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Contrary to what many on this forum appear to recommend, it seems that many of the top hedge fund managers today didn't start their finance careers out of IB.

For example, Bruce Berkowitz started out in PWM, Seth Klarman started out as a research analyst at Mutual Series, Joel Greenblatt as an analyst at a special sit. hedge fund, David Tepper as a credit analyst, Steve Druckenmiller as a research analyst, and many more that I could list.

The only two that I could find who started out in IB are David Einhorn and Bill Ackman. (Not to detract from them, as they are both great managers with excellent track records).

(Granted, most of these managers specialize in a long/short, value approach, but I'm most interested in this space, so these are the managers I'm most familiar with).

So my question is if you guys still think IB is the best place to start out if your ultimate goal is to eventually manage money under your own l/s fund, and if not, what entry level position in your opinion would give you the best experience/learning environment to help you achieve this goal. I'm curious to hear your input on this.

Thanks.

Comments (28)

  • westcoaster's picture

    that is my goal and I'm starting in S&T. Figure I can go to bschool to get the more in depth modeling skills down if I need to.

  • IlliniProgrammer's picture

    Trading, Research, or Risk Management.

    If you want to be the next John Paulson, you have to learn to think like a risk manager- figure out what risks the market isn't pricing in, and cheap ways of hedging them.

  • brotherbear's picture

    Wait...you think b-school is going to teach you 'in depth modelling skills'? B-school teaches you advanced undergraduate-level finance. It does the same for marketing, accounting, organizational behavior, etc. It definitely does not teach you advanced modelling skills that are beyond what you're going to learn on a desk.

    If you're a sales professional within S&T, maybe b-school adds some quantitative skills you wouldn't have picked up on the job. But so would the CFA. If you want to run your own fund, I'd say the best background is in research, not S&T.

    Historically, there were but a few paths to becoming a portfolio manager. Firstly, you could start within S&T (as a trader, not as a salesman), move from a market-making desk to a prop desk, and then take your track record with you to the buy-side. Or, you could start as a trader, move to a small hedge fund or asset manager, convince them to let you run a small portfolio, and take your track record with you to a larger fund (or use it to start your own fund). Or, you could start within the portfoilio management group at a large asset manager and work your way up, eventually having P&L responsibility on a fund of your own. And finally, you can start in research (on either the buy-side or the sell-side), publish your ideas, run a shadow portfolio based on those ideas, keep track of your own performance, and parlay your track record into a junior portfolio manager position on the buy-side.

    There are ups and downs to all of the paths. There are definitely more entry-level trader and research positions than there are entry-level portfolio management positions. If you're taken onto the buy-side immediately, you're going to be doing more menial work than your peers on the sell-side. You will not be running a portfolio or making any decisions within JPMAM, PIMCO, GSAM, or BlackRock for several years. You're going to start out doing portfolio attributions, portfolio construction, and (maybe) some cash management. On the other hand, you don't have to leave your team or find a new job to eventually run money yourself. It's a slower (but safer) path.

    Prop desks are largely dead now. Dodd-Frank killed them or molded them into something entirely different. You're not going to be sitting on a Goldman prop desk any time soon. That doesn't mean you cannot take proprietary risk as a market-maker. But how do you capture that? How can you prove your Sharpe Ratio? Your IRR? Your BPS per trade? It's going to be difficult. And there is a real difference between understanding liquidity constraints in the market, managing flow, and taking real proprietary risk based on solid fundamental or technical research.

    That's why I suggest the following: start in S&T as a trader. Try to rotate onto a couple of different desks in your first two years. Learn the business as fast as you can. And then, transition to research. Specifically, aim to become a 'desk strategist,' whose responsibility is to create fundamental or technical trading ideas for the desk on which they sit. Be a good strategist, and circulate your research amongst traders on several different desks. Make your salesmen aware of your ideas. Have them promote your thoughts to their clients. Have them introduce you to their clients, and you might find yourself on the buy-side sooner than you think.

    That would be the ideal background for a macro PM. For an equity long-short PM, research is better than trading. If you're going to learn trading, though, be sure to sit on both the long and the short desks. Learn how to fund yourself. Stock lending is the more esoteric field. Pretty much everyone knows how to buy stocks. Did you notice how you never mentioned a cash equity trader becoming a PM? That's because they're not stock-pickers, and that's what is required of a long-short manager. Research requires that skill set. So does strategy.

    Everyone focuses on S&T because Goldman's traders made a fortune leading into the crisis. Is that going to continue? Perhaps at some banks, but not all. The real money in finance is to be made on the buy-side, but only if you're a competent risk-taker. If your skills are 'hand-shaking' skills, be a salesman. That's what all partners at consultancies and law firms are. That's what all MDs in IBDs are. That's what capital raisers within PE funds or hedge funds are. You can make a lot of money as a salesman if you're good at it, so don't disdain the profession because you simply do not understand it.

    It took me longer than I would have liked to learn these things. No one told them to me in any case, so don't get so fixated on a particular field. It's not really possible to plan 5-10 years out. Not really. Think of what you'll do for the next 3 years, no more. Your life changes a lot between 20 and 30. Be open to what comes to you, position yourself for success, and see what happens. That's all you can really do.

  • Freshcut's picture

    I dont really think it matters. If you have the money, knowledge, and investor backing it really doesn't matter where you start. I heard that there is a small successful hedge fund being run by a guy who only graduated high school. If you have a decent strategy and enough people that trust you with their money you can go pretty far.

  • LLcoolJ's picture

    Klarman started Baupost at 25, and before that he was mentored by Max Heine and Michael Price who are legendary value investors.

    Tepper was head of the high-yield desk at Goldman at 28. And this was during the 80s where junk bonds were the hottest shit.

    Druckenmiller was head of equity research PNC at 25, and had started Duquesne at 28.

    most of these guys were running shit before many europeans had even finished university, so i don't think what technically their first job was really mattered. i think as long as you start in a front-office markets related job and you are good at what you do, you will eventually have the opportunity to build a track record. and your track record is what counts if you want to be a PM and run a fund. even from sales (which was actually considered the best S&T job in the 80s) - off the top of my head Dan Loeb was VP in junk bond sales at citi and SVP in distressed sales at jefferies.

  • In reply to brotherbear
    Brady4MVP's picture

    brotherbear:
    Wait...you think b-school is going to teach you 'in depth modelling skills'? B-school teaches you advanced undergraduate-level finance. It does the same for marketing, accounting, organizational behavior, etc. It definitely does not teach you advanced modelling skills that are beyond what you're going to learn on a desk.

    If you're a sales professional within S&T, maybe b-school adds some quantitative skills you wouldn't have picked up on the job. But so would the CFA. If you want to run your own fund, I'd say the best background is in research, not S&T.

    Historically, there were but a few paths to becoming a portfolio manager. Firstly, you could start within S&T (as a trader, not as a salesman), move from a market-making desk to a prop desk, and then take your track record with you to the buy-side. Or, you could start as a trader, move to a small hedge fund or asset manager, convince them to let you run a small portfolio, and take your track record with you to a larger fund (or use it to start your own fund). Or, you could start within the portfoilio management group at a large asset manager and work your way up, eventually having P&L responsibility on a fund of your own. And finally, you can start in research (on either the buy-side or the sell-side), publish your ideas, run a shadow portfolio based on those ideas, keep track of your own performance, and parlay your track record into a junior portfolio manager position on the buy-side.

    There are ups and downs to all of the paths. There are definitely more entry-level trader and research positions than there are entry-level portfolio management positions. If you're taken onto the buy-side immediately, you're going to be doing more menial work than your peers on the sell-side. You will not be running a portfolio or making any decisions within JPMAM, PIMCO, GSAM, or BlackRock for several years. You're going to start out doing portfolio attributions, portfolio construction, and (maybe) some cash management. On the other hand, you don't have to leave your team or find a new job to eventually run money yourself. It's a slower (but safer) path.

    Prop desks are largely dead now. Dodd-Frank killed them or molded them into something entirely different. You're not going to be sitting on a Goldman prop desk any time soon. That doesn't mean you cannot take proprietary risk as a market-maker. But how do you capture that? How can you prove your Sharpe Ratio? Your IRR? Your BPS per trade? It's going to be difficult. And there is a real difference between understanding liquidity constraints in the market, managing flow, and taking real proprietary risk based on solid fundamental or technical research.

    That's why I suggest the following: start in S&T as a trader. Try to rotate onto a couple of different desks in your first two years. Learn the business as fast as you can. And then, transition to research. Specifically, aim to become a 'desk strategist,' whose responsibility is to create fundamental or technical trading ideas for the desk on which they sit. Be a good strategist, and circulate your research amongst traders on several different desks. Make your salesmen aware of your ideas. Have them promote your thoughts to their clients. Have them introduce you to their clients, and you might find yourself on the buy-side sooner than you think.

    That would be the ideal background for a macro PM. For an equity long-short PM, research is better than trading. If you're going to learn trading, though, be sure to sit on both the long and the short desks. Learn how to fund yourself. Stock lending is the more esoteric field. Pretty much everyone knows how to buy stocks. Did you notice how you never mentioned a cash equity trader becoming a PM? That's because they're not stock-pickers, and that's what is required of a long-short manager. Research requires that skill set. So does strategy.

    Everyone focuses on S&T because Goldman's traders made a fortune leading into the crisis. Is that going to continue? Perhaps at some banks, but not all. The real money in finance is to be made on the buy-side, but only if you're a competent risk-taker. If your skills are 'hand-shaking' skills, be a salesman. That's what all partners at consultancies and law firms are. That's what all MDs in IBDs are. That's what capital raisers within PE funds or hedge funds are. You can make a lot of money as a salesman if you're good at it, so don't disdain the profession because you simply do not understand it.

    It took me longer than I would have liked to learn these things. No one told them to me in any case, so don't get so fixated on a particular field. It's not really possible to plan 5-10 years out. Not really. Think of what you'll do for the next 3 years, no more. Your life changes a lot between 20 and 30. Be open to what comes to you, position yourself for success, and see what happens. That's all you can really do.

    Another awesome post, brotherbear.

    Quick question. Can an elite MBA (wharton/booth/columbia) allow one to get into strategy or research at a BB S&T desk?

  • cplpayne's picture

    Make your own path and stop thinking you need to imitate everybody before you

    "One should recognize reality even when one doesn't like it, indeed, especially when one doesn't like it." - Charlie Munger

  • In reply to brotherbear
    DurbanDiMangus's picture

    brotherbear:
    If you want to run your own fund, I'd say the best background is in research, not S&T.

    I think we also need to reconcile all the evidence you provided with the reality that top-tier HFs are actively recruiting M&A professionals. A simple look @ Glocap these days for Analyst opps @ L/S and/or Value funds will substantiate that. Completely agree on the desk-analyst comment, a role often overlooked.

  • alexpasch's picture

    PE for me. ;)

    Consultant to a Fortune 50 Company

  • rickyross's picture

    Brotherbear, thanks for your insightful post. Nice to see substantive contributions sprinkled in with all the other crap posted on here lately.

    People tend to think life is a race with other people. They don't realize that every moment they spend sprinting towards the finish line is a moment they lose permanently, and a moment closer to their death.

  • In reply to Brady4MVP
    IlliniProgrammer's picture

    Brady4MVP:

    Quick question. Can an elite MBA (wharton/booth/columbia) allow one to get into strategy or research at a BB S&T desk?

    Maybe public-side research. An MBA doesn't really help you in trading, Brady. *Headslap* you should know better.

  • In reply to IlliniProgrammer
    Brady4MVP's picture

    IlliniProgrammer:
    Brady4MVP:

    Quick question. Can an elite MBA (wharton/booth/columbia) allow one to get into strategy or research at a BB S&T desk?

    Maybe public-side research. An MBA doesn't really help you in trading, Brady. *Headslap* you should know better.

    Trading desks at BB's recruit actively at top b-schools like wharton/booth/columbia.

  • IlliniProgrammer's picture

    There is not a single MBA working as a trader at my BB desk. Not even one. We do have an MBA working as a business analyst and a couple as salespeople. Not knocking MBAs- they're great for a lot of roles at a bank, but they're not particularly well-suited for trading.

    Yes, you can be a trader and have an MBA. You can also be a trader with an M. Div and five years of experience as a Baptist missionary or be a trader with a history PhD. That doesn't mean those experiences are particularly necessary or helpful for trading- though experience as a missionary in Brazil might be mildly helpful if you want to trade LatAm securities.

    MBAs are great for research, IBD, and consulting. They are generally worthless for trading, even at a BB- the only place where one might think they could be helpful. If you are getting hired as a trader out of an MBA program, you probably would have gotten hired into the same role before getting your MBA.

    If you want to do trading, get an MFE, not an MBA. MFE is a clear trading or structuring degree and demostrates quantitative competency in a way that an MBA cannot. Take a calculus-based probability course, take a programming course and take a linear algebra course- they can be done at any four-year school, and apply to Chicago's MFE program. If you really want to get hired into BB S&T or a high end prop shop after some industry experience, that's the easiest, cheapest, and fastest route if you aren't having success applying directly.

    Don't believe me? Andy Nguyen is the generally recognized expert on this stuff. Go talk to him on Quantnet.com. The only difference is that he'll tell you to get your MFE from IIT, not Chicago.

    BTW, Weitian says hi.

  • In reply to IlliniProgrammer
    Brady4MVP's picture

    IlliniProgrammer:
    There is not a single MBA working as a trader at my BB desk. Not even one. We do have an MBA working as a business analyst and a couple as salespeople. Not knocking MBAs- they're great for a lot of roles at a bank, but they're not particularly well-suited for trading.

    Yes, you can be a trader and have an MBA. You can also be a trader with an M. Div and five years of experience as a Baptist missionary or be a trader with a history PhD. That doesn't mean those experiences are particularly necessary or helpful for trading- though experience as a missionary in Brazil might be mildly helpful if you want to trade LatAm securities.

    MBAs are great for research, IBD, and consulting. They are generally worthless for trading, even at a BB- the only place where one might think they could be helpful. If you are getting hired as a trader out of an MBA program, you probably would have gotten hired into the same role before getting your MBA.

    If you want to do trading, get an MFE, not an MBA. MFE is a clear trading or structuring degree and demostrates quantitative competency in a way that an MBA cannot. Take a calculus-based probability course, take a programming course and take a linear algebra course- they can be done at any four-year school, and apply to Chicago's MFE program. If you really want to get hired into BB S&T or a high end prop shop after some industry experience, that's the easiest, cheapest, and fastest route if you aren't having success applying directly.

    Don't believe me? Andy Nguyen is the generally recognized expert on this stuff. Go talk to him on Quantnet.com. The only difference is that he'll tell you to get your MFE from IIT, not Chicago.

    BTW, Weitian says hi.

    I agree that MFE programs are better suited due to the heavy quant skills. However, it is a FACT that BB S&T desks aggressively recruit at top MBA programs, especially the ones known for rigorous finance, like wharton, booth, columbia. I personally know people at these schools who had NO previous finance background but easily got trading jobs at BB's. I think you underestimate the power of a prestigious MBA to open doors for you.

  • IlliniProgrammer's picture

    I agree that MFE programs are better suited due to the heavy quant skills. However, it is a FACT that BB S&T desks aggressively recruit at top MBA programs, especially the ones known for rigorous finance, like wharton, booth, columbia. I personally know people at these schools who had NO previous finance background but easily got trading jobs at BB's.

    They probably could have gotten trading jobs at BBs without their MBAs. $120K is a lot of money to spend just to get yourself in front of a recruiter at a job fair. $50K for an MFE is a lot less money to spend- and opens the door to a lot more positions- if you ask me.

    I think you underestimate the power of a prestigious MBA to open doors for you.

    My experience has shown that traders- even traders at BBs with target school backgrounds- have a crass disregard for prestige. In S&T at least, the target school system largely runs off of inertia from IBD and research, though more quantitative programs are starting to make run off of a little more than inertia.

  • In reply to IlliniProgrammer
    Brady4MVP's picture

    IlliniProgrammer:
    I agree that MFE programs are better suited due to the heavy quant skills. However, it is a FACT that BB S&T desks aggressively recruit at top MBA programs, especially the ones known for rigorous finance, like wharton, booth, columbia. I personally know people at these schools who had NO previous finance background but easily got trading jobs at BB's.

    They probably could have gotten trading jobs at BBs without their MBAs. $120K is a lot of money to spend just to get yourself in front of a recruiter at a job fair. $50K for an MFE is a lot less money to spend- and opens the door to a lot more positions- if you ask me.

    I think you underestimate the power of a prestigious MBA to open doors for you.

    My experience has shown that traders- even traders at BBs with target school backgrounds- have a crass disregard for prestige. In S&T at least, the target school system largely runs off of inertia from IBD and research, though more quantitative programs are starting to make run off of a little more than inertia.

    The on-campus recruiting and other career resources available at top schools are well worth the money. Let's say you were in a non-finance field but wants to trade emerging market currencies at a BB. Good luck getting an interview for such a role unless you have some sick connections. But if that same person went to a school like booth, he will easily land S&T interviews through on-campus recruiting, company presentations, etc. Getting in is the tough part, and having that access is worth the cost, which is why for career switchers, an MBA is ESSENTIAL.

  • In reply to Brady4MVP
    IlliniProgrammer's picture

    Brady4MVP:
    The on-campus recruiting and other career resources available at top schools are well worth the money.

    Sure, but you can get a headhunter with the same connections for free, and you can get an MFE and have access to the very same career resources for $70K less.

    Let's say you were in a non-finance field but wants to trade emerging market currencies at a BB. Good luck getting an interview for such a role unless you have some sick connections.

    Or a few years of relevant experience and a headhunter. Or an MFE.

    But if that same person went to a school like booth, he will easily land S&T interviews through on-campus recruiting, company presentations, etc. Getting in is the tough part, and having that access is worth the cost, which is why for career switchers, an MBA is ESSENTIAL.

    Haha, hardly. Perhaps a graduate degree, but I really do think that a Financial Mathematics or Financial Engineering degree from a good school is a much better value. You get the same S&T recruiting opportunities while paying 40% of the tuition. The catch is that you need to get three math and CS courses out of the way. This can be done at any four-year school. Chicago will honor just about any state school and even a number of four-year community colleges.

  • PeteMullersKeyboard's picture

    Excellent info in this thread, and a lot to think about.

    "When you stop striving for perfection, you might as well be dead."

  • Bondarb's picture

    yes this was a good old post...i think brotherbear basically covered it and actually i followed one of the paths he mentioned...was an ops guy, then an analyst at an old-school bank prop desk, they eventually let me trade, and then I got hired as a PM at a hedge fund. The bank prop model was great because there was much less pressure to put up percent returns without real investors so places were much quicker to give younger people a shot to trade and build something that at least resembled a track record. At a hedge fund it is much much harder to get balance sheet...nobody wants to tell an investor that some 28 year old kid with no real experience is rmanaging their money.

  • In reply to IlliniProgrammer
    CreditAnalyst85's picture

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  • BlackHat's picture

    I hate victims who respect their executioners

  • leveredarb's picture