S&T desk - advice for placement day
I’m currently in the placement process for my s&t internship ( trading track) at a top BB
Would you guys be willing to shed some light on some of these desks:
• rates trading; both securities and swaps
• credit indices (CDX and CDX options etc)
• high yield
• distressed
• equity derivatives ( index and single name)
• energy derivatives
• EM credit
• Chief Investment office
Are these desks good places to be and what type of person would be successful in these roles? Any insight would be much appreciated.
Bump
Following
Distressed- great team to learn a fundamental skill set, should get exposed to models, bonds prices are all over the place which is good for spreads and PnL. Because of the obscurity in where debt is priced unlikely it will be hit by automation
Rates - macro heavy product , definitely more flow and has some automation coming to the business but still need to know yield curves, swap pricing , etc . Common way to go into HFs
Chief investment office - not sure what kind of desk this is but if it anything the opposite of a flow type product you put yourself in a good position both in the short term(if you plan on returning to S&T) and long term (transferable skill sets)
Which products within rates do you think have the best career prospects and are most attractive to HFs?
Think it's hard to distinguish between signal and noise in answers to this sort of question but here's my two cents. A major caveat here is how good the bank's franchise of that specific/ccy product is, typically assessed in terms of how good your prices are to clients, and market share, as well as the type of macro HF. Additionally, I can only really advise on G10. Here are some broad rules for a typical multi-manager platform.
1. Liquid Linear Rates are good.
USD/EUR/GBP. All of these have very established liquid swaps/swap spreads and cash/credit markets. There is plenty of macro and RV going on, and I'd say the majority of macro HF interest is in these ccys. AUD/CAD are not as liquid, but are broadly similar and both have strong cash markets (and semis) and IBOR/OIS swaps. NZD/NOK/SEK are not nearly as liquid, some would say illiquid, and you tend to find these markets as primarily swap markets (NZD/NOK don't have cash maturities beyond 10Y), and are mainly played by real money, CBs, and very good individual HF traders with strong knowledge of local idiosyncrasies. I would 100pc avoid CHF and JPY rates as they are super de-correlated from the rest of G10 and are very poor franchises for banks (for CHF on the pricing side, and for JPY on the client interest side). In general, macro HFs find it easier to accept PMs in more liquid products because strategies are more scalable, transparent, data/market colour is easier and cheaper to get, curve interpolation/RV screeners/pricing tools are much easier to build, and they allow a greater breadth of strategy (macro, rv, systematic etc).
2. Cash bonds better than swaps, in many cases.
For banks cash isn't as profitable or sophisticated as swaps, but provides very good RV training, as rates rv is typically juicier and more nuanced in cash vs swaps (think of all the factors that affect cash but not swaps, special/GC repo, QE buybacks, issuance, coupon money, redemption, and bond-future basis). Cooler dislocations appear in cash cos there's only so many of a particular bond out there, so the market is easier bullied than swaps, which in theory you can have as much DV01 as you want. The downside is that bond rv is very balance sheet heavy and you will find that your balance sheet costs as a PM overwhelming if you have a bad year. Swap curve interpolation is quite complicated (ask a quant to walk you through even the USD curve), and there are some "arbs" here and there, but this is very hard to scale in a HF and stuff that nerdy is typically only reserved for dealers, unless you're heading off to BlueCrest. In practice many HFs treat swaps like "potatoes", and surprisingly a lot of young dealers as well, merely to trade duration and curve. Asset swaps (spreading a bond and a matched maturity swap) and invoice spreads (spreading future and swap) are done by both desks, which may stop you from being too pigeon-holed. My personal opinion is that a bond desk will teach you bond specifics and good RV, and also teach you how to do macro swaps trading, the inverse is not true.
3. Avoid non-vanilla or illiquid rates options products.
Swaptions and curve caps/floors for USD/EUR/GBP are great markets cos they are very liquid in OTC as well as in listed gamma (exchange traded options on bond futures), they also give you a degree of sophistication versus the standard linear rates guy, ie. dynamics such as Kangaroo issuance, negative convexity, Formosa vega supply etc. Obviously great for macro plays, though RV is much more difficult to execute here vs in linear space, given the need to hedge with OTC swaps or bonds and cos the market is much thinner for dealers to hedge RV risk. Other G10s except for AUD, basically don't have liquid rates options markets. You want to avoid so-called "hybrid/correlation/structured" desks because these are bank franchise desks, and exist primarily to cross flows between hedge funds buying options and RM/private banks/corporates typically selling options for yield, and do not help you develop a buy-side risk-taking mindset. On a deeper level these desks manage cross-asset correlation risk through even more esoteric products such as Quanto CDS (a CDS in a different ccy), multi-asset range-accruals (structured notes which pay a higher yield if say, equities, rates, fx to be range-bound), and these are never utilised as standalone strategies for PMs, though you might have that one structured trade in a highly levered and cheap, optionalised bet.
4. Avoid non-USD/EUR (Core) inflation trading.
Again, back to the liquidity idea, trading inflation-linked bonds and swaps outside of these two is basically entirely dependent on your relationship with the dealer. Good macro/RV exist here, and you could be that one or couple of PMs that specialise in a market most of the nominal rates world doesn't have a very good understanding of.
5. Avoid STIRT/XCCY.
The STIR world will be less interesting without IBORs as tenor switches (3s6s) and LIBOR-OIS switches won't exist. SOFR is very close to treasury rates (as it's based on repo), and so the only worthwhile bases left is SOFR-OIS and FX-OIS (FX forward yield against OIS rate). Both of these, though very liquid, are (will be) highly crowded by the community of STIR traders out there. Arguably, unless you are particularly authoritative in those fields and like being super specialised in a product far detached from "long-end rates", then you should avoid this. On the macro front, rates will remain lower for longer, so on an outright level the product is involatile. You will find that hunting for 3-4bps, in normal circumstances in this field to be considered a "very good trade". XCCY trading at HFs is very much hit and miss, as trading is super dependent on corporate flows knowledge/experience, and they are not as liquid.
Thanks for the insight, you mentioned both distressed and rates as top option. In general if you had to pick between credit and rates, which would you go for? What do you think are the pros and cons between the two
Following
I will only speak on Commodity / Energy Derivatives and make no comparison.
Depending on your shop...YES
Shops that only trade liquid screen energy derivatives will be less challenging than those that trade everything.
While what I am about to say is a wild generalization, shops that combine physical and financial trading provide a much more complete product view than others.
I've been doing commodity derivatives for 25+ years and there is always something new to learn and new ways to offset risk.
Doug,
I recently began as a physical trader in the Energy sector ( RT power to be specific), and, while I am enjoying it, I already know that I want to transition down the road into something that includes more financial trading.
My question to you is, what advice could you offer to help make such a transition both possible and successful?
Great to hear from you.
Do they still have the 4 on / 3 off / 3 on 12 hour day schedule? Great during football season, terrible during basketball season.
Where you work will determine when/if you make the move over. If you are at a utility, it may be a while, a bank, much quicker and HF, PM, REP, etc., even quicker. Senior utility traders generally are entrenched, have families and like the school district. There is very little utility turnover. Very few people actually are taking risk rather managing risk through liquid / screen products. If you are sitting at a utility, you may never get a shot, or magically, one day you show up and have your own book. At a PM/REP/HF, they are smaller, leaner and have to manage more risk than the utilities (basis, congestion, virtuals, etc.) due to the lack of assets being backed to backed...and they have no rate recovery.
I assume you want to trade financial to increase your VaR and take a more "positional" viewpoint on the market rather than being dumped the DA book and being told to "manage it"? Join a REP and that really doesn't happen. Join a PM and it also may never happen. They utilize the forward markets to hedge load, not speculate on it. Banks and HFs take on more risk, but the trend in power funds has actually been the real short end of the curve in the virtuals / FTR / DART, etc. The main reason is credit and credit availability
Advice:
Any other thoughts can wait until the next post.
D.O.U.G.
Great advice, and much is very transferable across any product desk. Thanks for the insights.
any insights into equity/derivatives desk?
Very few macro HFs do equity derivs as a strategy. Some have that allocation say Eisler, Capula, Symmetry, and BFAM (this is a MM). It's nowhere near rates in detail and diversity as nearly all of rates is an OTC market, which is not necessarily the case for stock index options. Structured products trading in equity derivatives is something to avoid as it's like rates exotics/hybrids, as stated above in being a franchise-only desk, not one that has a lot of interaction with HFs.
Good thing my internship is in exactly the area I should avoid haha
What about Energy derivatives or Credit(HY-Distressed), how's the outlook and exit opps for those?
What about delta one and ETFs?
Also very interested to hear about derivatives. Heard they also exit to Macro HF bc of options movements?
Thoughts on MBS? Agency seems like it would be most similar to rates, but how does it compare to treasuries, swaps, vol, etc in terms of comp and hedge fund exit ops? What about nonagency MBS? Looking at bios I see on linkedin quite a few PMs who worked in MBS, but its all pre GFC which isn't really comparable with modern MBS trading, with subprime extinct. MBS seems like it would have interesting RV opportunities, can anyone give color on this?
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