Beyond Mortgages, Fixed-Income Lives

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There is life in fixed-income - surprising though it may seem.

In a market devastated by losses from sub-prime mortgages and leveraged loans, several niches are seeing hiring activity, headhunters say. A few are even thriving.

Widely cited hotbeds are distressed debt investing and trading, and anything related to risk management. Both fields benefit directly from the credit crunch. Other fixed-income skills in demand include proprietary trading, flow trading for foreign exchange, interest rates and commodities, algorithmic trading, and fundamental analysis of financial institutions.

"What would be the golden job to have in 2008, it's risk - as long as you weren't at one of the wrong places in 2007," notes Wall Street compensation consultant Alan Johnson, managing director of Johnson Associates. He predicts average compensation for sell-side risk professionals in 2008 will hold steady or climb versus 2007, while banks' overall bonus pools shrink 30 percent or more.

Needed Skills for Risk Management

Employers are seeking a number of distinct skill sets in fixed-income risk management. With markets in turmoil and defaults expected to soar, institutions are devoting particular attention to managing counterparty risk, says Jay Gaines, chief executive of Jay Gaines & Co. These roles require both fundamental credit expertise and the business judgment to properly price and balance risk against the prospective return from a credit decision. While firms can shy away from principal trading and taking market risk, Gaines points out every financial institution must manage counterparty risk when trading with or lending to other institutions.

Expertise in quantitative models that help institutions track fixed-income market risk is another draw. "There's a growing need for better quant models and more transparency and people who can identify risk quickly," says Jim Geiger of Analytic Recruiting. He's seeing investment firms bring in people with experience implementing specialized systems for derivatives pricing, valuation and risk management. A typical recruit would be a quant Ph.D. who had implemented an outside software product at another investment firm. Demand for high-level quants is also coming from dozens of financial technology vendors that supply software for risk management.

Geiger also reports interest in middle-office risk analysts, often attached to trading desks rather than segregated in risk departments. These tend to be newly created roles. For these, the ideal candidate has back-office experience from a proprietary desk or hedge fund combined with a quant master's degree, programming skills and strong knowledge in a particular product area. "There's a career path for these people that leads into either a senior job in risk management or a trading desk role," Geiger says.

In distressed debt, both buy-side and sell-side institutions are committing large sums to pursue outsized returns from beaten-down assets and companies the markets unduly penalized. Hardly a week goes by without a report of another well-known name tossing their hat in the ring. The new distressed-investing groups are keen to hire portfolio managers, analysts and traders with a track record working with this asset type.

Fixed-Income Trading Opportunities

While trading desks in mortgage and structured finance are ghost towns these days, there is activity in Treasury and agency bonds, foreign exchange, commodities and interest rates, as well as distressed debt. That translates into job opportunities and bonus accruals for secondary-market sales and trading professionals. "Outside of tranche-type products, trading has been pretty active," notes Chad Dean, director of fixed-income recruiting at Integrated Management Resources, a search firm in Tempe, Ariz. Exceptions are corporate investment-grade and high-yield bonds, he says.

Geiger cites ongoing demand for algorithmic trading skills. These roles call for programmers with quant Ph.D.s and market savvy to design algorithms that execute trades or statistical arbitrage models that identify short-term profit opportunities. Traditionally concentrated in equities, algorithmic methods are broadening their reach in fixed-income, he says.

Opportunities are opening for sell-side bond research analysts to take proprietary trading roles with banks or credit-focused hedge funds, says fixed-income recruiter Craig Stocksleger of Comprehensive Recruiting. By jumping to trading, an analyst can create a profitable track record, the key to getting paid. Stocksleger also reports demand from both buy- and sell-side firms for seasoned analysts who focus on financial companies, as the market selloff starts to draw value investors to the sector. Many of these roles call for seven to 10 years covering brokers, banks or insurance companies, and very strong fundamental credit skills.