12/14/09

Hi fellow monkeys, I need your advice on my situation. I am a second year BB analyst and I have two HF offers, both in New York: one's a fundamentally-driven L/S equity fund; the other one is a special situations fund (they do merger arbitrage, distressed debt, restructuring. spin-offs etc.). In providing your advice below on which offer, please assume that pay is similar and I like the people in both places equally. Please also assume that I have no other options apart from the above funds, and only reply if you are in the HF industry please. In your response, please feel free to generalize as I know that each fund is different. My questions are:

1) I like assessing the prospects of companies and industries. I get the sense that there is less of that in a special sit fund as compared to L/S equity. is that right? Special sit / event-driven funds tend to bet on the occurrence of an event (e.g. merger arbitrage) and less on the long term fundamentals.

2) I like building models but do not like doing it under time pressure. I also do not like to model and quantify things down to the last minute detail (just a lot of pain without much reward). I prefer taking bets based on 5-6 key investment thesis. Which fund is more suitable in this area?

3) Which type of fund tends to have more reasonable hours (i.e. 70+ hours a week on average) and more *predictable* hours (i.e. minimal last minute requests for work on a Friday night and I have to shelve all my plans)

4) I love working independently and do not enjoy working in large teams (or indeed any team). Again, is there a difference here between the two types of funds?

5) Finally, I am pretty ambitious when it comes to $$$. which of these types of funds will pay better in the long run assuming that I make it to senior level, but NOT to the very top?

6) if you work in one of the above types of funds - please tell me the top 3 things that you like, and dislike about your work.

Thanks a lot, and do let me know what you think.

Comments (14)

12/15/09

Replies, anyone? there must be more hedgies around...............

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12/15/09

I can't offer much advice but congrats on the offers.

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12/16/09

a lot of the questions you're asking are really specific to the funds in question. the HF world is not as clear-cut as banking...

without having worked in those two kind of funds I could make some general comments ...

merger arb is different from those other SS categories ... any edge is probably from insider info and reviewing legal docs. very limited alpha opportunity - bad field to work long-term i would think.

whereas the other SS categories I would think involve substantial in-depth research into specific companies to the asset level maybe if BK is on the horizon. prob not so much industry analysis. good field to work

what about the size, returns, and rep of the two funds? in the long term your comp will be decided by what you bring to the table

12/16/09
MarginCalling:

merger arb is different from those other SS categories ... any edge is probably from insider info and reviewing legal docs. very limited alpha opportunity - bad field to work long-term i would think.

Exactly the concern I have. If the fund is a pure merger arb fund, I wouldn't have gone along with them at all. merger arb is more about fishing for information and understanding the M&A process, more than fundamental analysis.

MarginCalling:

whereas the other SS categories I would think involve substantial in-depth research into specific companies to the asset level maybe if BK is on the horizon. prob not so much industry analysis. good field to work

What is BK if you don't mind explaining?

MarginCalling:

what about the size, returns, and rep of the two funds? in the long term your comp will be decided by what you bring to the table

Both are multi-billion AUM funds, and in terms of comps, there's not much of a difference between the two now. Long term wise will be dependent on performance.

12/16/09

1) As a buyside analyst at a L/S fund you will most likely be tracking one or two industries, so you will get a chance to get a little more in depth with them. That said, there is much to be said for the broad exposure you get from special situations. Outside of merger arb, most special situations/event-driven ideas do require a good amount of fundamental analysis.

2) Time pressure probably applies more to special situations investing, but I think it is pretty much even money. As to the second point (i.e. modeling minutiae), that is more an issue of the quality of your model: if it isn't a significant driver, it shouldn't be in your model.

3) Opportunity is unpredictable by nature. This is a bit of a simplification, as there do exist compelling situations that sit around for months.

4) L/S might be slightly more team-driven, but both are fairly similar in this regard.

5) In the hedge fund industry, pay at the top is strongly linked to performance. That is to say, your compensation will depend much more on how good you are at what you do than on what you do.

6) I work at a BRIC multi-strat (value, GARP, special situations, etc.).
Top three things I like:
a) Being surrounded by people who are more intelligent than myself
b) Access to top management
c) Broad exposure
Top three things I dislike:
a) Hours
b) Living in an EM (though this is one of the things I like as well)
c) Fund size is very large for the size of the market, making investable universe small

$10 says that if you read Greenblatt's, "You Can be a Stock Market Genius," you will want to become a special situations investor. I suggest you pick up a copy immediately. It will quickly help you decide if special situations investing is for you.

P.S. Stay away from merger arb like the plague.

12/16/09

Thank you, HF analyst. yes, I have read Greenblatt's "you can be a stock market genius" and I am ok with that although the analysis is still pretty much non fundamental (e.g. forced selling after spin offs, insiders' stake in the spin off etc etc.). My main issue is that I don't want to spend a significant amount of time on merger arb which I would have to if I join the special sit fund, and I think now I know my answer. L/S equity is the way to go for me.

Anyway, can you please explain why you would stay away from merger arb? For me, it's because merger arb is a lot more of fishing for insider information and less of fundamental analysis

12/16/09

In my opinion, that is fundamental analysis. Incentives drive value. Also, forced selling of shareholders shows you why market value is diverging from fundamental value. Make no mistake, both these issues are very important to L/S as well.

Merger arb is too competitive these days. Also, more importantly, the upside is extremely limited for the amount of downside risk that exists. Sure, the odds might be slightly in your favor, but it is not the type of risk/reward situation I would like to invest in. Also the whole idea of looking at a paltry return and saying, "that looks pretty good on an annualized basis," is mostly bullshit. The amount of work required for that small return (or large loss) will be heavy.

Also, insider information is by definition fundamental analysis, but of course it's also illegal.

12/16/09

L/S sounds like the right answer for you.

If you don't want to randomly shelve plans, then you shouldn't go event-driven. Also, if you don't know what BK means, then you probably shouldn't go SS. No offense. It just sounds like you'd do better with L/S given your current level of knowledge and your interests.

12/19/09
MMmonkey:

. Also, if you don't know what BK means, then you probably shouldn't go SS. No offense. It just sounds like you'd do better with L/S given your current level of knowledge and your interests..

Well, the event-driven shop gave me an offer so I'm probably doing alright. Since you are so knowledgeable, maybe you should be in the buyside rather than being an associate in banking.

3/19/12

.

12/16/09

BK = Bankruptcy

12/20/09

Wow you guys get offended at the slightest perceived insults...

12/20/09
Newbie_banker:

1) I like assessing the prospects of companies and industries. I get the sense that there is less of that in a special sit fund as compared to L/S equity. is that right? Special sit / event-driven funds tend to bet on the occurrence of an event (e.g. merger arbitrage) and less on the long term fundamentals.

Generally speaking, fundamental analysis shouldn't be too different. For both strategies, you're attempting to set a value on an asset and identify the catalysts that will "unlock" that value. All these places use the same valuation techniques. The models are probably a little more complicated and you'll talk to more lawyers in special situations. Just make sure you get to do everything in special situations and not just merger arb.

Newbie_banker:

2) I like building models but do not like doing it under time pressure. I also do not like to model and quantify things down to the last minute detail (just a lot of pain without much reward). I prefer taking bets based on 5-6 key investment thesis. Which fund is more suitable in this area?

Being under time pressure is just the nature of the beast. Case in point, I've spent years covering certain industries/companies and I might only have a couple day to assess and capitalize on a trading opportunity (is it an irrational drop in price or a falling knife). Just keep in mind, most places that hire banking analysts specifically hire you to grind you. You probably won't be able to implement any investment thesis until you move up.

Newbie_banker:

3) Which type of fund tends to have more reasonable hours (i.e. 70+ hours a week on average) and more *predictable* hours (i.e. minimal last minute requests for work on a Friday night and I have to shelve all my plans)

Kind of hard to clock in and out in this business. You're constantly reading and observing. With that in mind, special situations is much more unpredictable...but I enjoy that part.

Newbie_banker:

4) I love working independently and do not enjoy working in large teams (or indeed any team). Again, is there a difference here between the two types of funds?

I've only worked in team based environments so I don't know. If the fund is structured in a way where analysts compete with each other pitching the PM ideas, you might have more autonomy. Some funds create silos between the analysts and you're literally not allowed to talk about what you're working on.

Newbie_banker:

5) Finally, I am pretty ambitious when it comes to $$$. which of these types of funds will pay better in the long run assuming that I make it to senior level, but NOT to the very top?

Love what you do and the $ will follow. Special situations gives you more flexibility to move up and down the capital structure and pursue the best risk adjusted returns. You might be the best L/S equity fund on the street, but there was really no good way to capitalize on the sub-prime implosion in the equity markets (not unless you and your investors could stomach years of volatility).

Newbie_banker:

6) if you work in one of the above types of funds - please tell me the top 3 things that you like, and dislike about your work.

Likes and Dislikes will probably be similar for both strategies.

Like:
1. You work with incredibly smart people
2. The work is very interesting and mentally stimulating
3. The pay is not bad

Dislike:
1. You're only as good as your last year (I know...applies to both strategies)
2. Hours are volatile (love-hate relationship)
3. Reading footnotes and legalese is a grinding exercise at times

4/18/11
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