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Aside from the fund structure type things, what are the major differences in terms of the work done by employees at an AM firm versus a HF?

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  • syntheticshit's picture

    Subset but culturally different, in large part due to the fee structure of both industries (allegedly) and the people involved (more likely) and the regulation that hamstrings AM at times.

    To overgeneralize, at a large institutional top-tier AM house, there is going to be a lot more soft client work since performance fees are not allowed for certain types of clients whose money they chase. You'll notice the client side of the business is far more developed and they have to advertise new flavor-of-the-month products more and "research pieces" to give a glimpse of what's under the hood without saying a thing is important.

    Because of fees, winning a lot of $1B mandates at anywhere from 10-50bps p.a. (sub-30 bps happens, the horror!) becomes the goal so the client side has to work harder. That, coupled with regulation, and the inability to lock-up capital for egregious periods of time or use gates unless you are realistically running a RE focused fund, and the possibility of inflows and outflows if you play the mutual fund game, makes investing in anything illiquid/esoteric rather difficult. Scalability is a huge concern if your strategy takes off; most HF strategies honestly stop working well after $5B, and $5B in traditional AM fee structure is a joke so those won't be pursued either. Strategies like: capital structure arbitrage, statistical arbitrage, distressed debt, event-driven stuff, or anything involving leverage in excess of 3:1 is generally not going to be seen. Asset-gathering at the biggest houses (unfortunately in my opinion) becomes part of management's focus because it's the only way they profit more.

    Hedge funds have popularized the notion that only they know how to short things, even though being underweight something relative to a long-only benchmark is pretty much shorting it conceptually. What actually determines a lot of your short-side alpha if you aren't one of those guys running a hilarious 10-name concentrated portfolio with zero turnover is your prime broker killing you for fees or not; it is incredibly difficult to make an argument that some no-name $100MM POS equity l/s hedge fund will get better prime broker fees than some place like a BlackRock or Wellington running an equity l/s fund. You will see a few equity long/short guys at top-tier AM houses hidden away quietly, and these guys launch their own cayman funds for people who believe the manager can make real money.

    The biggest joke ever invented was benching yourself to cash and charging a performance fee over it even if the return and risk profile of your fund does not match it at all in any conceivable notion. Thus it becomes very possible to have a 30 person outfit running $3B in a 2 and 20 structure; you will notice the headcount:AUM ratio across AM versus HF will be drastically different for this reason.

    Additionally, HF features a lot of ex-prop traders, and certain styles have a lot of ex-banking guys. AM not so much. Accordingly, culture will be very different than a AM lifer where the setting is a little more snootily intellectual at times and more laid back. The pressure of living/dying by your PnL is reduced when you are clipping 20 bps on average off of a huge capital base as opposed to a 2 and 20 structure off of a puny capital base.

    Hope this helped

  • shark-monkey's picture

    Synthetic Shit, Good Shit. Couldn't have said it better. As with both HF's and AM, Flows follow Performance; I would say this is more of the case with HF's (especially on a relative basis to AUM). There is more pressure in the air, generally, to perform because if you have a poor year(or blow up), you are done and are out of a job..

    Fear is the greatest motivator. Motivation is what it takes to find profit.

  • In reply to BlackHat
    syntheticshit's picture

    BlackHat wrote:
    syntheticshit wrote:
    those guys running a hilarious 10-name concentrated portfolio with zero turnover

    why hilarious?

    Not knocking these guys BlackHat--it's just alien to me because the normal rules don't seem to apply. I understand the merits of investing in a small basket of companies that you feel like you have a true fundamental understanding of and feel are misvalued for whatever reason. It does eliminate a lot of the execution issues of larger funds.

    However, it's very hard for a 10-name portfolio to not be significantly tilted towards a traditional factor or sector--to what extent are you making an actual fundamental call or an implicitly deeper bet? If you were forced to have more size, would you simply scale up your positions pro rata until liquidity becomes a concern? Or would you be forced to do more research on more names? How much of your returns are your thesis being correct or you just simply being stubborn and riding a deeper trend that has nothing to do with firm-specific risk?

    If we distilled down your style to a set of rules that captured the return and risk profile of your strategy it in a systematic manner, would it still demonstrate outperformance?

    It'd be really nice to be an Eddie Lampert or David Einhorn and to some extent your positions become partially self-fulfilling based on how the rest of the market reacts to you taking a position in a name.