I’m happy to present our latest interview with Hunter founder of the Distressed Debt Investing Blog & Distressed Debt Investors Club. Hunter brings a different perspective to value investing. Enjoy!
Background:
Hunter has spent the majority of his career as a value investor. He currently works as an investment professional at a large money manager: focused on high yield and distressed debt investing. Previously, Hunter worked at two other hedge funds, where he focused on distressed debt and event-driven investing situations. He runs the Distressed Debt Investing Blog, How To Get A Hedge Fund Job , & The Distressed Debt Investors Club.
Interview with Distressed Debt Expert & Founder of the Exclusive Distressed Debt Investors Club
Copyright 2009 SimoleonSense.com
Background Questions:
Q. When did you first become interested in allocating capital?
A. When I was about twelve year old, my father used to walk around the house, holding the newspaper to his nose, looking at these tiny little numbers of the pages. Obviously, I inquired what he was doing – and he set out on explaining the stock market to me. I first started investing when I was 15 years old – I actually read the Intelligent Investor by the time I graduated college – not that it made much sense to me at the time! In college, I was a member of the investment club and began to become more and more fascinated in allocating capital, especially debt capital strategies as those seemed so overlooked. Given this interest, I read as much about Michael Milken as I could – I could not get enough of it. I remember reading his rationale for investing in high yield debt: Unlike common stocks, in a debt instrument, you know your return (yield), you know the length of your investment horizon (maturity), and you are higher up in the capital structure.
Q. How did your interest for finance evolve into distressed debt investing, starting two blogs, and developing an exclusive investment club?
A. Distressed Debt Investing is complicated. And complicated situations generally create inefficiencies. I used to look at my peers in college and ask them how they could ever get an edge on the common stock like Microsoft or General Electric. In distressed debt investing, you are more often than not sacrificing liquidity (these things trade very little), for superior information. I would make that trade anyday.
The blogs came about because I believe one day I would like to teach. And I enjoy writing. And blogging about something that interests me, that the general public generally is shut out of, was a perfect fit. I get many many emails a week from students and equity investors telling me I opened their eyes to a whole new investing world – it really is gratifying.
And the Distressed Debt Investor Club – well that is because I truly believe in common idea sharing among peers. If I can create a community of truly strong professionals focused on high yield and distressed debt investing, lots of us are going to make a lot of money just collaborating on certain investment opportunities.
Q. Given your investment niche, which investors do you admire? Besides these investors who else has influenced you?
A. Seth Klarman is, in my estimation, one of the best capital allocators in the world, if not the best. Others that I admire include Michael Price (Klarman taught him the biz), David Einhorn, and Howard Marks.And of course, Warren Buffett.
Investment Questions:
Q. Tells us about your approach to distressed debt investing-what is your focus/edge?
A. Understanding the “story” in distressed debt investing is vitally important. I want to know why a company is in trouble, or why the company is in bankruptcy, and if that problem is fixable. Value traps are situations where the problem is permanent. An over-levered capital structure is a fixable problem: swap debt for equity. A secularly declining industry like Tier 2 level newspapers (not the NYT, but not your local paper), is a permanent problem.
After understanding the story, and deciding whether the problem is fixable or not, I then try to characterize all the interests of the parties involved. People more often than not act on incentives (in the corporate and investing world these usually mean monetary ones). I try to figure out each parties’ incentives and then work backwards to see what outcomes those incentives, taken together, will more than likely occur. With that in mind, I value each part of the capital structure, weigh what I think will happen on a probabilistic basis, and then take the bet that offers the most compelling risk reward opportunity, with risk defined as permanent loss of capital.
Q. We are curious, what is the key to successful distressed debt investing? How does this differ from traditional value oriented equity investing?
A. Documentation is so important in credit investing. Understanding what a credit agreement or indenture will or will not allow makes all the difference. In the equity world, unless you are looking at a severely distressed situation, you are probably not going to read what the restricted payment basket carve out is.This is the stuff we pore over. I spend just as much time reading credit documents and bankruptcy rulings, as I do reading 10Ks.
Q. How do you approach the search process for generating investment ideas?
A. In the high yield and the distressed debt world, a lot of buysiders talk with other buysiders as well as trading desks of the investment banks. A lot of these situations are so estoteric, that you would not know they existed unless XYZ or ABC hedge fund or investment group is involved. I had lunch with a former colleague a few weeks ago and he told me about a situation that I literally had never heard of, and it was one of the best ideas I have seen in a long while.
Q. Give us an example of your best and/or worst investments? What did you learn?
A. It is hard to quantify in terms of return – but I would say the investment I am most proud of is my work on Enron. That was the most complicated situation at the time, and only a few people could initially understand it. We made a lot of money investing in the defaulted corporate securities – if I didn’t keep plugging away night after night, I do not think that would have been possible.
And worst investment? There are a number of distressed situations right now that we bought in too high because the valuation was incredibly compelling at the time – things just kept going lower. Time will tell if they ever pan out!
Q. How do you look at risk?
A. Risk to me is simply the probability and severity of permanent loss on capital. I will never invest in a situation where the chance of permanent capital loss is anything more than diminimus. Remember – the key to making money is not losing money. If you were simply flat in 2008, you would be so far ahead of the indexes it would be mind boggling. If you do not make any money on a particular investment and your capital is locked up for a number of years – I view that situation as FAR more compelling that any sort of loss.
Q. What’s your take on leverage?
A. Crazy as it sounds – Each firm I have worked with has never used leverage – despite everyone around me being leverage finance professionals. Leverage never produced EXCESS alpha - if you can make money without leverage, you will be just fine.
Q. Tell us about the role of special situations in your portfolio?
A. We try to take market neutral bets in the sense that a lot of our situations have no correlation to the market as a whole. If the market went down 1000 points tomorrow, maybe our positions would go down 1 or 2 points, but on the whole, these situations are micro dependant – your return will depend on your work on this situation in particular – not on the movements in the market. We also engage in merger arbitrage, liquidations, short term high yield debt that has a clear path to being paid off/maturing, and other strategies that fit the bill of not moving with the market.
Q. What has the financial crisis taught you?
A. That buying way out of the money put options and very tight CDS positions like Seth Klarman has talked about for the last 10 years is so crucial to investment success because it means you will be around until the end of the race. A lot of very very smart people lost their ability to play the game because investors could not take the volatility and the rug was pulled out from under them – and you know what – I bet those funds would be up 75-100% if their book was still running.
Let’s Talk About The Distressed Debt Investors Club:
Q. Tell us briefly about your exclusive investors club. Who is the intended audience?
A. The Distressed Debt Investors Club, like the few other investment “clubs” out there, is a group of investors committed to idea sharing and building a community around, in our case, high yield and distressed debt investing. We wanted to make the community as strong as possible and that is why we have chosen to go via the application route instead of simply opening the site up to everyone. I want to be able to see an idea on the site, and know, for certain, that I can trust XYZ member. The intended audience will be 90% professional investors, with the balance being retail and student investors, that have experience in high yield and distressed debt investing.
Q. What type of investment ideas you are looking for?
A. You know – I called it the Distressed Debt Investors Club, but distressed debt ideas are not SOLELY the focus. Users are able to talk about any idea they find compelling (even undervalued equities). The difference between other sites though: I hope more than 90% of ideas on the site are credit related. That could mean investment grade tightening trades, trade claim ideas, bankrupt bank loans, Freddie/Fannie MBS, etc. No one has attempted this before and we hope we can make it work.
Q. When can investors send you applications for the DDIC? Where should they send them?
A. The site: www.distresseddebtinvestorsclub.com has an Apply Link right on the home page. Follow the steps there, and applicants should be set.
Q. Given the write-up requirements for joining the club. How can prospective members add enough value so as to secure membership?
A. I want to be able to feel/hear your investment though process. I want to know your logic is sound and that your conclusions make sense given the information presented. Even if you are solely an equity investor, we want you to apply if you think you can add value. The more opinions and eyes we have on a particular investment, the better.
Q. Is there anything else you would like to tell us about DDIC?
A. We are terribly excited about the site. We thank everyone for their support (especially the beta testers) in helping us pull this together.
Personal Questions:
Q. What is the most interesting part of your job?
A. Learning something new everyday. As mentioned above, I read a lot of bankruptcy filings. With each one I learn something new, and put it in the toolbox.
Q. Which books have made you a better investor & decision maker?
A. I have read Security Analysis 2 times and plan on reading it a 3rd time. Anything that Ben Graham wrote is required reading. Same thing goes for Seth Klarman: Margin of Safety, if you can get your hands on it is phenomenal.
Q. Is there any type of schooling (i.e. MBA, CFA, Law School etc) that you would recommend for distressed debt investors.
A. I come from the “learn on the job” school of though. Reading a few bankruptcy documents every day, or going through and analyzing a few 10ks a week, for 2 or 3 will put you light years ahead (in my opinion) of someone just coming out of school without that sort of training.
Q. What’s your opinion of the efficient markets hypothesis and practitioners of technical analysis?
A. I hope people still think either EFH or Technical Analysis are true – as they create more inefficiencies for me to exploit.
Closing Questions:
Q. What advice would you give investors interested in distressed debt investments?
A. Find a few cases that interest you. These could be businesses in which you have analyzed before – at any point in time, certain companies in every industry are in distress or bankruptcy. Find the docket of these businesses/cases (if you can’t find a few, contact me, I have more than enough to analyze), and read through some of the filings. Get a sense of the language in that world. Find out why the company filed and try to determine for yourself if that problem is permanent or temporary.
Q. What does the future hold for you and your website? Are you going to do this forever?
A. I so humbled by the response the blogs have received. Hopefully the DDIC keeps the momentum going.In the future, I may launch a few other blogs / site – some investing niches still need to be introduced to the general public. And finally, for the future, I plan on starting my own investment vehicle – hopefully within the next 5 years.
Q. What message/advice would you give to readers of SimoleonSense?
A. Keep working on your goals. If you want to succeed in this business, do something every day that moves you closer to your goal. The person more than likely holding you back from where or who you want to be – is the person stares at you in the mirror everyday. Do not stop trying to succeed – no matter how you define success. Be relentless.
Hunter, we appreciate the opportunity to interview you. We wish you the best.
-Miguel Barbosa , Founder of SimoleonSense.com “Enriching Ideas for Intelligent Investors”
Below are some of our favorite Distressed Debt Investing Blog articles:
*Truth is we recommend reading all of the posts on Distressed Debt Investing. For novices we believe the list below to be the best starting ground.
1. All You Want To Know About The Distressed Debt Investors Club
2. FAQ: Distressed Debt Investors Club
3. Distressed Debt Reading List
4. Distressed Investing Concept
5. Distressed Debt Case Study
6. How to Become a Better Investor
7. Simplified Distressed Debt Recovery Analysis
Miguel Barbosa
Founder of http://www.simoleonsense.com/
Background:
Hunter has spent the majority of his career as a value investor. He currently works as an investment professional at a large money manager: focused on high yield and distressed debt investing. Previously, Hunter worked at two other hedge funds, where he focused on distressed debt and event-driven investing situations. He runs the Distressed Debt Investing Blog, How To Get A Hedge Fund Job , & The Distressed Debt Investors Club.
Interview with Distressed Debt Expert & Founder of the Exclusive Distressed Debt Investors Club
Copyright 2009 SimoleonSense.com
Background Questions:
Q. When did you first become interested in allocating capital?
A. When I was about twelve year old, my father used to walk around the house, holding the newspaper to his nose, looking at these tiny little numbers of the pages. Obviously, I inquired what he was doing – and he set out on explaining the stock market to me. I first started investing when I was 15 years old – I actually read the Intelligent Investor by the time I graduated college – not that it made much sense to me at the time! In college, I was a member of the investment club and began to become more and more fascinated in allocating capital, especially debt capital strategies as those seemed so overlooked. Given this interest, I read as much about Michael Milken as I could – I could not get enough of it. I remember reading his rationale for investing in high yield debt: Unlike common stocks, in a debt instrument, you know your return (yield), you know the length of your investment horizon (maturity), and you are higher up in the capital structure.
Q. How did your interest for finance evolve into distressed debt investing, starting two blogs, and developing an exclusive investment club?
A. Distressed Debt Investing is complicated. And complicated situations generally create inefficiencies. I used to look at my peers in college and ask them how they could ever get an edge on the common stock like Microsoft or General Electric. In distressed debt investing, you are more often than not sacrificing liquidity (these things trade very little), for superior information. I would make that trade anyday.
The blogs came about because I believe one day I would like to teach. And I enjoy writing. And blogging about something that interests me, that the general public generally is shut out of, was a perfect fit. I get many many emails a week from students and equity investors telling me I opened their eyes to a whole new investing world – it really is gratifying.
And the Distressed Debt Investor Club – well that is because I truly believe in common idea sharing among peers. If I can create a community of truly strong professionals focused on high yield and distressed debt investing, lots of us are going to make a lot of money just collaborating on certain investment opportunities.
Q. Given your investment niche, which investors do you admire? Besides these investors who else has influenced you?
A. Seth Klarman is, in my estimation, one of the best capital allocators in the world, if not the best. Others that I admire include Michael Price (Klarman taught him the biz), David Einhorn, and Howard Marks.And of course, Warren Buffett.
Investment Questions:
Q. Tells us about your approach to distressed debt investing-what is your focus/edge?
A. Understanding the “story” in distressed debt investing is vitally important. I want to know why a company is in trouble, or why the company is in bankruptcy, and if that problem is fixable. Value traps are situations where the problem is permanent. An over-levered capital structure is a fixable problem: swap debt for equity. A secularly declining industry like Tier 2 level newspapers (not the NYT, but not your local paper), is a permanent problem.
After understanding the story, and deciding whether the problem is fixable or not, I then try to characterize all the interests of the parties involved. People more often than not act on incentives (in the corporate and investing world these usually mean monetary ones). I try to figure out each parties’ incentives and then work backwards to see what outcomes those incentives, taken together, will more than likely occur. With that in mind, I value each part of the capital structure, weigh what I think will happen on a probabilistic basis, and then take the bet that offers the most compelling risk reward opportunity, with risk defined as permanent loss of capital.
Q. We are curious, what is the key to successful distressed debt investing? How does this differ from traditional value oriented equity investing?
A. Documentation is so important in credit investing. Understanding what a credit agreement or indenture will or will not allow makes all the difference. In the equity world, unless you are looking at a severely distressed situation, you are probably not going to read what the restricted payment basket carve out is.This is the stuff we pore over. I spend just as much time reading credit documents and bankruptcy rulings, as I do reading 10Ks.
Q. How do you approach the search process for generating investment ideas?
A. In the high yield and the distressed debt world, a lot of buysiders talk with other buysiders as well as trading desks of the investment banks. A lot of these situations are so estoteric, that you would not know they existed unless XYZ or ABC hedge fund or investment group is involved. I had lunch with a former colleague a few weeks ago and he told me about a situation that I literally had never heard of, and it was one of the best ideas I have seen in a long while.
Q. Give us an example of your best and/or worst investments? What did you learn?
A. It is hard to quantify in terms of return – but I would say the investment I am most proud of is my work on Enron. That was the most complicated situation at the time, and only a few people could initially understand it. We made a lot of money investing in the defaulted corporate securities – if I didn’t keep plugging away night after night, I do not think that would have been possible.
And worst investment? There are a number of distressed situations right now that we bought in too high because the valuation was incredibly compelling at the time – things just kept going lower. Time will tell if they ever pan out!
Q. How do you look at risk?
A. Risk to me is simply the probability and severity of permanent loss on capital. I will never invest in a situation where the chance of permanent capital loss is anything more than diminimus. Remember – the key to making money is not losing money. If you were simply flat in 2008, you would be so far ahead of the indexes it would be mind boggling. If you do not make any money on a particular investment and your capital is locked up for a number of years – I view that situation as FAR more compelling that any sort of loss.
Q. What’s your take on leverage?
A. Crazy as it sounds – Each firm I have worked with has never used leverage – despite everyone around me being leverage finance professionals. Leverage never produced EXCESS alpha - if you can make money without leverage, you will be just fine.
Q. Tell us about the role of special situations in your portfolio?
A. We try to take market neutral bets in the sense that a lot of our situations have no correlation to the market as a whole. If the market went down 1000 points tomorrow, maybe our positions would go down 1 or 2 points, but on the whole, these situations are micro dependant – your return will depend on your work on this situation in particular – not on the movements in the market. We also engage in merger arbitrage, liquidations, short term high yield debt that has a clear path to being paid off/maturing, and other strategies that fit the bill of not moving with the market.
Q. What has the financial crisis taught you?
A. That buying way out of the money put options and very tight CDS positions like Seth Klarman has talked about for the last 10 years is so crucial to investment success because it means you will be around until the end of the race. A lot of very very smart people lost their ability to play the game because investors could not take the volatility and the rug was pulled out from under them – and you know what – I bet those funds would be up 75-100% if their book was still running.
Let’s Talk About The Distressed Debt Investors Club:
Q. Tell us briefly about your exclusive investors club. Who is the intended audience?
A. The Distressed Debt Investors Club, like the few other investment “clubs” out there, is a group of investors committed to idea sharing and building a community around, in our case, high yield and distressed debt investing. We wanted to make the community as strong as possible and that is why we have chosen to go via the application route instead of simply opening the site up to everyone. I want to be able to see an idea on the site, and know, for certain, that I can trust XYZ member. The intended audience will be 90% professional investors, with the balance being retail and student investors, that have experience in high yield and distressed debt investing.
Q. What type of investment ideas you are looking for?
A. You know – I called it the Distressed Debt Investors Club, but distressed debt ideas are not SOLELY the focus. Users are able to talk about any idea they find compelling (even undervalued equities). The difference between other sites though: I hope more than 90% of ideas on the site are credit related. That could mean investment grade tightening trades, trade claim ideas, bankrupt bank loans, Freddie/Fannie MBS, etc. No one has attempted this before and we hope we can make it work.
Q. When can investors send you applications for the DDIC? Where should they send them?
A. The site: www.distresseddebtinvestorsclub.com has an Apply Link right on the home page. Follow the steps there, and applicants should be set.
Q. Given the write-up requirements for joining the club. How can prospective members add enough value so as to secure membership?
A. I want to be able to feel/hear your investment though process. I want to know your logic is sound and that your conclusions make sense given the information presented. Even if you are solely an equity investor, we want you to apply if you think you can add value. The more opinions and eyes we have on a particular investment, the better.
Q. Is there anything else you would like to tell us about DDIC?
A. We are terribly excited about the site. We thank everyone for their support (especially the beta testers) in helping us pull this together.
Personal Questions:
Q. What is the most interesting part of your job?
A. Learning something new everyday. As mentioned above, I read a lot of bankruptcy filings. With each one I learn something new, and put it in the toolbox.
Q. Which books have made you a better investor & decision maker?
A. I have read Security Analysis 2 times and plan on reading it a 3rd time. Anything that Ben Graham wrote is required reading. Same thing goes for Seth Klarman: Margin of Safety, if you can get your hands on it is phenomenal.
Q. Is there any type of schooling (i.e. MBA, CFA, Law School etc) that you would recommend for distressed debt investors.
A. I come from the “learn on the job” school of though. Reading a few bankruptcy documents every day, or going through and analyzing a few 10ks a week, for 2 or 3 will put you light years ahead (in my opinion) of someone just coming out of school without that sort of training.
Q. What’s your opinion of the efficient markets hypothesis and practitioners of technical analysis?
A. I hope people still think either EFH or Technical Analysis are true – as they create more inefficiencies for me to exploit.
Closing Questions:
Q. What advice would you give investors interested in distressed debt investments?
A. Find a few cases that interest you. These could be businesses in which you have analyzed before – at any point in time, certain companies in every industry are in distress or bankruptcy. Find the docket of these businesses/cases (if you can’t find a few, contact me, I have more than enough to analyze), and read through some of the filings. Get a sense of the language in that world. Find out why the company filed and try to determine for yourself if that problem is permanent or temporary.
Q. What does the future hold for you and your website? Are you going to do this forever?
A. I so humbled by the response the blogs have received. Hopefully the DDIC keeps the momentum going.In the future, I may launch a few other blogs / site – some investing niches still need to be introduced to the general public. And finally, for the future, I plan on starting my own investment vehicle – hopefully within the next 5 years.
Q. What message/advice would you give to readers of SimoleonSense?
A. Keep working on your goals. If you want to succeed in this business, do something every day that moves you closer to your goal. The person more than likely holding you back from where or who you want to be – is the person stares at you in the mirror everyday. Do not stop trying to succeed – no matter how you define success. Be relentless.
Hunter, we appreciate the opportunity to interview you. We wish you the best.
-Miguel Barbosa , Founder of SimoleonSense.com “Enriching Ideas for Intelligent Investors”
Below are some of our favorite Distressed Debt Investing Blog articles:
*Truth is we recommend reading all of the posts on Distressed Debt Investing. For novices we believe the list below to be the best starting ground.
1. All You Want To Know About The Distressed Debt Investors Club
2. FAQ: Distressed Debt Investors Club
3. Distressed Debt Reading List
4. Distressed Investing Concept
5. Distressed Debt Case Study
6. How to Become a Better Investor
7. Simplified Distressed Debt Recovery Analysis
Miguel Barbosa
Founder of http://www.simoleonsense.com/
