Distressed Debt Investing at a Boutique Firm: Better Than a Bulge Bracket Sales & Trading Offer?
In the post-financial crisis economy, most people would be ecstatic to get a single offer on any sales & trading desk of any bulge bracket bank.
Forget about the desk itself, the type of work, the group’s performance, or the team – just winning the offer should be an amazing turn of events, right?
Years ago, the bulge bracket landscape seemed more attractive – with few restrictions on trading, sky-high paydays, and even more lucrative exit opportunities.
Today, though, it’s a tougher case to make… and boutique prop trading firms are looking like ever more attractive.
Our reader today went through this process himself, won multiple offers at both bulge bracket banks and boutique trading firms, and ultimately chose to join a boutique firm that focuses on distressed debt investing.
I’ll hand it over to him to explain why and how he chose the smaller firm – and what makes distressed investing so appealing:
Multiple Options on the Table
Q: Your story, please.
A: Sure… I’ll give you a brief summary because you’ve already written a lot about S&T recruiting before.
I came from a family that had no background in finance; my only “connection” was a family friend that worked in PWM.
I got interested when I attended a well-known university and joined the finance club there, where people were constantly talking about investment banking and sales & trading.
After that, I started absorbing information like a sponge, networking with alumni, and applying to almost every position under the sun, from equity research to investment banking to sales & trading.
My networking strategies were similar to what previous readers have described – emailing alumni, setting up informational interviews, getting referrals, and so on.
Q: Right. But it seems tough to prepare for so many types of interviews – IB interviews are completely different from S&T interviews.
What did you do?
A: A lot of it was getting every interview guide and resource I could find, doing mock interviews with alumni and older students, and having a slightly different “spark” for each version of my story.
For example, in IB interviews I talked about Barbarians at the Gate and explained how it made me interested in LBOs and deal advisory, but I wouldn’t say that in an S&T interview.
I also consolidated my stock pitch prep and prepared for a more detailed, 10-minute discussion in equity research interviews, and a much shorter pitch in S&T interviews – but I used the same companies to save time.
I always tried to pick companies that everyone could relate to, or companies with fun/interesting products – because they sparked better discussions.
Personally, I did not encounter a ton of brain teasers or math/probability-based questions at bulge bracket banks or at boutiques.
I prepared by reading through interview guides that covered those questions and categorizing all the problems (there are not THAT many different types of questions they can ask).
IMPORTANT NOTE: I did not interview at many “true” prop trading firms (my focus was more on market-making firms), which is why I received fewer math / brain teaser questions as well.
How to Turn Down a Bulge Bracket Bank’s Offer and Live to Tell the Tale
Q: Thanks for sharing.
Let’s just get right into how you made your decision, since you won multiple offers.
A: Sure. A lot of students flock to bulge bracket banks because they’re familiar names and they are perceived to be “less risky” than smaller firms.
If you see yourself working at a PE or HF mega-fund in the future, then sure, a bulge bracket bank is a better bet. You also get more networking opportunities and you get to know your entire class of analysts/associates.
But there are also plenty of downsides: for one thing, office politics are much more prevalent and there’s a lot more “cross-divisional risk” (e.g., someone in another group screws up, loses a ton of money, and your bonus suffers as a result).
You also run into situations where the MD never wants to leave and there are a ton of people between you and the MD – Analysts, Associates, VPs, etc.
MDs can make a ton of money and get their “golden handcuffs” after a point, which makes it much harder to advance no matter how good you are.
At a smaller firm, by contrast, you’re much more likely to get real work and real responsibility right away because group sizes are small (if it’s a group of 3, there might be 1 new hire, someone a few years out, and then someone with 20+ years of experience).
And while bulge bracket banks still pay well on paper, most traders at bulge bracket banks are now capped at $150K USD cash compensation, with the rest coming in the form of options, stock, and deferred compensation
It’s a way to keep you “trapped” there and incentivize you to stay one year, stay the next year, stay another year, and keep staying as more of the compensation is paid out.
No one would complain about earning “only” $150K, of course, but if you’re an exceptional trader you can earn higher cash compensation in your first few years at a boutique firm.
I actually would have made more money “on paper” if I had accepted one of my bulge bracket offers.
But I saw better opportunities, higher cash compensation, and more room for advancement at the boutique.
Q: Right, you make some interesting points there.
But why not start out at a bulge bracket bank to get the brand name on your resume, and then move to a boutique later on?
A: You could do that as well, but why bother? If you’re in it for the long-term, I think it makes more sense to start out at a smaller firm.
In trading, they care much more about your P&L and track record and less about the prestige of the firms you worked at.
Q: Fair enough, I think that’s in-line with previous comments from readers.
What can you tell us about the landscape of boutique trading / prop trading firms? There’s a lot of confusion because these firms are so secretive.
A: The main distinction is between prop trading firms and market-making firms.
Prop trading firms include places such as DRW and Jane Street that give you a certain amount of capital, allow you to trade, and then pay you a percentage of your P&L.
You’ll get tons of math questions and brain teasers in interviews at these places (unlike my experience above).
The market-making firms, by contrast, do exactly what the name suggests, but at a much smaller scale and for more thinly traded securities than bulge bracket banks (e.g., trading 500 or 2,000 bonds at a time instead of 10 million).
Then there are other variations, such as “broker’s brokers” – if two dealers want to remain anonymous via OTC contracts, for example, some firms fulfill that role.
Finally, some firms are much more programming-oriented than “traditional trading”-oriented.
I found information on these firms mostly via alumni networking. Without having access to a solid database, you’re shooting in the dark because most of these firms don’t have websites or easily accessible phone numbers.
So if you’re at a school without a huge presence in finance, it might actually be easier to start out at a large bank first, build up your network there, and then transition over once you’ve gotten to know people at these smaller firms.
Discovering the Distressed Desk
Q: OK, thanks for explaining that one.
A: Sure. My firm focuses on market-making, but we also do a bit of prop trading and sometimes take long/short positions.
It is really, really important to balance our own views with what clients want; if they want to buy, we have to sell, regardless of our own views on the security in question.
The main difference here is that fit is ultra-important. We have fewer employees than a bulge bracket bank has interns in a given year, so you get to know everyone on a first-name basis.
I was drawn to distressed investing (more specifically, distressed debt investing) because you use fundamental analysis more than in other trading groups.
Going back to the finance clubs I was in back in university, I was always more interested in understanding what drives a company and the factors that explain its long-term success (or lack thereof) than in short-term “momentum trading” or anything based on very quick trades.
Q: That’s it? Please, keep going.
A: Sure! A few other things I found interesting about distressed debt investing:
First, there are MUCH wider bid-offer spreads with distressed bonds than there are with equities or “investment-grade” corporate bonds.
We might pay you $0.20 on the dollar for your bond and let you buy ours for $0.35, which you’d never see in equities; for a blue-chip, highly liquid stock, you’d see a spread more like $100.01 – $100.02.
We sometimes buy into a distressed company for $0.20 on the dollar because we think it’s actually worth $0.60 – and if we’re even close to correct, that’s a huge gain that would be almost impossible to match with plain vanilla securities.
Companies here also tend to have interesting stories, and in order to succeed you need not only valuation skills, but also knowledge of the credit markets, familiarity with bankruptcy laws, and the ability to control your emotions and manage risk.
Before the Volcker Rule came along, distressed desks were hugely successful at bulge bracket banks; many famous traders who founded their own hedge funds actually started out on distressed desks.
Q: And I know you haven’t been working for that long, but what are your impressions of the job so far?
A: So far it has been great.
I normally arrive around 6:30 AM, catch up on the news, and see what’s happening with our positions and with bankruptcy cases.
After that, the day varies quite a bit depending on what’s going on.
Sometimes I’ll spend time analyzing companies and doing research on them; other times I might support the senior traders here by completing modeling/valuation work, researching the bondholders, or even contacting the lawyers involved in different bankruptcy cases we’re following.
There’s much more variety than you would see in a flow trading role at a bulge bracket bank, which is a major reason why I picked this job.
Another big part of the day is negotiating bid/ask spreads – since spreads are so wide for distressed bonds, we take a lot of calls from people asking to buy or sell at very different prices and we spend a fair amount of time figuring out what’s reasonable.
The nice thing here is that when the markets close, you pretty much go home and there’s less “wrap-up” work than at a large bank.
So I often leave between 5 and 6 PM, which makes for roughly a 50-60 hour workweek.
S&T jobs at large banks technically also follow “market hours,” but actually take up more time than that because there’s more busywork and face time.
So my per-hour compensation is definitely higher than what it would be at a bulge bracket bank, with the added bonus of not having to worry about deferred compensation.
Q: Awesome, thanks for sharing all that.
Any final thoughts for readers who are considering trading at large banks vs. trading at smaller firms?
A: More than the pay and hours and other specific numbers, think about the environment you want to be in.
Personally, the office politics and more repetitive work at a large bank would drive me crazy.
So I’m happy to accept more interesting work at the expense of not getting a brand name firm on my resume.
Oh, and if you’re interested in all different areas within finance, like I was, think about distressed debt investing: it’s a great way to combine the valuation / modeling skills you use in IB with the skill set of a trader.
Q: Great. Thanks for your time!
A: My pleasure.
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