Focusing on Investment Style Fit

An Instagram follower asked me if there is a rule of thumb to decide on what types of investment firms to join and what lifestyle it entails. During my coaching journey, I unfortunately have a deep understanding of the challenges of serving the sell-side and buy-side research industries and the divergent needs of a fragmented client base. This week I discuss my framework of thinking about the tradeoffs of working under different equity investment styles.

Punchlines upfront (just like how you should structure a stock pitch): Grass is always greener. Like everything else in life, it is really about the tradeoff.

Your ability to add value

I am not a hypocrite – we are all in this business to make big money. I want to remind you:

1. Without the ability to add value on the job, the million-dollar bonus is just a mirage. Make sure you find a philosophically aligned firm even if it pays less than another shop. Just to be clear, most don't make million dollar bonuses as a junior analyst anyways. 
2. Many on forums start their question thread telling others their ultimate goal is to start a hedge fund. To those types: please understand the back office cost and the legal complexity of setting up a hedge fund (or any fund). Also, have fun explaining to your investors after your first fund drawdown, as you for sure will have one. Again, everyone wants to heaven but no one wants to die.

I will try my best to list the pros and cons of each path without mixing in my personal view on trading vs. investing (and that my long-time audience knows that market neutral / multi-manager is my no-go zone for career choice). There are always exceptions in this profession so understand everything below is a generalization – investment firms are small businesses where culture / style is heavily influenced by founder’s decisions.

Quick reminder of the terminologies in my prior article. 

Multi-manager / Pod Shops

Pros

• The only true meritocracy – you eat what you kill
• It’s pure alpha because beta neutral (S&P up 20% or down 20%, pod shop should make money)
• Tailwind: capital is flowing into this style
• Abundance of resources (ie. alternative data, sell-side access, etc.)
• Fastest path to wealth and responsibility (managing a book) for the skilled (think pre-2020 Gabe Plotkin)
• Relatively most job openings (well, there is a reason)

Cons

• Highest stress (in a relative sense, as all investing is stressful)
• Poorest work life balance (65 hour per week, IB hour, 80-100 hour? during earnings seasons)
• Poorest job security (risk limit breach, the entire portfolio team is let go. No es personal, it’s contractual)
• Stock price is always going to be more random than what the company is worth over time, so this style is very prone to short-term randomness such as macro

Directional Single Manager Hedge Fund

Pros

• Better (relative) stability than pod shops
• At the right lineage (eg. Tiger Cub), great launch pad to start your own fund after a strong track record
• Still very good money (because better bonus than long only at the same experience level)
• Can be longer term than pod shops, especially on the long side

Cons

• Less openings than pod shops
• Slim chance to managing a book (the PM runs the show, hence “single manager”)
• Not truly long term investing as they claim because the LP capital is not that long duration
• Lifestyle dependent on the fund, cannot generalize – can be a 35-40 hour work week or pod shop lifestyle, depends on the founder and his / her lineage (think a Citadel cub like Melvin / Candlestick vs. a pseudo-long only hedge fund)

Long Only

Pros

• Best stability
• Best lifestyle
• Very long-term focused on the business
• Lowest relative stress

Cons

• Lowest relative compensation
• Stagnant or declining asset growth because many firms don’t add any value through the cycle
• Longest time to becoming a portfolio manager (if one aspires to managing a book)
• So few job openings because of asset decline and people don’t leave

I will elaborate briefly on the other styles that I have limited familiarity with

Distressed

A very cyclical industry that requires bankruptcies to make money. Loose monetary policy for the last decade has kept many ShitCos on life support so it has not been in favor. Many have created tremendous wealth for clients and for themselves (Milken cubs like Joshua Friedman / Mitch Julis, Howard Marks). It’s a very patient style of investing as bankruptcy takes a long time to work out.

Distressed investing is very confrontational. The zero-sum game nature brews bad culture that changes people. Admirer of Paul Singer will probably say he is a tough negotiator, but what Elliott did to get Argentina to make whole on the debt is telling of the kind of people you deal with in this profession.

Activists

Similar to distressed. People think activism is very glamorous because of the publicity and you are in control of your destiny. One, the barrier to entry is insanely high because there are very few firms. Most activist firms are confrontational (think Dan Loeb with his Poison Pen and of course the corporate raider-rebrands like Carl Icahn and Nelson Peltz), so similarly you deal with certain type of personality. Second, activist firms do not engage in campaigns all year so a lot of the times it’s just like a regular value hedge fund.

Credit

Credit market is multiples larger than the equity market and is more illiquid (which is a good thing). Credit investing is by definition value investing as it focuses on downside protection and cash flow. The profession can have decent longevity. It comes down to whether you want to learn to read credit documents, which are a lot of legalese.

To sum up, everything in life has its pros and cons. Please think hard about fit before obsessing over pay (and even worse prestige which means nothing to nobody.) When you find a good fit, I can guarantee you will get paid as long as you add value.

Like the stock market, price is what the labor market pays, value of the talent is what they get. Always focus on increasing your value, which is very much in your control.