Clickbait: What is so special about PE that teaches you a different process than what MMHFs employ? Can anyone explain how a "PE approach to public markets" is any different than the same analysis that occurs at a pod shop?
Disclaimer: this is not a debate about which one is "better" or recruiting paths - I want to focus on the tangible investment process differences.
On another thread someone asked about why tiger cubs need the PE background and the "PE approach to public equities" vs. the MMHF style. We have debated the career tracks and the "betterness" of one vs. the other, but I want to avoid that. I also know we are increasingly seeing pod shops analysts transition to SM/tiger cubs/ longer duration investment shops, but I can't reconcile what are supposed to be the major differences, and was hoping someone with a more intimate understanding of some of the longer time horizon SMs could elucidate.
Majority of the time, an investor is looking to buy at a stock at a discount. An analyst at a pod shop is going to need to be very familiar with the market's perception of a business, and how other investors view the story. They will hone in on the ~3 factors that are most likely to drive an idiosyncratic move in the stock. They will be well acquainted with the "quality" of the business, secular vs. cyclical end market drivers, unit economics, ROIC, any major leading indicators that will drive inflections in results (and thereby drive revisions in expectations / change market's perception), etc.
Why are those people not "trained" or adequate enough to work for the top SM hedge funds/tiger cubs/all else with longer time horizons? What "bad habits" have to be unlearned that are too difficult to unlearn? Furthermore, what training in private equity better equips you with an understanding of the SM investment process that is not learned elsewhere?
I see these comments often, but I just can't wrap my head around it. Is time horizon such an impossible wall to work around - especially when we work in a field that requires such a broad tool base, flexibility, creativity, self education, etc.?
Furthermore - what is different about the SM/.tiger cub process that is not being done at pod shops. I believe there has to be more to it than 1) longer time horizon 2) assessing a businesses "quality" better? Flexibility in making calls about customer fit? More focus on product than the "trading path" of a business?
have u seen the performance of SM/tiger cubs/ and longer duration investment shops...
1000%. But as I said in my post, I am not looking to debate the performance of these funds or strategies. I am well aware I will get a snarky comment like "SMs just rationalize their existence for beta riding" and "true investing means only harvesting alpha!".
What is clear is that there has been a delineation of career paths and arguments made as to why MMHF analysts and SM HF analysts are different jobs. At the end of the day, other than the time horizon lens (and what minor details may matter more for the investment), I can't find a huge difference between the analysis steps and knowledge required to do both jobs. Just would like more color on these bad habits / pigeon holing arguments, and what other magic is involved in a "PE approach to public equities" that any other analyst is not already doing.
I haven’t worked at either so feel free to ignore this, but the way it’s been described to me is that Tiger et al research companies while MMs research stocks. The implication is that the Tiger approach believes that prices will converge with intrinsic value over the long term and the daily (or weekly or monthly or annual) moves in stock price are just noise. On the flip side, a MM firm couldn’t care less about the company itself or it’s intrinsic value (this is an exaggeration) from a qualitative perspective. It’s all about figuring out what moves the stock and finding the right way to be positioned around changes in price.
I get what you are saying as an overview, but the reality is that you cannot perform an analysis of a stock (even at a MMHF) without developing a view on what the intrinsic value of a business is either. Your conclusion regarding the timing of the investment and how to implement can be very different, but you still need to know what the market's perception of the business is. What will drive inflections in this business (both results and PERCEPTION)? You can't get there without analyzing the FCF potential of this business into perpetuity / exit multiple. Business quality, ROIC, unit economics, etc. all impact that. Yes earnings is a catalyst, but we are all looking at the same things.
From my experience, if there was a duration investor and a pod shop analyst debating Apple back in the mid 2010s, they would be talking past each other because each of them are trying to answer fundamentally different question. If we bring it to the highest levels, pod shop analysts would be asking how many iPhones were sold and what margins are going to be next quarter whereas the duration investor would be trying to figure out how sticky Apple’s ecosystem will be 5-10 years from now and how incremental products can drive growth / margin expansion in the next 3-5 years. You can make both money ways, but day to day, both investors are asking different questions to experts. From a structural standpoint, pod shop analysts cover 30-50 names at any given point so velocity of idea generation is higher, but just given function of portfolio size, they will know less about Apple than the guy that covers 10 names for a highly concentrated book. It’s not that one guy is smarter than the other, but they just spent their time differently.
Totally get that - but that means the pod shop guy is not well equipped for long duration investing? What makes the private equity training so superior?
Not to focus too much on one random example, but for arguments sake: it is not like the pod guy is ignorant of the debate surrounding Apple's ecosystem/longevity/durability.I feel like they are going to be highly aware of any debate focused on the stickiness of the ecosystem - or that new services growth can drive an inflection in growth and/or margins (and that pricing power is key). Then they hone in on ST performance results that will drive positive revisions and drive investors to see progress towards the LT thesis. They will probably be focused on different alt. data sets and expert questions for the sake of implementing the strategy (handset sales and ST margins), but the comprehensiveness of the analysis should be no different. I don't get how you can analyze one thing and not also recognize/analyze/incorporate the other. So it strikes me as odd that a pod analyst can do that job and not be informed or aware or capable of analyzing these LT questions.
I think you’re giving the pod shop analysts too much credit. They are extremely good at what they do and definitely understand their sectors / companies cold, but they don’t have more than 24 hours a day and financial implications of long term strategic decisions for a company just falls in relative importance compared to getting the quarterly earnings correct. As a result, I disagree with your view that the “comprehensiveness” of the analysis should be no different. Pod shop analysts simply don’t have as much time to spend on each idea than their counterpart at a SM HF. This obviously works out better if you’re operating in a MM model where you’re squeezing out singles and doubles and levering up at the fund level and worse when at a SM HF where you concentrate all your time / effort into one name and that name blows up. Separately, just by way of spending differing amounts of time on the business, the two investors may get to different conclusions. If a pod shop analyst expects Apple’s earnings to come in weaker than expected vs. consensus and market to react negatively, they may be short, but the duration guy may see this as a temporary dislocation and go long b/c this quarter they missed earnings, but other KPIs are still trending in right direction on their numbers 2-3 years out. Both investors probably agree on the key debates and questions, but they position / express their views differently. This is super high level, but that’s how I view the games they are playing. At the end of the day, people gain conviction in different ways and some people are better suited for pod shops whereas others want to be more long term oriented. We can all recite the recent performance of MM vs SM hedge funds, but I think it’s far more important to align to a research / investment process that makes sense to you as a person and not just follow trends. Everyone is going to talk up their own process.
It’s funny because everyone has their own biases when it comes to work experience. While the pod guy with an IB / SS ER background may discount PE experience, I don’t think anyone can argue that 2 years in PE does indeed make you a better investor long term. It’s additive to your overall investment acumen to sit in board meetings, build detailed operating models, think creatively about efficient capital structure, negotiate working capital adjustments / work through QoE to get a sense for true owner earnings, identify secular tailwinds and validate volume growth rates, etc. I think anything more than 3-4 years in PE is overkill, but both pod shops and SM HF clearly view PE as a helpful experience to have long term. Sure there are some annoying work streams that virtually have no impact on your public markets career (quarterly valuation, NDA negotiations, internal docs, eclectic.), however, that’s all part of the job / role. Ultimately, PE truly helps you think about investing as buying a piece of an operating business vs. pure financial asset (i.e., trading sardines). It helps contextualize what you’re buying and how companies are run in the background. It’s hard to fully understand this dynamic until you actually work with management teams on all sorts of things from add on acquisitions, intercompany employee dynamics, supplier / customer relationships, hiring, etc.
The way I've heard it described might be helpful - it's the fact that the pod shop guy hones in so much on ST performance that makes it more difficult for them to get comfortable with a LT thesis (esp. if there's NT volatility in a name, no variant sentiment, no clear catalyst, etc.) and underwrite the duration - it's a different skillset and it's hard to unlearn some of the ST bias and that way of thinking about stocks, but certainly not impossible and depends on the investor more than anything. Have to have the mindset to look past NT choppiness
I think most good investors are aware of the debate around the LT fundamentals of a stock, whether at a SM or MM (and fundamental analysis seems pretty table stakes at this point anyway)
Putting aside investment process. What is a better seat for an entry level analyst a place like tiger/lone pine or a place like citadel/p72? Coming out of bx pe or gs or whatever
My post: Lets put aside the 2 trillion other threads that discuss the same debate over exit opportunities and "maximizing career earnings", and analyze the investment process differences in more detail
You: Lets put aside the investment process differences and get back to our regularly scheduled programming
there is so much wrong with this question that I don't even know how to answer it
I absolutely hate this question lol
Yoo whats with the monkey shit - was my question/comment super low quality? I guess I gave pod shop investors too much credit for certain analyses and that is super obvious?
Have been on both sides. Obv prev rate env SM was clearly ideal at junior level. Still there ARE SMs that have done well, both on an absolute P&L basis and also an alpha basis (which needs to be measured vs mandate which is x% long-biased). The processes, especially on the short side, are less different than most people think. A lot of capital accrued to garpy types who took more of a VC approach to public mkts - I can it the “church of TAM”. There is for sure a real advantage to having duration and ability to size big in best ideas and withstand vol. if you take the absolute best analysts I know, the MM ones would make more PnL with an SM mandate, while the SM ones would probably get booted from an MM on risk. That said - there are funds who pivoted from growth or have great LPs and can go giant into a great short and withstand a mild squeeze or are able to buy an obvious long that is going to probably bomb the next print, or is able to be net long/short a geography/factor/sector etc. Most funds that have the ability to do that misuse it or aren’t thoughtful, but plenty are.
Imagine a bar chart of a company's cash flows projected out 10 years with a terminal value stuck at the end.
Long-only goons analyze the whole business and compare their projected cash flows to the market. Their positions are either higher growth, higher quality or better value than everyone else thinks (note the implicit factor bet).
Pod monkeys don't do the whole projection, instead relying on the heuristic that inflection points dramatically affect the DCF calculation. So flat cash flows accelerating can get you a 15-20% pop on earnings. Rocket-ship cash flows decelerating gives you the opposite. Hitting a few inflection points per quarter across a big, well-hedged portfolio gives you solid alpha with very low volatility. This is great until the alpha pool gets saturated by the volume of capital deployed in this strategy.
Mostly accurate but a bit reductionist. I know plenty MM teams still do a sanity check 20yr dcf, i personally don’t but depends on sector.
More important is that it is relative value - not absolute, which is why events are the focus. Most of a stocks return is beta/sector/factors. If you hedge all if that you’re left with the idiosyncratic alpha (idio). So the job is not to say “will AAL do way up/down” but will AAL go up/down more or less than UAL. Well the idio tends so be realized when new info is being revealed by one company and not the other, so earnings. Also there is a lot of considering exposures to dif geographies/end-markets and tracking readthrus I.E. if DAL says Latin America crushed it but Asia sucked, then AAL Will o/p UAL prob given dif exposures.
It’s more about thinking where is the best place for a $ to be right now, which is a function of what u think company will do, stock Will do, peers will do. But sector neutral = it’s more around prints. Common commentary that this is harder to diligence than 5yr trajectory, Covid should tell us that’s silly
Covering a sector in MM is a bit like your companies are your chess peices and you want to try to play the best games with them, knowing which to employ to capture changes in views on this or that. Expressing broader views through limited set of tools that u know very well. Imo it is equally enjoyable and intellectually engaging, but I do think some sectors have more oppty for edge (esp ones that aren’t really good sectors to long-bias so SMs don’t play). The risk limits are stressful tho.
Yo would love your view on which sectors are easier to cover in terms of playing the MM game thx. As well as which arehard to play MM game in. Like a ranking would be sick but the main thing is easy ones thx.
Also is good to remember many of these roles are targeting a comp level that is too high for a new grad or someone with limited experience. While at the same time many firms want raw ability they can mold to fit their culture and style.
The range of MM analysts after two years is much wider and some are much more raw/established. Not everything is about skillsets/experience.
I think an important thing to consider is that people get "stuck" in the MM world and can't move over to the SM world easily for the same reason 30 year old post MBA VPs get stuck in banking, senior associates in VC / growth have a hard time moving over to buyout shops, etc. Essentially, they'd have to take a massive step down in terms of autonomy, seniority, compensation etc. to make such a pivot and most people have more important things in life than eating the costs and headaches of doing so.
E.g., if you say did 2-3 years IB or ER followed by 2-3 years of MM, you'd be a "senior associate" or "analyst" at the age of 26-28, realistically making $500-800k. For a single manager to hire you, they'd probably put you in the same bucket as someone with 3-4 years total experience, i.e. a junior analyst, who make around $300-500k starting out. Very few people are going to move over and accept a $200k opportunity cost, no matter how much more they might enjoy assessing moats, long term strategy, etc.
I think this, moreso than any fundamental difference in skill sets, is why people tend to stick with one style of public markets investing in their career. That and the fact that interviewing while working is really hard therefore people tend to follow the path of least resistance.
I'm curious how you feel this impacts job "security" at a SM vs MM. You may risk getting stuck in the trap for MM, but you don't worry about Citadel blowing up. On the other hand, even after three years in a pod, you're still relatively replaceable. Setting aside the comp problem, which type of fund is less likely to leave you stranded like you described?
I think if you’re worried about job security, you shouldn’t go into this business as a all roles across SM and MM are fairly volatile compared to any other industry
This is turning into a great thread.
Few would ask about the other time horizon comparison with HFT as minutes vs quarters is viscerally different. And though the golf-playing PE folks may seem soft, investing on the timescale of years to decades is similarly a different beast. Not to mention they learn what a company looks like from the inside.
Let be real tho any criticism that Tigers are just levered beta, PE is ACTUALLY levered beta pure interest rate/mult expansion bet in many cases. PE marks slower. Their reckoning awaits
Two angles to view this in my opinion:
Adding too: I actually think diversity of viewpoint has ability to make your background more application to long term investing. People tend to hire people with backgrounds like them and it leads to parochial decision making. Real diversity, I.e. diversity of thought and experience yields better decision making and lenses to view things that others are too conditioned to see.
I’m in a concentrated strategy and my coworkers all did PE / MBA. It’s really hard to tell what practical value those 4 years provide above and beyond my time in MM, esp given oppty cost. They are however a good filtering mechanism and if you ever want to raise money I would guess some allocators like to see the golden path
This
Tiger cubs about riding themes. MM 80%+ idio. Both need to know your stuff. Goals are just different.
Del
I think it’s certainly an interesting debate.
I know some long-term single managers that take active interests into companies too - which I think is the main difference in strategies.
Having said this, the skillsets required for the analysts in these seats go way past the traditional metrics that we use to analyse stocks. These analysts must hold an extensive understanding of proxy fights, board seat allocation and legalities around that. Think of activist investing. Coming from a PE background sets you up for this more than any other route.
Just my two cents…
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