Josh Friedman and Mitch Julis built Canyon after learning their trade from Michael Milken. Now, in a challenging market, their discipline is put to the test once again.

The Hotel Bel-Air nestles jewel-like in the winding hills of tony Bel Air, one of the most affluent neighborhoods in Los Angeles. Driving there on Stone Canyon Road, you pass some of the citys most exclusive real estate. The hotel itself, reached by a bridge over a swan lake, was built in the 1930s and once home to Grace Kelly and Marilyn Monroe.

On a balmy evening in April 2014, jazz wafted over the hotel lawns as guests wandered across a wooden footbridge to an invitation-only party  an affair designed to coincide with the Milken Institute Global Conference taking place across town. Among the 150 or so sipping cocktails and serving themselves sushi were Harvard University economics professor Kenneth Rogoff and his wife; a clutch of California Institute of Technology professors; Bobby Shriver, a Kennedy cousin running for Los Angeles County Board of Supervisors; and two former Los Angeles mayors.

The hosts were Mitchell Julis and Joshua Friedman, representing the alternative-investment firm they co-founded, Canyon Capital Advisors. Mixing with the academics and civic leaders were investment officers and advisers from U.S. pension funds, foundations, endowments and family offices. Over dinner, guests listened to a talk from a Caltech scientist about a privately funded initiative to explore Mars.

The Hotel Bel-Air is a long way from Juliss Bronx and the Boston suburb that is Friedmans hometown. Today, with more than $25 billion in assets, Canyon, founded in 1990, is one of the top hedge fund managers in the world. Its success has been fueled by a rare alchemy between Friedman, 58, and Julis, 59  friends since Harvard Law School  and the culture they have built at the firm. That culture has been shaped by Canyons Los Angeles home, by the co-founders long involvement in bankruptcy and restructuring, and particularly by their tenure at Michael Milkens 1980s high-yield operation on Wilshire Boulevard. They owe much of their success to the evolution of credit in the capital markets  changes kicked off spectacularly by Milken at investment bank Drexel Burnham Lambert Group.

Canyon specializes in credit products. As Friedman says, We are value-oriented, event-driven investors with a credit orientation. In a world where banks are in retreat and demand for credit exceeds supply, thats not a bad place to be. The opportunity confronting Canyon is global in scale and potentially, as Milken himself might say, transformational.

Julis is precise about the nature of that opportunity: We look to anticipate or precipitate the next change of a complex balance sheet and participate in that change.

The Milken connection is important to both men. By providing credit in the form of junk bonds to companies that had been locked out of the capital markets, Milkens operation changed the financial landscape. Out of the rubble of Drexels collapse  the firm filed for bankruptcy in February 1990 after Milken was indicted for securities violations  Friedman and Julis founded Canyon.

For his part, Milken points out that Julis and Friedmans expertise goes well beyond credit. Both are very familiar with and spent a number of years with me understanding the entire capital structure of a company, he says. At Drexel, you could move through an entire capital structure by walking 100 feet in the trading room. Milken adds, Theyre an investment group for all seasons.

Today, Canyon invests in corporate credits, loans and bonds to sovereign debt, mortgage-backed securities and equities. It engages in loan origination and takes an active role in bankruptcies. From inception in 1993 through August 31, 2014, Canyons flagship fund had annualized returns of 10.7 percent. Returns on its more volatile Canyon Balanced Fund, launched in 2004, amount to 13.4 percent.

Theyre very smart, and theyre good people, says Ken Moelis, chairman and CEO of New York boutique investment bank Moelis & Co. and a veteran of UBS and Donaldson, Lufkin & Jenrette. Moelis also worked for Milken at Drexel and today lives near Julis. One of their strengths is that they have been extraordinarily careful in how theyve grown their business, he says. Theyve kept a good corporate culture, a culture of steadiness, and spent a lot of time looking into the nooks and crannies to see what would hurt them.

Canyon, like Moelis, is part of the Drexel diaspora  firms founded or built by Drexel alumni. Milken has said that there have been more than 200 such firms, including Apollo Global Management, GSO Capital Partners, Jefferies, Oak Hill Capital Partners and Ares Management.

Neither Friedman nor Julis particularly fits the swashbuckling stereotype of the hedge fund manager. They are conservative, Moelis says. They generate returns while maintaining a conservative view.

The firm is headquartered on the 11th floor of 2000 Avenue of the Stars, a glass and marble complex in Century City that locals call the Death Star, in a reference from Star Wars. The building is best known as the home of Creative Artists Agency, one of Hollywoods biggest talent agencies.

Finance, however, has little cachet in LA, despite Milkens continuing presence. Julis and Friedman can walk  or, more realistically, this being LA, drive  unrecognized, and their names may not score reservations at hot local restaurants. Employees insist that this relative anonymity helps immunize Canyon from the group think and competitiveness of New York and still leaves them hungry.

Canyon is also relatively small, with about 240 employees. Staff turnover is low, and loyalty is high. The average tenure for the 12 Canyon partners is 13 years. Breakdowns, of course, do occur. In 2013, Canyon had to reshuffle its real estate business after a difference of opinion over strategic direction. The desire to keep the inner circle intact made parting with the longtime head of the group, K. Robert (Bobby) Turner, difficult. Canyon is currently rebuilding that business.

Many say that Friedman and Juliss greatest loyalty is to each other. Colleagues and friends agree that the pairs relationship is more akin to that of siblings or a long-married couple. They will argue a point as long as they want, says Canyon partner and head of debt trading Desmond Lynch, who joined the firm in 1993. But once one of them has made a decision, the other will back them up.

Adds Patrick Dooley, a now-retired partner who also joined in 1993: The key strength they have is the time theyve spent together and the trust thats been built up. Mitch might frustrate Josh at times, and, similarly, Josh Mitch. But when you get down to it, they know they have each others backs. They know that together they have been far better than they would have been on their own.

Friedman and Julis met at Harvard, both in pursuit of joint degrees in law and business. As Friedman recalls it, Julis stood out: Mitch was always the one at the front of the class asking the teacher questions. The pair were in the same section and study group and roomed together for a time. Julis is more obviously intense than the polished Friedman. Friedman has a trim, wiry frame; sports frameless glasses; and dresses like an investment banker. Juliss disregard for fashion is manifest in his orthopedic shoes, which exasperate and amuse Friedman.

Julis, 59, grew up a few blocks from the Bronx Zoo, the son of European immigrants. His father was Greek-Jewish; his mother  née Rabinowitz  was Polish-Jewish. The couple met while attending City University of New York. Juliss mother became a speech therapist; his father, a social studies teacher and junior high school assistant principal. Julis and his brother attended New York City schools until the prospect of a torturous school commute caused the family to move to the suburbs of Rockland County. When Julis was ten, he suffered from a hip ailment and underwent a year and a half of bed rest. He attended sixth grade via an intercom system connecting his home to his school. Julis wanted to be a diplomat, but at Princeton University he took a well-known course in health economics taught by professor Uwe Reinhardt and decided to study business and law.

Friedman, 58, grew up outside Boston. His parents families had also emigrated from Europe. His father was a mechanical engineer who was drafted in World War II before he could finish college. His mother also taught in the public schools. Friedmans most successful uncle, a businessman, had gone to Harvard, and his father encouraged him to get an education. Friedman recalls, He would always tell me: Go to Harvard, study law, but dont practice as a lawyer. And dont spend your life working for someone else. He majored in physics at Harvard College, went to the University of Oxford on a Marshall Scholarship, then returned to Harvard for graduate work.

That was 1978, the same year Congress passed the Bankruptcy Reform Act, establishing Chapter 11 and making it easier for insolvent companies to reorganize. Bankruptcy reform would prove key to the development of the high-yield and distressed-investment markets. Using Chapter 11, the courts established a road map for creditors in bankruptcies, making it possible for investors to calculate a return on capital and more willingly lend to companies that lacked investment-grade ratings.

After graduation Julis, who had considered pursuing entertainment law, accepted a job with New York law firm Wachtell, Lipton, Rosen & Katz. His work involved the bankruptcies of show business figures including Jerry Lewis. In 1982 he wrote an article for Los Angeles magazine on entertainers who were using bankruptcy in creative ways to avail themselves of the advantages of the new code. That was followed by other pieces, including one for Rolling Stone on deal making and deal breaking in the record industry that got spiked, Julis was told, after the intervention of music mogul David Geffen. Juliss reporting for another Los Angeles article, on moneymaking strategies in the Reagan Recession of 198081, led him to Drexel.

The firm was minting money in the recession thanks to Milken and his high-yield operation. In the 70s, while working at Drexel in New York, Milken had concluded that debt from fallen angels  companies that had slipped from investment-grade status  performed quite well. At the time, the market for such bonds was small. Over the next two decades, Milken grew the junk market into a multitrillion-dollar empire; he moved his operation west in 1978. He attracted financiers, money managers and entrepreneurs such as Ted Turner and Steve Wynn, and effectively pried open a U.S. bond market that long had been the preserve of major companies.

Before Milken few investors bought non-investment-grade bonds; they were considered too risky. What Mike said was,You can pick your risk-reward part of the spectrum, and if the rate is right, then buy it, says Moelis. That, in turn, opened up an opportunity for less creditworthy companies to sell bonds. You have to take yourself back to 1980, Moelis says. Within a decade U.S. rates had risen from 4 percent to more than 18 percent. A tremendous risk to small business was their inability to get fixed-rate long-term financing, he explains. You couldnt tap the bond market; your choice was to go with bank debt and the risk of a floating-rate note or try to tap the equities market. With junk bonds, Moelis adds, all of a sudden, a growth-business person said, Wait, I can depend on a fixed rate for several years? It was a unique thing.

Julis joined Drexel in November 1983. His group was focused on the debt of companies that had crashed to earth. One day Drexels director of international capital markets, Peter Ackerman, said he was looking for someone to join as a partner in financing the burgeoning leverage-buyout business and other specialized capital market transactions. Julis had just the person: his law school friend Friedman.

Friedman had been hired by Stephen Friedman (no relation) at Goldman, Sachs & Co., where he was working in the M&A group. M&A was booming, and they were building a business. Still, Drexel sounded intriguing. Friedman flew to Los Angeles to interview. And, Julis recalls, to everyones shock and amazement, he joined Drexel.

Milkens Drexel was an incredible learning organization, Julis says. Mike was a great leader. Milken remains a charismatic and controversial figure. Speaking at his conference in April, he said he entered the financial markets because of the Watts riots here in Los Angeles [in 1965] and the idea that access to capital was the same as other issues of human rights that were being addressed. Theres some truth to that, though Milken and his legacy are still much debated. He really does believe that broader access to credit and the ability to build businesses is the key to sharing in the American dream and that the high-yield market is a distinctively American institution. The first junk bonds, he insists, were issued by Treasury secretary Alexander Hamilton to pay off the states Revolutionary War debts.

Others see Milkens junk bond revolution differently: Watts remained poor while the junk bond king grew phenomenally rich. Even at the height of their power, Milken and his network were outsiders. They were, writes Connie Bruck in her 1988 book on Milken, The Predators Ball, a band of mainly small-time entrepreneurs, raiders, greenmailers, the have-nots of the corporate world, who had had only bit parts to play until Milken made them stars. Milkens junk also empowered T. Boone Pickens and Carl Icahn with their M&A assault on corporate America in the 1980s.

By 1988, as the Reagan boom faltered, Milken found himself the subject of investigations. In 1990 he pled guilty to six counts of securities and tax violations. He eventually served 22 months in prison and was barred from the industry for life. By then, Drexel had failed.

The firms bankruptcy put Friedman and Julis on the street. Julis was interviewed by George Soros and Stanley Druckenmiller; Friedman, recalling his fathers advice, wanted to start his own firm. Persuading Julis to turn down Soros was fair, Friedman says, since he had given up the chance of becoming a Goldman partner. I figured Id screw up his career since hed screwed up mine, Friedman jokes. Julis simply says, I wanted to go into partnership with Josh.

Milken puts his own spin on it. The movement to stop the democratization of capital began in 1985, he says, with attempts to ban interest deductions on corporate debt. Many people felt they could knock me off and end the process, he says. Instead, Drexels talent diffused. If you have the most talented people, theyre naturally going to want to work with the very best, he says.

The week after Drexel filed for Chapter 11, Julis and Friedman started Canyon with three other partners. They managed money in separate accounts, including one for Bank of Austria, and ran a bankruptcy and restructuring advisory business. They also had a broker-dealer. We were doing anything we could to keep the lights on, says Julis.

Then one of their early investors suggested that Canyon go the hedge fund route. Friedman and Julis agreed and launched the firm as a hedge fund, registering with the Securities and Exchange Commission as an investment adviser in 1994.

Mitch and Josh were working relentlessly, recalls Dooley, who headed research before retiring in 2012. Mitch lived in the office. Josh was focused on investments but also spent a lot of time helping to structure the evolving business. Julis had an investing background; Friedmans expertise was investment banking and underwriting.

The offshore version of the Canyon Value Realization Fund started in 1993, with the onshore fund launched in late 1994. The fund specialized in deep-value investment opportunities, mostly in credit. Using Friedman and Juliss network, the fund was able to originate its own loans for corporate issuers. Though the pairs backgrounds were in corporate credit, the Canyon Value fund can invest in all kinds of securities, including equities, asset-backed securities, convertible notes and sovereign debt.

When we were first starting out, the intensity was much higher, Lynch says. A small loss could be catastrophic. Everything was a make-or-break decision. Tensions flared, often between Friedman and Julis. The early days were a little more volatile, agrees Dooley.

Yet the pair recognized the value of their combined strengths. Julis was the dogged researcher, Friedman the Wall Street professional. As Dooley says, Josh is the guy who is pushing the accelerator; Mitch is the guy asking, Are you sure this brake on the car works? When an analyst explains a deal, he says, Josh is the guy you sit down with and he says,I love this; how much can we put on? Mitch is the guy asking 25 more questions. Or as Friedman himself says: I make sure we take risk. Some might call me the risk-on guy and Mitch the risk-off guy.

From the start, Canyon was institutional in its approach. We registered with the SEC in 1994, Friedman says. You have to be compliance-focused and totally transparent. Chicago-based fund-of-funds firm Grosvenor Capital Management was an early investor. With that and relationships from the Drexel days, the firm could establish a reputation with other institutions. By 1998, Canyon was a firm to be taken seriously. After years of solid performance, it was attracting as much as $50 million in assets a month.

When Dominique Mielle graduated from the Stanford University Graduate School of Business in 1998, her classmates thought she was crazy. Rather than putting her MBA to work at an Internet start-up, Mielle, who had an undergraduate degree in business management from Frances École des Hautes Études Commerciales, wanted to work in finance. So while most of her class signed up with companies with com in their names, Mielle joined Canyon.

They seemed very entrepreneurial, she says. I thought, This is somewhere I can really have a career, make a difference, be someone who matters. And have an adventure.

When Mielle first interviewed, before graduating, Canyon had $1 billion in assets. By the time she joined, in September, Canyon was down to $500 million. Mielle thought shed made an error in her notes. I was a little puzzled as to how I had written down double the size of the assets when I interviewed. The disparity, however, lay not with Mielle but with the sovereign credit markets.

In August 1998, Russia suddenly announced it would not repay its debt, triggering a massive sell-off in the global credit markets. Believing it could apply the same analysis to sovereign balance sheets that it had to companies, Canyon had diversified into sovereign credit and emerging-­markets debt. We had been following that trade around the emerging markets, and then we got involved with Russia, recalls debt-trading head Lynch. When it collapsed, you literally had the market close its doors on a Friday afternoon. The Canyon Value Realization Fund ended 1998 down some 15.75 percent  its first losing year.

Canyon bailed out of emerging-markets debt, believing it lacked the specialized skill set to invest. These days it invests in the sector through a joint venture, ICE Canyon. Julis recounts a more personal story about the episode. When his mother heard Canyon had invested in Russian debt, she told her son: How could you give money to those people? Dont you remember what they did to your grandfather? Juliss maternal grandfather grew up in Bialystok, on the Polish-Russian border. The Soviet occupation decimated Bialystoks Jewish population from 50,000 in 1941 to 1,085 at the end of the war.

By mid-2001, Canyon was thriving again. Allen Ba, now a senior portfolio manager, joined that year. An English major from Dartmouth College with an MBA and JD from the University of California, Los Angeles, Ba had a job in New York working at Crown Capital Group, a private equity firm started by Friedmans former boss Ackerman. When Ackerman decided to close up shop, he asked his young analyst, a native Angeleno, what he wanted to do. I said I wanted to go back to LA and try my hand at public markets, Ba says. Ackerman made some calls. At some point in that process, I met up with Josh and Mitch, and we just clicked, Ba adds.

Bas first day at Canyon was September 11, 2001. The terrorist attacks deepened a recession that had begun in March 2001. Corporate default rates spiked, creating opportunity for deep-value and distressed investors like Canyon.

Mielle found herself analyzing the debt of bankrupt airlines, which had been grounded following the attacks. Ba worked on other corporate bankruptcies. Senior portfolio manager Todd Lemkin joined Canyon in 2003  another English major and California transplant looking to go home  and focused on distressed corporate credit. It was a great environment to generate returns, Lemkin says. It was a lot less competitive.

Today, Canyon partners Mielle, Ba and Lemkin all say they learned from Friedman and Juliss knowledge of markets and corporations, and their approach to making investment decisions. The atmosphere at Canyon, Mielle says, feels more like a study or a library than the trading floor in the movie Wall Street. People are very serious, and they put a lot of heart and effort into their work; theres a lot of time spent studying and communicating. Says Ba: Some of the best, most formative conversations have been ones where it was just Mitch and me or just Josh and me or the three of us discussing a particular credit or market. Part of the intent was to train me to develop the thought process and investment approaches they wanted.

Friedman and Julis believe the dual CIO-CEO role has been beneficial to Canyon. If you look at Goldman Sachs at the time they had two CEOs with complementary skill sets, it worked really well, says Friedman. The reference to Goldman is telling. Whereas Julis is content to have Drexel on his résumé as his only other finance job, Friedman identifies as much with Goldman as he does with Drexel. This isnt just ego; Canyon has taken pains to cultivate good relationships with the Street.

The research department at Canyon is Juliss domain. The firm has long used academics as advisers. In recent years Canyon has talked a lot to Rogoff, professor of public policy and economics at Harvard. Rogoff and his co-author Carmen Reinhart, from Harvards John F. Kennedy School of Government, are among the leading experts on credit market crashes, which they summed up in their influential and controversial 2009 book, This Time Is Different: Eight Centuries of Financial Folly.

Canyon was early to spot the subprime mortgage market bubble. Led by Ba and another portfolio manager, Jeffrey Davis, the firm started shorting mortgages in 2005. By 2007 the trade was proving extremely profitable. The firm, however, was not prepared for the extent of the 2008 credit market collapse and ended the year down 29 percent  its worst year ever. These results are both disappointing and unsatisfactory, Friedman and Julis wrote to investors. We believe they reflect investment decisions that failed to anticipate adequately the speed and severity of market disruptions.

Michael Rosen, chief investment officer of Los Angeles asset manager Angeles Investment Advisors, says the way Canyon handled its poor performance in 2008 left him with more respect for the firm. They were always available and completely transparent about what was going on in the portfolio and with the firm, he says. In the midst of the turmoil, we had access to everyone at the firm. Rosen knew Friedman was working long hours and was deeply shaken by what had happened. He felt a personal obligation and responsibility to manage out of the mess, Rosen says.

But the credit markets and credit-focused investors were about to experience a massive recovery. In 2009 the Canyon Value Realization Fund returned 54.95 percent, making money in nearly every area of the portfolio, with big winners in bank debt, high-yield bonds and securitized assets. The more concentrated Canyon Balanced Fund, which can have higher equity market exposure, finished up 75.67 percent.

The 2008 collapse produced a spasm of banking reform. In the U.S. the Volcker rule of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 prevented banks from trading for their own accounts. The Basel Committee on Banking Supervision pushed through higher capital requirements for banks, limiting leverage and reducing the amount of illiquid assets they could hold. Meanwhile, the Federal Reserve began buying up debt and lowering interest rates, flooding the markets with easy credit to boost asset values and prop up the economy. The result: a boom for hedge funds that could step into the breach.

The credit markets panel is an annual high point of the Milken Institutes Global Conference. The session includes key credit market players and is moderated by Milken himself. The April 2014 conference was no exception. As he has in the past, Friedman participated, joining Apollo co-founder Marc Rowan, GoldenTree Asset Management CIO Steven Tananbaum and Moodys Corp. chief risk officer Richard Cantor. Early in the session Milken asked how the speakers got into finance. You can blame yourself with respect to half the panelists here, quipped Friedman. Milken directed the conversation to European balance sheets  and opportunities. Youve got a couple of hundred billion dollars at least that is going to be sold, Friedman said. The system to sell the debt is a process, its competitive, and youre competing against other sophisticated people, almost all alternatives people. The market is less crowded than in the U.S., and most of your competitors are people who have double-digit returns in mind. The assets are large: $50 million to $500 million blocks. That takes competition down to a place where at least you have a credible shot at having very good value, which stands out in significant contrast to most other credit markets that we participate in today, Friedman said.

In September, Canyon led a consortium of investors buying a 200 million ($257 million) portfolio of performing and nonperforming loans from Spain in a so-called bad bank set up to hold distressed assets. The portfolio largely consisted of loans backed by residential buildings in and around Madrid. Canyon benefits from the big European banks need to sell balance-sheet assets. Lemkin, who runs Canyons European effort, began investing in European distressed telecommunications securities for the firm in the mid-2000s. There are just not a lot of guys that are going to buy this stuff, he says. Canyon isnt directly betting on the Spanish economy improving. The price of the loans was sufficiently discounted that Canyon felt it had a valuable option on any macroeconomic recovery.

In the U.S., Canyon has successfully invested in residential-mortgage-backed securities. By the end of 2012, the firm had generated more than $4.2 billion in gross profits from its RMBS position since getting into the market in 2005. In 2013 it produced an additional 26.2 percent. For 2014 the RMBS portfolio was up 22.8 percent through September 22. But Ba says the nature of RMBS trading is changing. After shorting the securities in 2005, Canyon started investing in agency derivatives in mid-2007, then buying higher-quality nonagencies in 2008 and lower-quality debt in 2011.

We dont see an obvious gift trade right now, Ba says, but you are still nowhere near a normalized marketplace for mortgages. Three vital factors will affect mortgages in the near term. First, rising interest rates will trigger market volatility. Second, the Fed will no longer be the buyer of most new mortgage products. Third, the fates of Fannie Mae and Freddie Mac are unclear.

Friedman is particularly concerned about market structure and what he calls the liquid credit guys. Those are investors, such as mutual funds and exchange-traded funds, that require daily liquidity. With the banks in retreat, such funds have become the dominant market participants, but some are buying assets with contracts that take 60 days to settle. Spreads on U.S. corporate credit have narrowed as investors have sought yield and borrowing standards have become looser.

We continue to source what we believe are undervalued individual securities with high return potential, but we are forced to work harder than ever to do so, and we have to cast a wide net, Canyon wrote in its 2013 year-end letter to investors.

One intriguing long-term option is European and U.K. loan origination. At 68, Milken is as evangelical as ever and continues to argue that nothing spurs job creation as effectively as access to credit. On the credit markets panel, he said investors had an almost moral obligation to build high-yield markets around the world, particularly in China and Europe. In Europe lending has long been dominated by banks. Now, as banks retrench and shed illiquid securities, European firms in need of capital may finally turn to alternative lenders and secondary market participants, as they do in the U.S. The understanding of access to capital and the skill of our panelists here to help these markets grow, I think, is key, Milken said.

Still, Canyon is cautious not to overstate the situation. Its happening, Lemkin says. The European high-yield market has absolutely been growing. But it is still tiny compared with the U.S. and lacks liquidity, he adds: There is nowhere near the scale of the retail buying base. The U.S. market works because youve got trillions of dollars looking to go into the market through mutual funds and ETFs. And he notes, There is a regional bias toward domestic issuers in Europe, which the U.S. does not have. Though many of these European countries share a currency, many euro zone bonds still trade almost entirely in their countries of issuance.

Milken waves off the potential dangers of an economy that encourages high levels of borrowing, saying that the mistakes that have been made, particularly in recent years in the housing market, dont have to be repeated in other countries in the world. But the realities of capital markets suggest that increased access to credit feeds excessive speculation and a boom-and-bust cycle. Given its own history, Europe  particularly Germany  is acutely sensitive to debt. That history is not lost on Canyon.

At the Milken Institute conference, Julis usually sits on a panel devoted not to the markets but to global governance. This year his panel included former European Commission member Mario Monti, who was named prime minister of Italy in November 2011, amid that countrys debt crisis. Monti successfully passed a package of austerity reforms  measures that cost him the February 2013 election. Such are the political realities of European economic reform.

Greece has suffered its own dysfunctions. Since the countrys first debt crisis, in 2009, a number of hedge fund managers have shown interest in Greece, Canyon among them. The firm has investments in Greek sovereign debt and corporate credits. Lemkin and Julis have frequently traveled to Greece, meeting with political, central bank and business leaders. Having Julis in such meetings is a unique experience, Lemkin says: Mitch loves the political-economic world theater part of it. There are interrelationships between Greece and Turkey and Russia and Germany. He works extremely top down.

Meanwhile, Julis and Friedman have begun to look beyond the firm. Three years ago Julis and his family gave $10 million to Princeton to establish the Julis-Rabinowitz Center for Public Policy and Finance at the Woodrow Wilson School. Named for Juliss parents, the center aims to promote research on financial markets and the macroeconomy, and their intersection with public policy. Both my parents were educators in the New York school system during the fiscal crisis in the 1970s, and I am reminded of those tumultuous times when assessing the postLehman Brothers world, Julis said in a statement announcing the gift. Boom-bust cycles and their adverse social consequences are going to continue to occur unless public policy makers develop a better understanding of the strengths and weaknesses of our financial system and can formulate appropriate solutions.

Although Friedman says he still feels like an East Coaster, he has adapted to Los Angeles. In 2012, he was named to the board of trustees and is chairman of the investment committee of Pasadena-based Caltech, and hes on the board and chairman of the finance and investment advisory committee of the Los Angeles County Museum of Art, where billionaire philanthropist and arts patron Eli Broad is a lifetime trustee. (The Broad family office has an investment in Canyon.) Last year Friedman was named to Broads eight-person investment advisory committee. Friedmans knowledge and understanding of the credit market is incredible, says Broad Foundations CIO Marc Schwartz. Because he touches a number of markets, hes able to connect the dots in different ways, and that is really helpful in thinking across asset classes.

Recently, Friedman was biking in the LA hills near the Hollywood sign. He hit some gravel and ended up on the side of the road. As cycling accidents go, it was not severe: a mild concussion and some lacerations. But it was enough for both his family and Julis to urge him to take it easy on the bike. (Julis is a keen rider of a stationary bike.)

With both men in their late 50s, the question of succession still seems theoretical. There are, however, practical and competitive reasons to start planning. In the wake of recent financial reforms, the large asset management firms are stepping into roles once filled by banks. To do so, you need scale, and theres a benefit to diverse strategies. Canyon has built out its product offerings over the years, raising specialty funds, some with more-private-equity-like long-term lockup structures. Its most recent, the Canyon Structured Asset Fund, launched in 2011, has cumulative returns to date of 95 percent. Canyons real estate business has been in existence since 1993.

But at $25 billion, Canyon remains smaller than rivals such as Ares, Apollo and GSO. And Friedman and Julis are reluctant to grow Canyon too quickly; they never want to mismatch their assets and liabilities. As Julis says, Structure determines behavior, and behavior determines structure. Thats also how they think about the direction of the firm. I really believe that what makes us unique today is to some extent the culture, Friedman says. Culture is a fragile thing. You dont want to mess with it.

Canyons upstairs neighbor in Century City, Ares, raised $100 million with an initial public offering this past March, making CEO Antony Ressler, a fellow Drexel alum, a billionaire. Still, an IPO does not appear likely any time soon for Friedman and Julis. Canyon may draw inspiration from Milken, but it builds its future in a changing business its own careful way.  

Follow Imogen Rose-Smith on Twitter at @imogennyc.