Has Moved Up and Become More Automated – So, it’s tricky to time these trips correctly, and they may not give you an advantage in getting past a HireVue, online tests, headhunters, etc.
3. Remote and Hybrid Work Have Become More Common – Depending on the city, you might not even be able to find that many bankers in their offices during the day.
4. Traveling is Expensive, and the Logistics Are Difficult – You must be able to take 2-3 days away from school/work, you have to pay for the transportation, and you might have to pay for a hotel or Airbnb if you can’t stay with a friend.

Because of these issues, weekend trips work best for undergraduates and recent graduates looking for summer internships, off-cycle internships, or full-time roles.

The MBA-level recruiting process is highly structured at the top schools, so independent trips won’t necessarily work.

And for lateral hiring, you’re better off sticking to email, the phone, and LinkedIn.

When Should You Schedule a Weekend Trip? And What Are the Requirements?

If you want to make at least one weekend trip, you need to decide on the timing before doing anything else.

If you’re a university student, it’s best to do the trip 2-6 weeks before internship applications open.

Unfortunately, the start date seems to change each year, and different banks and regions do it differently, so you’ll have to pay attention to the announcements.

For example, in the U.S., with banks launching summer internship recruiting over a year before internships start, you might aim for a weekend trip in the first quarter of the calendar year.

But in London, the entire process starts later, so a trip over the summer or early fall might be better.

You do not want to schedule your trip on major holidays, such as Thanksgiving in the U.S. or Christmas anywhere in the world.

Beyond the timing, weekend trips also work much better if you have already done a good amount of networking via informational interviews.

For example, if you’ve already spoken with 20+ bankers in one city over the past few months, you should get a decent response rate if you email them to let them know about your trip and ask about meeting up.

You could contact bankers you’ve never interacted with and ask them about meeting in-person, but the response rate will be very low.

(Exceptions might be for referrals or cases where you have a strong, specific connection with the person despite never speaking.)

The Step-by-Step Process for Investment Banking Weekend Trips

If you decide that a weekend trip is in your best interest, you can follow this process to set one up:

1. Email Your Contacts to Request Meetings 3-4 Weeks Before Your Trip – And be very specific about the dates and times. The location should always be “at or near their office” so it’s as easy as possible.
2. Book The Trip (If You Get Enough “Yes” Responses) – For example, if you plan to be there from Thursday to Saturday, you want at least ~5 potential meetings per day with several bankers on your “reserve list” (because cancellations are guaranteed).
3. Email Each Person for a Confirmation Right Before – In the 1-2 days before you arrive, send each person a reminder email and confirm they can still meet at the time and place you suggested.
4. Meet Each Person for 15-20 Minutes – You can go into more depth on certain topics, ask more about their story or background, or ask for more specific advice about the challenges you’re facing.
5. Make Your End-of-Meeting or Post-Meeting Request – This one depends completely on the mood and how receptive they seem, but you could casually ask to see their office for a few minutes, or you could just send them a quick email afterward to thank them and ask about interviews.

I won’t go into detail on each step because there’s a lot of overlap with informational interviews and other networking strategies, but here are answers to a few of the most common questions:

Which Type of Bankers Should You Target?

In general, you’ll get higher response rates from Analysts and Associates.

Senior bankers such as VPs and MDs often travel, or they might be “working from home,” usually far outside the city.

If you’ve spoken with senior bankers in previous informational interviews, sure, you could request meetings, but don’t bet too heavily on responses.

You also want a good mix of different banks; with a schedule of 15 meetings, it’s best to target 1-2 meetings per firm.

How Should You Request These Meetings?

Assuming you’ve already spoken with the person, an email request template might look like this:

SUBJECT: [University/MBA Name Student] / [Company Name Position] – Trip to [City Name] on [Dates]

“[Name],

Thanks again for taking the time to speak with me about [Describe the main topics in your first conversation] [a few days/weeks/months ago] (as a reminder, I’m the [Give 1-2 relevant facts about yourself to jog their memory]).

With recruiting season starting soon, I wanted to let you know that I’ll be in [City Name] in [Give approximate time frame and then the exact dates]. I know you’re extremely busy, but if you have a few minutes to spare, it would be great to meet up in-person so I could learn more about [Their firm, a recruiting strategy, or anything else they mentioned in your first chat].

I’ll be in your area, right near the office on [Firm Street Address], between [Time 1] and [Time 2] on [Dates]. Please let me know what works best for you, and I look forward to hearing from you soon.

Best regards,

[Your Name]”

What Should Your Meeting Schedule Look Like?

The main points are:

1. Clustering – For example, if you’re visiting New York, you don’t want to run between Downtown and Midtown in between meetings. Aim to spend the morning in one area and the afternoon in another.
2. Times – You should request meetings during the day, as it might send the wrong signal if you ask about dinner or meeting up at night (especially if you’re female). One meeting every 1-2 hours is fine. If you try to cram in too many meetings, you’ll run into problems because of cancellations, delays, and people showing up late.
3. Devices – You will be using your phone, tablet, or other devices a lot, so bring a portable battery pack and be on the lookout for coffee shops or places that allow you to charge.

A time/location list for an upcoming weekend trip might look like this:

What Should You Wear?

Business casual is fine, but you could bring a jacket if you need to look more formal for specific meetings.

It might look a little weird if you go to coffee shops dressed formally, especially since most bankers will also be wearing business casual.

What Should You Talk About?

These in-person meetings are extended informational interviews.

You might feel that you’ve already asked all your questions in the initial call, but there’s always room to ask more.

You can follow four main strategies:

• Strategy #1: Ask more in-depth questions about topics you previously discussed.
• Strategy #2: Report back on their advice, explain how you implemented it, and ask follow-up questions.
• Strategy #3: Ask about new/different topics, such as their experience at their current firm or what it’s like working there as a [Insert Person Type].
• Strategy #4: Pivot to non-work topics, such as hobbies, interests, or plans for an upcoming trip, holiday, or other time off.

You have to be a bit careful with Strategies #3 and #4 because they can backfire if you don’t ask the questions delicately.

What to Do After a Weekend Trip

After your weekend trip, send follow-up emails thanking each person and directly asking for recruiting help, an interview, or internal recommendations/referrals.

You should follow up quickly – within 24 hours of meeting the person – because this trip should be close to the start of recruiting season.

It’s usually not worthwhile to send typical “staying in touch” emails because you should aim to convert these trips into interviews ASAP.

Are Investment Banking Weekend Trips Worth the Effort?

Investment banking weekend trips are firmly in the “high-risk, high-potential-reward” category of networking.

Depending on your timing and profile, they might work very well for you.

But let’s be honest: if you’re seriously considering investment banking roles, you probably have good “qualifications,” and you’re probably not that outgoing.

If that’s you, you’d be better served by following other networking strategies and, if you have the time, money, and inclination, making a single weekend trip later in the process.

On the other hand, if you’re more of a “diamond in the rough” candidate – due to a lesser-known school, a lower GPA, a late start, or an unusual background – the IB weekend trip might be a critical part of breaking in.

Just make sure you visit a city where humans still interact with other humans in real life rather than through screens.

The post Investment Banking Weekend Trips: Pathway to Interviews, or an Outdated Recruiting Strategy? appeared first on Mergers & Inquisitions.

Anyone who’s ever traded stocks can understand long/short equity, and even simple global macro trades are easy to explain to the average person.

But if you invest in credit and try to explain your job to a normie, their eyes will glaze over as you talk about credit default swaps, crossover credits, or the springing maturity date found on page 374 of a loan agreement.

This complexity and the need to understand legalese mean that credit investing is less accessible to the average person.

But if you have the right knowledge and experience, credit hedge funds can provide a great career path:

What is a Credit Hedge Fund?

Credit Hedge Fund Definition: Credit hedge funds buy and sell fixed-income securities, such as high-yield bonds, distressed bonds, structured credit, and their derivatives; they profit by setting up trades that reduce one type of credit risk while betting on mispriced securities whose prices are likely to change in the future.

This definition already feels difficult to understand, so a quick example might help.

The simplest example of a long/short credit trade is to long one bond and short a similar bond issued by a peer company.

In other words, you buy one bond to earn the interest it pays and sell it if/when its price increases, and you borrow another bond, sell it, pay the interest coupons to the counterparty, and buy it back if/when its price decreases.

Let’s say that Target has a bond with an 8% Yield to Maturity, i.e., you earn an internal rate of return (IRR) of 8% if you buy the bond at its current market price and hold it until maturity.

Walmart, a peer company, has a similar bond, but its YTM is only 5%, even though the terms, seniority, and maturity are similar.

So, you long the Target bond and short the Walmart bond.

You’ll earn interest on the Target bond and will have to pay interest on the Walmart bond.

You could close out this trade in several ways:

• Hold Until Maturity – Assuming that neither company defaults and the 3% spread does not change, even if overall interest rates do, you’ll earn an annualized return equal to the YTM of Target Bond – YTM of Walmart Bond – Short Sale Costs.
• Sell/Buy When Prices Change – For example, maybe company-specific factors result in the YTM of the Target bond falling to 6%, meaning its market price has increased. The Walmart bond’s YTM is still 5%, so its market price is the same. You could now sell the Target bond and buy the Walmart bond to close your short position, and you would profit based on the initial spread, the increase in the Target bond’s market price, and the short sale costs.

This may not sound like a great result because it’s less than a ~3% annualized return.

But you can boost the results with leverage, and if the price change in the second scenario happens over a few months, it might result in a much higher return.

You might also look at this trade and say, “Wait a minute. Why would you short the Walmart bond? Wouldn’t you earn more simply by longing the Target bond to get the 8% yield?”

Yes, you would earn more in a favorable credit environment (falling rates), but this trade aims to hedge one type of credit risk.

The three traditional credit risks are default risk, credit spread risk, and illiquidity risk, and with structured credit, there’s also default correlation risk.

With this trade, even if overall interest rates change, meaning that both bonds’ market prices change, we’re still fine as long as the spread stays at 3%.

We’re betting that company-specific factors will change each bond’s price.

If we purchased the Target bond without shorting the Walmart bond, we would be exposed to company-specific and interest-rate risk: if overall interest rates rose, the bond’s market price would fall.

There are hundreds of possible credit trades, but a few simple examples include:

• Synthetic Long/Short – You make the same trade as above, but you use credit default swaps instead of the underlying bonds. You profit if you can sell protection on one bond for a higher price than you pay for protection on the other bond.
• Long a Longer-Term Bond and Short a Shorter-Term Bond – For example, if Target has a 10-year bond with an 8% YTM and a 5-year bond with a 4% YTM, you could long the 10-year bond and short the 5-year bond and bet that longer-term yields will remain above shorter-term yields.
• Long a Credit Pool and Short Specific Tranches – For example, you could long a mortgage-backed security pool but bet against specific tranches by shorting them or using CDS.

Types of Credit Hedge Funds

To simplify, we can say that credit hedge funds operate in three main areas:

1. Long/Short Credit – It’s similar to long/short equity, but with bonds rather than stocks. See the example above.
2. Structured Credit – Now you’re buying or selling pools of similar debt obligations rather than single securities or derivatives. See the Structured Finance article for more; subcategories include mortgage-backed securities (MBS), asset-backed loans (ABL), and collateralized loan obligations (CLO).
3. Distressed – The main difference is that the range of possible outcomes is much wider; similar to distressed private equity, a hedge fund could trade the distressed bonds, or it could use them to gain influence or control eventually.

Here’s how Preqin divided up the credit hedge fund universe (old data but still directionally correct):

“Investment-grade bonds” are not an explicit category because it’s much harder to find significantly mispriced securities in that space.

Besides these categories, we can divide most credit hedge funds into trading vs. investing.

• “Trading”-Focused Funds: These trade more-liquid credits, hold more positions (50-100+), use shorter holding periods, and use more leverage to amplify their returns. Often, they aim to profit from macro moves such as changing interest rates while hedging company-specific risk.
• “Investing”-Focused Funds: These trade less-liquid credits, hold fewer positions (perhaps 10-15), and use longer holding periods. These funds tend to favor distressed or stressed bonds and attempt to profit via fundamental changes in the issuer’s credit profile while hedging interest-rate risk.

Credit hedge funds share some traits with direct lenders, mezzanine funds, and distressed private equity firms, but they also differ in important ways:

1. Primary vs. Secondary Issuances – Direct lenders and mezzanine firms fund companies directly, i.e., they purchase their debt when the company issues it at the issuance price. But credit hedge funds usually purchase bonds in the secondary market after the prices have changed significantly, and they bet on changes in these prices.
2. Flexibility – Most direct lenders and mezzanine funds operate in a “loan to own” mentality, where the goal is to hold an issuance until maturity or change of control. By contrast, credit hedge funds can do almost anything, from long-term holding to long/short trades to complex trades involving derivatives.
3. Security Types – Other credit firms tend to focus on specific types of fixed income, such as mezzanine. Even distressed PE firms focus on the “fulcrum security” (the one most likely to be converted into equity in a bankruptcy process). But credit hedge funds could trade almost any type of credit.

There is a good amount of overlap between distressed hedge funds and distressed private equity firms.

The main difference is that PE firms are more likely to pursue control strategies that result in significant equity stakes or to gain influence in the restructuring/bankruptcy process.

What Makes Credit Hedge Funds Different?

This article from Barclays has some useful graphs, and the one with returns from 2000 – 2019 and 2010 – 2019 sums up the advantages of credit funds quite well:

In terms of other criteria/features:

1) Liquidity – This one varies by the trading vs. investing distinction, but credit hedge funds tend to offer less liquidity and longer lock-up periods than strategies like equities and global macro (but less so than activist investing).

2) Time Horizon – It could be days/weeks/months for trading-style funds or multiple years for funds that focus on distressed bonds.

3) Low-to-Moderate Leverage – The average credit fund uses far less leverage than a global macro fund and a bit less than the average equity fund.

Finally, credit funds tend to incur higher startup costs and require a higher AUM than other fund types because of the extra employees and outside services required.

For example, to process and check loan documents efficiently, you’ll have to pay for covenant-review services or lawyers.

So, if you are crazy enough to start a hedge fund, a credit fund is not exactly “DIY-friendly.”

The Top Credit Hedge Funds

Almost all the large hedge funds and private equity mega-funds are active in credit.

So, you’ll see well-known names like Ares, Elliott, Oaktree, and Cerberus at or near the top of most lists.

Many of these funds do everything from direct debt origination to specializations in areas like non-performing loans (NPLs).

If you want a list of smaller hedge funds that are known for their credit investing, here it is: Anchorage (now partially shut down), Angelo Gordon, Arbour Lane, Avenue, Bracebridge, Brigade, Canyon, Capula, Centerbridge, GoldenTree, Gramercy, Ellington, King Street, Magnetar, MJX, Saba, Silver Point, Symmetry, and Varde Partners.

Some firms on this list, like Saba, are more trading-oriented, while others, like Canyon, take more of a fundamental / “deep value” approach.

Who Gets Into Credit Hedge Funds?

To win offers at credit hedge funds, you need experience analyzing, trading, or investing in debt. In practice, that means:

• Any investment banking group that does a lot of debt issuances, including many industry groups and Leveraged Finance, but probably not DCM (less analysis).
• Credit research, either on the sell-side or the buy-side.
• Certain trading desks, such as rates trading or distressed debt.
• Credit rating agency experience.
• And, in theory, other credit-related roles such as direct lending, mezzanine, and distressed private equity.

Here are the most common backgrounds I found when looking up professionals currently working at credit hedge funds on LinkedIn:

• Investment Banking: 37%
• Sales & Trading: 23%
• Other Hedge Fund / Asset Management Roles: 23%
• Investment Banking + Private Equity: 7%
• Credit Rating Agency: 7%
• Research: 3%

If you have a trading background, you’ll be competitive for trade execution roles at investing-oriented funds and possibly for investment roles if you target a strategy like relative value or fixed-income arbitrage.

Otherwise, if you want to work at research/investing-oriented firms, you’re better off in a credit-heavy IB group or as a credit desk analyst in S&T doing the research.

I could not find many direct examples of people who worked in roles like direct lending and mezzanine and then joined credit hedge funds, but it seems possible if you target the right strategies.

It might just be that people in these roles are more interested in traditional private equity.

Interviews, Case Studies, and Credit Pitches

You can expect questions similar to the ones in a LevFin, DCM, or Restructuring interview, but they’ll be framed in terms of your views as an investor.

For example, they might ask you to explain a credit’s strengths and weaknesses and whether or not you would invest based on limited information.

They could also ask you why different credits might trade differently despite similar profiles.

For example, why might Bond A have a 10% YTM with an 8% coupon rate while Bond B has a 9% YTM with a 10% coupon rate if they have the same ranking in the capital structure?

The most obvious answer is different maturities, but liquidity/size (smaller issuances are less liquid), call protection, or different covenants might also explain this.

It also helps to know about CDS, options, and various credit indices (the BofA High-Yield Index, the LCDX, the LSTA 100, etc.) so you can use them to construct trade ideas.

Finally, especially for research-oriented funds, you should know the terms in credit agreements very well, ranging from covenants and change-of-control clauses to “Restricted Payment” (RP) baskets. There’s a good summary here.

For open-ended case studies (they tell you to find a company and credit), the easiest strategy is to do the following:

1. Read up on significant events that might act as catalysts, such as potential M&A deals, management shakeups, divestitures, and asset sales, and see if the companies in question have debt. You can search sources like the WSJ or FT to get ideas. Start with “potentially troubled companies” rather than specific issuances.
2. Do a quick debt analysis, focusing on senior notes through the mezzanine and preferred stock. If you don’t see a potential mispricing (e.g., the YTM on two bonds is similar even though one is subordinated to the other), move on. Otherwise, keep going.
3. Create several simple scenarios, such as what happens to the bonds if the company refinances successfully vs. its business declines and it can’t refinance vs. the company gets sold in an M&A deal. For distressed companies, you can consider alternatives like a debt-for-equity swap, liquidation, or DIP financing.
4. Use the output of the scenarios to argue that one or more of the company’s bonds is mispriced and could change in the future due to the catalysts you found in Step 1. For example, you could argue that in a standard refinancing or debt-for-equity swap, Bond A is undervalued by 15-20%; investors would lose money only in a full liquidation, which is extremely unlikely.

Recovery analysis will be a key part of almost any case study because you always focus on the chances of losing money in credit recommendations (example below for real estate):

You could easily have a “good business / bad credit” case or a “bad business / good credit” case, and you must be able to articulate why, such as a large value gap between first-lien and second-lien loans.

Credit Hedge Fund Careers

Not much in this section is specific to credit hedge funds, but I will point out a few differences:

• Schedule / Lifestyle – Expect the standard 60-70 hours per week at hedge funds, with longer hours during earnings season or “busy issuance season.” The need to follow new debt issuances and not just corporate earnings can make your average hours longer, especially at trading-oriented funds.
• Team / Culture – Credit investing tends to be more of a “team sport” than other strategies because you often depend on other groups for data and pricing information, and you may even hire an outside firm to review loan documentation. And if you’re a trader, you depend on the research team to dig into companies’ filings.
• Moving Around Within Credit – It’s easier to move from distressed to high-yield or structured credit than to do the reverse, and it’s far easier to move from distressed to investment-grade than to do the reverse.

Exit Opportunities

As with other hedge funds, reverse the entry points to determine the exit opportunities.

If you leave a credit hedge fund, you could move into many other credit-related roles, from direct lending to mezzanine to the credit platforms at the mega-funds.

You could potentially even go back to a role at a large bank, but few people do that willingly.

It’s more useful to point out the unlikely exit opportunities.

First, you probably don’t have a great shot at private equity unless you’ve already worked in it – or you’ve worked at a distressed fund, and now you’re aiming for distressed PE funds.

Some credit analysis is involved in private equity, but everything tends to be more process-oriented and geared toward long-term holding.

Second, you don’t position yourself very well for roles at normal companies, such as corporate development and corporate finance, because the skill sets are not related.

Finally, credit hedge fund roles are unlikely to lead to venture capital; even something like venture lending is a stretch because the analysis and deal work is quite different.

For Further Learning

• The Handbook of Fixed Income Securities – The Fabozzi classic; still useful for learning/reviewing the fundamentals.
• Leveraged Finance: Concepts, Methods, and Trading of High-Yield Bonds, Loans, and Derivatives – More useful for trading.
• Distress Investing – If you’re more advanced (written by a famous distressed investor and a professor).
• Distressed Debt Analysis – The classic Moyer guide.
• Corporate Financial Distress, Restructuring, and Bankruptcy – For an overview of everything.
• com for good-but-expensive credit data; you can follow their Twitter account for free webinars and case examples.
• The Distressed Debt Investing Blog – No longer actively updated, but the older information and examples are all still useful.

Credit Hedge Funds: The Final Verdict

I don’t think credit hedge funds are the best choice for everyone, but they are one of the more overlooked areas.

Part of the problem is that many courses give the impression that credit analysis is “boring” because the examples mostly deal with investment-grade bonds.

But high-yield bonds, distressed bonds, and structured credit are significantly more complex.

And although you focus on credit analysis, you need to understand entire companies and have views on entire capital structures, which means the job also involves equity analysis.

You can also get into the industry from many different roles, so it’s less restrictive than something like activist hedge funds or even global macro.

Some people also argue that the “pay ceiling” at the top levels is lower than at other fund types due to lower fees, higher overhead, and more predictable performance, but I could not find much real data to back up that claim.

And even if it were true, I don’t think the pay differences would matter much after a 10 or 15-year career.

So, I think the biggest issue with credit funds is accessibility.

It’s extremely difficult to “learn” how to read a long loan document independently, and it’s not viable to trade most bonds in your personal account because the denominations being traded are quite large.

So, you normally have to get real-world experience in credit and use that to move in.

But if you can do that, credit hedge funds might offer one of the best career paths.

Want more?

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