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. The Walmart bond’s YTM is still 5%, so its market price is the same. 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.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.You could close out this trade in several ways: You’ll earn interest on the Target bond and will have to pay interest on the Walmart bond. So, you long the Target bond and short the Walmart bond.

Walmart, a peer company, has a similar bond, but its YTM is only 5%, even though the terms, seniority, and maturity are similar. 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. 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. The simplest example of a long/short credit trade is to long one bond and short a similar bond issued by a peer company. This definition already feels difficult to understand, so a quick example might help.

This complexity and the need to understand legalese mean that credit investing is less accessible to the average person.īut if you have the right knowledge and experience, credit hedge funds can provide a great career path: What is a Credit Hedge Fund?Ĭredit 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. Credit hedge funds might be the most consistently overlooked buy-side opportunity.Īnyone who’s ever traded stocks can understand long/short equity, and even simple global macro trades are easy to explain to the average person.īut 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.

Hedge fund resume