Best Entry Level Job for Running Future Hedge Fund
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.
trading
trading
that is my goal and I'm
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.
Trading, Research, or Risk
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.
Work hard, play hard.
Wait...you think b-school is
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.
I dont really think it
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.
Klarman started Baupost at
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.
excellent post, brotherbear!
excellent post, brotherbear!
brotherbear wrote: Wait...you
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?
Make your own path and stop
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
brotherbear wrote: If you
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.
PE for me. ;)
PE for me. ;)
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Brotherbear, thanks for your
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.
brotherbear wrote: . Thank
.
Thank you, trully appreciate the insight.
Brady4MVP wrote: Quick
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.
Work hard, play hard.
IlliniProgrammer
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.
There is not a single MBA
Work hard, play hard.
IlliniProgrammer wrote: There
Quote: I agree that MFE
Work hard, play hard.
IlliniProgrammer
Brady4MVP wrote: The
Work hard, play hard.