Mega HF below HWM vs. New Fund
Fellow Monkeys,
I'd value your assistance. How would you evaluate recruiting between the following two options? Both are equity L/S SM funds. The first is a brand name fund that crushed it for years, but is now below its high water mark and would have a decent way to go to achieve parity. Nonetheless, still big AUM, high aum/head, and founder committed to earning it back. The second is a newly launching fund that has firm commitments to raise several hundred MM (likely ~300-400MM), and hopefully expand further once the fundraising spigot turns on again. Fund would be PM + 3 other investment professionals (4 with me).
Would be joining at the associate level, but theoretically have a fast track to partner at either. Solving for probability of earning financial independence as quickly as possible, as well as future ability to start own fund.
Thanks!
Ah, the classic dilemma of the mega fund versus the upstart in the hedge fund jungle! Let's swing through the vines of wisdom and break down your options:
Mega Hedge Fund Below High Water Mark (HWM): - Brand Recognition: A well-known fund can be a powerful ally in your career. It's like having King Kong in your corner – everyone respects the big guy. - AUM Size: Over $1B AUM is nothing to throw bananas at. It means serious business and, typically, more stability. - Resources: With high AUM per head, you'll likely have access to top-tier research and tools. Think of it as having the best bananas on the highest tree branches. - Recovery Potential: The founder's commitment to bouncing back is a good sign. It's like a silverback gorilla leading the troop – inspiring, as long as he knows the way. - Path to Partner: You mentioned a "fast track to partner," which is great, but remember, in larger funds, there might be more vines to swing on before you reach that level.
Newly Launching Fund: - Growth Potential: A new fund with committed capital has room to grow, and you could be part of that exciting journey. It's like being part of a new troop exploring uncharted territories. - Team Size: A smaller team means you could have a significant impact and potentially more meaningful work. You're not just another monkey in the troop; you're a key player. - Fundraising Prospects: If the fundraising spigot turns on again, you could be riding the wave of success as the fund grows. - Path to Partner: A smaller team could mean a quicker ascent to partnership. It's like climbing a smaller tree to get to the top – fewer branches, but you feel the wind more.
Solving for Financial Independence and Starting Your Own Fund: - Earning Potential: Both paths could lead to financial independence, but the mega fund might offer more stability, while the new fund could offer higher risk-reward. - Future Fund Launch: Brand name experience can be invaluable when starting your own fund, but being part of a successful launch can also be a compelling story to potential investors.
In the end, it's a bit like choosing between a steady diet of reliable fruits or gambling on a new banana grove that could yield a bountiful harvest. Both have their merits, and your choice might come down to your appetite for risk and your confidence in each fund's leadership.
Remember, in the jungle of finance, sometimes the biggest rewards come from the paths less traveled. Good luck, and may your investments swing to the treetops!
Sources: How to approach LMM PE recruiting?, Impact Funds Oncycle Recruiting?, I've raised money for PE and HFs. Q&A, How do you know if a less well-known fund is good?, Top firms for distressed investing. Solving for brand and deal experience more than ability to growth within the organization.
Depends on your career goals. If you’re trying to maximize for comp, then being a partner at a large fund heavily favors being a partner at a smaller fund. If you’re at a large enough fund and have points in the fund, just the management fee alone can reward you very well. Does your current fund have a modified high water mark whereby you can charge half the performance fees on the way up?
Not sure
Would take the larger fund. Economics of the startup are not great and I wouldnt count on fundraising. What would your economics be at the smaller fund? If you could get a solid % of bonus pool (Contractually, NOT promised) then it could make sense
Pay would be similar at either to start. No contractual bonus guarantee at either - just normal promises of paying well for performance. Am less focused on near-term pay, very focused on long-term pay and optionality
It depends how far below HWM. I’d think upside is capped until they can charge meaningful incentive fees again.
The answer just depends on which firm you think has greater chance of success. The large firm can certainly make its way back above its HWM but it also can struggle and eventually die - there are a lot of large firms in the past that are no longer around today. Same thing with the new fund - yes in general new funds aren’t great risk/rewards but that’s just a generalization. There are some really great new fund seats, it just depends on the founder. The best seat for you long term is the fund that ultimately performs the best on a go forward basis, not what happened in the rear view mirror. Pick the seat like you would pick a stock. If the large fund can recover and you believe in the team, the HWM is just a near term issue.
Thank you. How do you think about the "right" founder/team? The new founder has good pedigree and seems like a good person, but probably stuck at 300-400MM at launch and then hopefully scale over time with performance and new capital. Team would have a good pedigree as well.
Large fund performed very well historically, so could definitely theoretically recover. Still 30%+ below high water mark though and recognize that high water mark issues sink many funds. Maybe could raise fresh incremental capital which could help mitigate that issue.
How do you think about the upside / downside at each too? Would better name brand significantly mitigate recruiting risk, or not really impact exits otherwise? My current background is solid.
Ideally you want a founder that is a good investor, can raise capital and build a business/manage a team. Few are all 3. The latter 2 are more important IMO as there are a lot of smart investors who never reach scale, and commercially, that’s what matters more for you.
If he can raise 3-400m, he’s probably a good enough investor. Not many people are raising billion dollar funds anymore. Yes there are like 2-3 people in the last 2-3 years but those are the exceptions, so I wouldn’t rule this opportunity purely based on that data point alone. Whether he can scale in a few years is something you’re going to have to make a judgement call on. Sometimes you meet people and you just know. If you talk to 10 new fund managers, I think you’d be able to have a good sense which ones have the higher probability of success.
Brand name does help with recruiting risk but how much more it does, really depends. It’s hard to say without knowing who these people are. If the founder of the start up is really well known and comes from a big brand name shop, it can help mitigate it.
How do you think about "good" scaling pace for a new fund's AUM? If the PM thinks they can likely gain +200MM over the next four years (organic returns + new capital) would that be "on track" to scaling well, or too little / too slow? Do you give much credence to the argument that fundraising is slow and more money will come in when markets unfreeze? Or would only happen if performance materially outperformed the benchmark in-between now and when things unfreeze?
And how much AUM does a fund need to have generally better staying power?
Thank you.
I think to be an institutionalized firm with resources and reasonable corporate access, assuming you have a standard strategy going mid to large caps, you want to be at least a billion. I think there is real credence around LP liquidity but it’s really hard to predict how much of that will flow back into equities over the next 1-2 years. Assuming he launches with 400m, the path to a billlion is as follows: 1) good performance in the first 3 years - doesn’t have to be exceptional but has to be good enough to give someone a reason to invest 2) consistency in business and strategy 3) PM ability to market. If all 3 happen, it is unlikely your firm will be sub a billion. Hard to know where the LP market goes (obvious bias is that it gets better) but if all 3 happen, the tailwinds behind the business will be strong and the firm’s pitch will be compelling enough that you should be able to raise capital. It’s just about creating a durable investment product.
this won’t be helpful but the HF industry is small and so many situations are dependent on the people involved. It’s hard to make generalizations across opportunities without knowing who it is
I often find in cases like this the "feel" I get from the people I meet at each fund makes it a lot easier to make a decision. Who is more likely to invest the time to teach me stuff? To give me increased responsibility over time? To care about me?
But you don't even mention any of these things. It's like you want to bet on who's going to do well so you can share the spoils (irrespective of your own performance/growth), rather than consider which of the 2 might put you in a position to be a real contributor.
Thank you for your thoughts, MMPM. I feel similar levels of "buy-in" to my growth at either, hence why I did not differentiate between the two. And I fully expect to be a meaningful contributor at either / am not expecting to get paid well if I do not contribute. But I think it is important to seek to assess the upside/downside risk respectively, assuming I perform, since I'll initially be a junior employee.
The DD resources would presumably be at least marginally better at the large fund. PM exposure feels like it would be similar.
Thank you.
If you get no equity in the smaller fund, the larger fund is a no-brainer. You’ll have way more optionality such that the HWM is a non-issue: it won’t affect your comp at the junior level and if the fund hasn’t recovered/shuts when you have 2-3 YOE you’ll have plenty of opportunities to move to 1B+ HFs that are not underwater
WSO is always going to say take the larger firm not even sure why people ask this on here. While what MMPM was alluding to is that your first 2-3 years on the buyside is going to shape the kind of investor you will be, chances of meaningful contributing is rather low truly as well. It is about growth and and building the framework you want.
Also find it a bit laughable any junior who thinks I need equity to take the smaller/new-er shop, why on earth would anyone hand over equity that just shows clearly mis-trust in the PM in charge. Either the fund is going to succeed 3x in 3-5 years where the PM will take care of you, or it will not where this so called equity is not worth anything anyways.
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