Hedge Funds interview preparation

Questions

100

Traced to a firm

39

Firms

16

Updated

September 2026

Asked at

All firmsMan Group10Balyasny Asset Management7Bridgewater Associates3DED.E. Shaw3Apollo Global Management2KKR2Oaktree Capital Management2Point722SCSquarepoint Capital2ACAQR Capital Management1BGBaupost Group1Coatue Management1HPS Investment Partners1Northern Trust1Viking Global Investors1Wolverine Trading1

Topic

All topicsStrategy taxonomy8Stock pitch10Short selling6Portfolio construction8Risk and drawdown8Performance and alpha7Event-driven and merger arb8Distressed and credit5Fund structure and economics7Financing, NAV and operations6Compliance and research process5Quant and systematic6India and Category III AIFs5Career and fit11

Level

AnyCoreIntermediateHard

Type

AnyTechnicalMarket viewBrainteaserCaseFit

1. 056Describe what distressed debt is.Distressed and creditIntermediatetechnicalOaktree Capital ManagementRisk · Los Angeles · 2022

   Say this

   Debt of a company that the market believes will not be repaid in full, so it trades at a large discount to par, conventionally below 70 cents or at a spread above 1,000 basis points. You are not buying a yield, you are buying a claim on a restructuring and underwriting what that claim recovers.

   Then walk it

   1. The analytical shift is the point. In performing credit you ask whether the company can pay the coupon. In distressed you assume it cannot, value the enterprise, and work out where your claim sits against that value.
   2. So the work is a waterfall exercise. Enterprise value first, then apply it down the capital structure in priority order: super-senior and DIP, secured bank debt, senior unsecured, subordinated, then equity. Wherever the value runs out, that is the fulcrum.
   3. Two distinct approaches, and it is worth naming both. Trading distressed is buying mispriced paper for a recovery, in and out. Loan-to-own is buying the fulcrum deliberately to convert into equity and control the reorganised business.
   4. It is a legal business as much as a financial one. Intercreditor agreements, covenants, collateral perfection, credit bidding rights, voting classes and the cramdown rules determine the outcome more often than the operating forecast does.
   5. The classic mistake is to buy on price alone. Paper at 30 cents is not cheap if the claim is structurally subordinated and recovers 10. Cheapness is expressed relative to modelled recovery, never relative to par.
   6. Say the limitations honestly: illiquid, so marks are estimates and can be stale; the timeline is long and legally uncertain, often 18 months or more; and the supply of opportunities is entirely cyclical, which is why a distressed fund can wait years with dry powder. Oaktree's own framing about the primacy of risk control rather than return maximisation is exactly the right register for this desk.

   Where candidates lose it

   Describing it as high-yield investing with more risk. It is a different discipline: recovery analysis and legal process rather than spread and coupon. If you cannot say the word fulcrum and sketch the waterfall, you have not answered a distressed interviewer's question, and at a firm with a documented risk-first philosophy you should also say what could go wrong before being asked.

   Expect next

   • What is the fulcrum security and how would you find it?
   • How do you value a company in bankruptcy?
   • What is the difference between trading distressed and loan-to-own?

   Reported by candidates at Oaktree Capital Management (Risk, Los Angeles, 2022). Source: Wall Street Oasis.

2. 057What is the fulcrum security, and how do you find it?Distressed and creditHardsuperdayDistressed debtSpecial situations

   Say this

   The fulcrum is the most senior claim that does not get paid in full, so it is the layer that converts into the equity of the reorganised company. You find it by valuing the business, then walking the capital structure down in priority order until the value runs out. Whichever tranche is sitting where the money stops is the fulcrum.

   Then walk it

   1. Worked example. Enterprise value 800. Secured bank debt 500, senior unsecured 400, subordinated 200. The banks are covered in full, the seniors receive 300 against 400 claims, so they recover 75 cents and take the new equity. Senior unsecured is the fulcrum; the subs and old equity get nothing or a nuisance tip.
   2. So the first job is the enterprise value, and the whole answer hinges on it. Use a multiple on normalised through-cycle EBITDA plus a liquidation floor on hard assets, and be explicit that you are valuing a restructured business without the current debt burden.
   3. Then build the waterfall properly, which means reading the documents. Structural seniority from where debt sits in the group, collateral and whether the lien is perfected, guarantees from operating subsidiaries, intercompany claims, and any leakage from drop-down or J. Crew style transactions that moved assets away from lenders.
   4. Then add the claims people forget: DIP financing, which is super-priority; administrative and professional fees, which in a long case are enormous; pension deficits; tax claims; and rejected lease and litigation claims that crystallise in the process.
   5. Why it matters: owning the fulcrum means owning the equity upside for a debt price, and it gives you a seat at the negotiating table because your class has to vote on the plan. That control is often worth more than the recovery arithmetic.
   6. The honest limitation: the fulcrum moves. A change in the EBITDA estimate or the exit multiple of one turn can shift it a whole layer, and the process itself can reallocate value through negotiation rather than arithmetic. So I would buy the fulcrum with a margin of safety, or buy the layer just above it and give up some upside for structural protection.

   Where candidates lose it

   Identifying the fulcrum from the capital structure table without an enterprise value. The fulcrum is defined by where the value breaks, so no valuation means no answer. Second trap: ignoring administrative costs and DIP priority, which routinely push the break a layer higher than a clean model suggests.

   Expect next

   • What happens to the fulcrum if your EBITDA estimate is 20 percent too high?
   • What is a DIP loan and why does it price so well?
   • How does a drop-down transaction hurt existing lenders?
3. 058What is the difference between credit and equity investments?Distressed and creditIntermediatetechnicalKKRDistressed Debt · New York · 2025

   Say this

   Credit has a capped upside and a contractual claim; equity has unlimited upside and no claim at all. That changes the question you ask. In equity you underwrite how good it can get; in credit you underwrite how bad it can get and still get paid.

   Then walk it

   1. The payoff shape drives everything. A bond at par returns the coupon if things go well and nothing extra if they go brilliantly. So credit work is asymmetric downside analysis: the base case is already known, and your job is to price the tail.
   2. Which makes the analytical emphasis different. Equity cares about growth, TAM, reinvestment and multiple expansion. Credit cares about free cash flow versus fixed charges, the maturity wall, covenant headroom, liquidity, and asset coverage in a liquidation.
   3. Credit also has documents and equity does not. Covenants, collateral, guarantees, restricted payment baskets and intercreditor terms are enforceable rights. A credit investor with a blocking position can shape outcomes that an equity holder can only watch.
   4. Priority is the other structural difference. In a downside scenario credit gets paid first and can end up owning the business, which is why distressed credit is the one place where credit investors capture equity-like returns.
   5. Metrics I would actually use: for credit, net leverage, interest coverage, fixed charge cover, free cash flow after capex and interest, and the maturity schedule. For equity, return on incremental capital, growth durability and free cash flow per share.
   6. The honest overlap to name: at a distressed price, credit is an equity investment wearing a bond's clothing, and at a stretched leverage level, equity is a call option on the enterprise. The frameworks converge in the extremes, which is exactly why a credit solutions group inside a firm like KKR sits next to the private equity team rather than away from it.

   Where candidates lose it

   Answering only with 'debt is safer'. The distinctive content is capped upside, contractual rights and priority, plus the different metric set. If you are interviewing for a credit seat, make sure you can name covenants and fixed charge coverage, and say what actually attracts you to a capped-upside payoff.

   Expect next

   • Why would you choose an asset class with capped upside?
   • What covenants would you want in a loan to a cyclical business?
   • When does credit analysis become equity analysis?

   Reported by candidates at KKR (Distressed Debt, New York, 2025). Source: Wall Street Oasis.

Firm tags come from public, anonymous candidate reports on Wall Street Oasis: strong signal, not sworn testimony. Firms are named as the places a question was reported, not as partners of Fin Maverick. Answers are written for this page to show how to think out loud; they are not scripts to recite.