• Sharebar

Some of these messages are very old but I'm going to answer them anyway b/c I’m in a helpful mood.

Question: How would I know what the career path for [this particular hedge fund]?

Every fund has their own "career path"...it just depends what the founder thinks. Some give a shit and want to develop junior people. Others don't care at all and will churn and burn you. A good proxy for a quality career path is employee turnover. Are guys sticking around or not?

Question: Also, how do you tactfully talk about salary?

As long as you’re at a quality fund (which doesn’t mean high AUMs), don’t worry about salary for your first buyside job. LEARN. Honestly, most new guys are useless for the first 1-2 years and are basically highly compensated apprentices. Realize the skill sets and mentorship you get early on will materially compound your value over time.

Question: I saw that you mentioned you were going to post a case study awhile back and was wondering if you could possibly send that to me? I am trying to read and learn as much as possible about the industry before the recruiting process kicks off in April

Sorry about the delay. I’ve been buried in a bunker the last 12 months. I hope you got a gig after the April recruiting process. Don’t know if I have time to put together a case but generally I put together scenarios that require candidates to think about what a company is trying to accomplish based on the financials and supplemental information. Can you figure out a company’s strategy based on deconstructing the financials and supplemental disclosures? What’s the catalyst that will drive value creation? This requires looking at the segment data, incremental ROIC trends, changes in capital intensity, etc.

Question: [Paraphrasing] Should I (first year analyst) jump to HF after first year or wait until the second year?

It’s up to you. I’ve seen people have success leaving after 1 or 2 years. It actually might be helpful to go through the process your first year with some funds to get a feel for the questions you’ll be asked and see if your modeling/finance skills are competitive. If you get an offer…great. Otherwise you have another year to focus on areas to improve in order to be a competitive candidate the second year.

Question: What key areas would you focus on to determine if you should take a long position on the target in a merger arb position?

I really don’t do merger arb situations. I’ve been fortunate enough to be invested in a few companies that were acquired and I usually always sell on the day of the acquisition announcement and don’t bother waiting for the deal to close to get the incremental cents/dollars. I let the merger arbs deal with that lol. That said I’ll take a crack at the question…I’d key in on:

1. The size of the target relative to the acquirer. Obviously a bigger deal takes longer the close.

2. The financial health of the acquirer. Can they close the deal without relying heavily on the capital markets? Is it a cash deal or does it require debt financing?

3. The structure of the acquisition. Are you getting cash or is a portion of the buyout some random security/warrant (which may or may not be an opportunity)

4. Regulatory issues. Are these companies playing in a highly concentrated market and would get a lot of scrutiny from regulators?

Question: What do you feel is the "best" route to be a PM and why?

This is going to sound really broad, but a good route is to find a role where you are given a lot of responsibility and freedom to find names/investment situations (or at least a role that eventually leads to this kind of responsibility). I started out analyzing specific names curated by senior people but now am responsible for a bunch of sectors and pitch/find my own names. You learn very quickly that you must pitch ideas in the context of the whole portfolio (is there already a ton of exposure in an existing position, etc.).

Question: Can you be a value investor and utilize an event-driven investing strategy?

Yes. Value stocks without a catalyst are value traps.

Question: How do I transition from non-brand IB (with non-brand school credentials) to HF?

This is a challenge if you’re trying to go through a headhunter. They act as filters and would honestly get run out by a HF manager if the resume book had a bunch on non-brand name people (i.e. “What am I paying you for?!”) . It is what it is. If you want to make the jump, expect to put in some leg work. Identify funds you’re interested in (smaller is probably better since the bigger institutional places can be snobby) and start sending quality pitches or critiques of existing positions. Great analysis/ideas coupled with hustle trumps brand.

Question: Are there any books that will prime me on capital structure theory at different stages of the business cycle?

Not that I know of. I learned on the job. Although you an learn a ton reading investor letters from smart investors.

Question: Do you know of any other blogs that are written in the spirit of Distressed-debt-investing.com?

Nope. That site is solid. You can always check out valueinvestorclub to get some flavor on equity analysis (some of those write-ups suck though)

Question: If my ultimate goal is becoming a PM at a Hedge Fund, would the BB Analyst Role or Buy-Side (Traditional Asset Management) serve me better?

Depends. You can learn a ton analytically at the right asset manager, but the modeling skills that many funds are looking for is best found at investment banks. Also, many headhunters are given a clear mandate to look for BB analysts. And to be honest, the recruiting pipeline is already very established between the banks and headhunters…why put in the effort to make inroads with an asset manager that doesn’t have the kind of churn a bank annually produces.

17

Comments (97)

  • solb22's picture

    Hi Mr P, thanks for doing this!

    I have a superday at DE Shaw coming up. Any advice/insight on how these HFs interview and what to expect? Its for their rotational associates program. Sorry if this is too specific!

  • Kenny_Powers_CFA's picture

    Mr. Pink Money wrote:
    Question: Can you be a value investor and utilize an event-driven investing strategy?

    Yes. Value stocks without a catalyst are value traps.

    Can you talk a little more about what you look for as catalysts other than transactions?

    There have been many great comebacks throughout history. Jesus was dead but then came back as an all-powerful God-Zombie.

  • In reply to BigHedgeHog
    Mr. Pink Money's picture

    BigHedgeHog wrote:
    Mr. Pink Money wrote:
    BigHedgeHog wrote:
    What does a fund need to do/have in order to attract institutional money (instead of just HNW)? thx

    Relationship building can be a multi-year process with institutional funds. They will require extensive reporting and your fund will need more back office support to handle their accounts. Expect to spend a lot more time on marketing than investing.

    Are there specific things that institutions like to see more than HNW guys? eg: higher sharpe/sortino ratio, lower vol, more consistent returns, no sector concentration,...etc.

    They like infrastructure lol. A robust back office staff to handle regular reporting and communication. Diversity also helps (half joking).

  • In reply to Series7
    Mr. Pink Money's picture

    Series7 wrote:
    I don't think anyone has yet covered the prospects for a MBB consultant with ~1.5y experience entering the HF space.

    I work mostly with PE clients in the corporate finance practice. Prior internship experience from top BBs in equity research and M&A. Studied finance and able to build sufficient models. I'm currently based in Europe.

    My interest lies in fundamental equities and have read my Graham etc. Would much rather move into a smaller fund which would give enough responsibility. No desire to be a model monkey in large cap PE that I could enter very quickly if I wanted to. End goal to become a PM.

    Some questions:

    1) How is the consulting experience valued relative to bankers?
    2) I assume my best shot is targeting fundamental strategies? Do you know specific funds that like consultants?
    3) Smaller funds probably not interested in sponsoring me a US visa?

    1) I personally like consulting experience...especially if they've done cases that required valuation centric analysis (i.e. strategic alternative analysis)
    2) I assume the MBB sites have internal job boards posting opportunities...and you can always try the typical headhunters.
    3) It's a challenge but I've seen smaller funds sponsor people...especially if you're fluent in a language they want more country exposure to.

  • In reply to solb22
    Mr. Pink Money's picture

    solb22 wrote:
    Hi Mr P, thanks for doing this!

    I have a superday at DE Shaw coming up. Any advice/insight on how these HFs interview and what to expect? Its for their rotational associates program. Sorry if this is too specific!

    Not too familiar with their process. Sorry.

  • In reply to Kenny_Powers_CFA
    Mr. Pink Money's picture

    Kenny_Powers_CFA wrote:
    Mr. Pink Money wrote:
    Question: Can you be a value investor and utilize an event-driven investing strategy?

    Yes. Value stocks without a catalyst are value traps.

    Can you talk a little more about what you look for as catalysts other than transactions?

    Not going to share all the good stuff but a subtle catalyst would be any material changes to executive compensation (i.e. change of control payout is boosted, comp tied to total shareholder return, etc.)

  • OhYeah's picture

    Do you find value in blue chip stocks or do you primarily make the best investments in mid cap stocks that the information is not already discounted by the market.

    "Sincerity is an overrated virtue" - Milton Friedman

  • In reply to Mr. Pink Money
    Kenny_Powers_CFA's picture

    Mr. Pink Money wrote:
    Kenny_Powers_CFA wrote:
    Mr. Pink Money wrote:
    Question: Can you be a value investor and utilize an event-driven investing strategy?

    Yes. Value stocks without a catalyst are value traps.

    Can you talk a little more about what you look for as catalysts other than transactions?

    Not going to share all the good stuff but a subtle catalyst would be any material changes to executive compensation (i.e. change of control payout is boosted, comp tied to total shareholder return, etc.)

    That makes a lot of sense, thanks. I deal mostly with credit so we are used to "hard" catalysts in a lot of our ideas.

    Are you/is anyone else at your firm a VIC or DDIC member? How would membership be viewed on a resume?

    There have been many great comebacks throughout history. Jesus was dead but then came back as an all-powerful God-Zombie.

  • In reply to Kenny_Powers_CFA
    Mr. Pink Money's picture

    Kenny_Powers_CFA wrote:
    Mr. Pink Money wrote:
    Kenny_Powers_CFA wrote:
    Mr. Pink Money wrote:
    Question: Can you be a value investor and utilize an event-driven investing strategy?

    Yes. Value stocks without a catalyst are value traps.

    Can you talk a little more about what you look for as catalysts other than transactions?

    Not going to share all the good stuff but a subtle catalyst would be any material changes to executive compensation (i.e. change of control payout is boosted, comp tied to total shareholder return, etc.)

    That makes a lot of sense, thanks. I deal mostly with credit so we are used to "hard" catalysts in a lot of our ideas.

    Are you/is anyone else at your firm a VIC or DDIC member? How would membership be viewed on a resume?

    I'd view VIC/DDIC favorably for a junior person trying to break into the industry, but you start getting into muddy water if you're a member and at another fund. Does their boss know? If he joined us, would this person post ideas without our knowledge? etc.

  • In reply to Mr. Pink Money
    Kenny_Powers_CFA's picture

    Mr. Pink Money wrote:
    Kenny_Powers_CFA wrote:
    Mr. Pink Money wrote:
    Kenny_Powers_CFA wrote:
    Mr. Pink Money wrote:
    Question: Can you be a value investor and utilize an event-driven investing strategy?

    Yes. Value stocks without a catalyst are value traps.

    Can you talk a little more about what you look for as catalysts other than transactions?

    Not going to share all the good stuff but a subtle catalyst would be any material changes to executive compensation (i.e. change of control payout is boosted, comp tied to total shareholder return, etc.)

    That makes a lot of sense, thanks. I deal mostly with credit so we are used to "hard" catalysts in a lot of our ideas.

    Are you/is anyone else at your firm a VIC or DDIC member? How would membership be viewed on a resume?

    I'd view VIC/DDIC favorably for a junior person trying to break into the industry, but you start getting into muddy water if you're a member and at another fund. Does their boss know? If he joined us, would this person post ideas without our knowledge? etc.

    Makes sense. At least one fund I know of has a "shared" account for the research team.

    How is your fund's research team structured in terms of sector, etc responsibilities, and how are junior analyst resources allocated? Do you all have free reign to source ideas wherever you want? Do you have a dedicated junior or two that works exclusively with you or is there a pool of underlings that everyone draws from?

    There have been many great comebacks throughout history. Jesus was dead but then came back as an all-powerful God-Zombie.

  • eriginal's picture

    Great information so far - you talked briefly about SS ER and I was hoping you might be able to elaborate.

    I'll be starting in a Value Based Buyside ER Associate role; will it be easier to transition to a HF and advantageous over traditional IB, just as difficult as SS ER, or make no difference whatsoever?

    "One man with courage makes a majority." — Andrew Jackson

  • madgames's picture

    Mr Pink - I worked at a top IB (think GS/MS) for three years and now work at a small event-driven fund. I've been here for about 2 years. I'm looking to move to another fund that does more value based investing, diligence and focuses on fewer positions. At the moment I feel like I'm not learning anymore and feel really stretched as I'm one of two analysts supporting 4 PMs. It seems like it's really hard to lateral as you have mentioned and talking to headhunters always brings the risk of your team finding out you are looking - Do you have any thoughts on this or considerations on how to move around and if junior analysts form Event-Driven backgrounds and something people are looking for?

    Thanks a lot for your thoughts.

  • In reply to Ravenous
    oracle's picture

    Ravenous wrote:
    I'll chime in on the banker vs. ER discussion.

    I hired two people earlier this year to help me at a top L/S fund. It was very difficult to find what I wanted, and I ended up interviewing ~50 people before making a decision. My general impression was that nobody knew anything about anything, even if they had worked in junior roles on BB M&A teams or even at other well known HFs and PE shops. So it was more about fit, potential, and the likelihood that they would stay with the firm for a few years. As Mr. Pink implied above, it's not really worth my time to train someone who leaves after a year or two. Where I work, we ask for a minimum 4 year committment -- basically two years to move up the curve (people are practically useless for the first year) and then two years of solid contribution. Of course, no one HAS to stay, but that's what we are looking for.

    I found that bankers had better technical skill sets in terms of modeling and valuation than the ER people I met. The investment style of the firm is looking at whole businesses, and bankers were also better at that, versus ER who seemed much more concerned with what the stock was going to do in the next 10 minutes (which we don't care about). Someone who thinks they have a call that a company will beat EPS by a penny next quarter and that the stock is 20% undervalued in that context is not going to make a good impression on me. OTOH, someone who pitches me on the stock of a company that has a clear value proposition and would be a good buyout candidate in a consolidating industry, but which is trading at a low multiple with good fundamentals is going to make a much better impression.

    My ideal candidate would be a smart liberal arts major with solid accounting skills and a couple of years of experience in finance. You don't need a CFA or MBA to work here, and I don't care where anyone went to school. I'm looking for someone who loves to learn, is entrepreneurial and aggressive in finding information, and who knows enough about the technical aspects to get us on the map. Someone who loves games would be a plus (chess champion, poker player, Risk, online strategy games, etc.). We employ people who are good at all of those games, and if you claim to be good, we will test you (lol).

    My advice to anyone starting out in their career is to take a job where you will learn as much as possible. I made an offer to someone three years out of UG who had worked at GS M&A who was considering our firm and a well known PE firm -- he chose the latter because they offered him more money. I told him it was probably a mistake, that he would be 8th man on the deal team and wouldn't learn much of value. About six months later, he called me and said he felt stuck in his current role (manning the copy machine or whatever bitch jobs they gave him) and wanted to know if he could take me up on the previous offer. I said no of course. If you look at the entirety of your career, it's obvious that the goal should be to maximize your NPV. First year earnings are not the priority.

    Just my opinion, it varies widely by fund.

    I personally like doing ER because the way I TRY to do it is I like to actually get "down and dirty" with the company and not just spit out Buy/sell/hold and price targets. What I really want to learn is how to value assets (stocks & bonds, real-estate, hard asset, etc. I chose ER simply because I thought it would help me learn/refine my process/mindset for evaluating all of the things mention above. You mention that you've seen technical skills in banker that you didn't see in ERs, I wanted to ask what are those skills and what would you recommend doing for someone not from a finance/business/econ background in order to gain those skills? and are the courses from WSO worth looking into and would they actually teach me something I couldn't learn from books?

    Clever got me this far
    Then tricky got me in
    Eye on what i'm after
    I don't need another friend
    Smile and drop the cliche
    'Till you think I'm listening
    I take just what I came for
    Then I'm out the door again

  • In reply to oracle
    Ravenous's picture

    [/quote]I personally like doing ER because the way I TRY to do it is I like to actually get "down and dirty" with the company and not just spit out Buy/sell/hold and price targets. What I really want to learn is how to value assets (stocks & bonds, real-estate, hard asset, etc. I chose ER simply because I thought it would help me learn/refine my process/mindset for evaluating all of the things mention above. You mention that you've seen technical skills in banker that you didn't see in ERs, I wanted to ask what are those skills and what would you recommend doing for someone not from a finance/business/econ background in order to gain those skills? and are the courses from WSO worth looking into and would they actually teach me something I couldn't learn from books?[/quote]

    I didn't mean to thread jack on Mr. Pink's thread (his input is awesome), but in the spirit of trying to help people...

    I have a SS ER background so I am not trying to bash it. But in my opinion, it is finance-lite at best. The vast majority of SS research is focused on very simplistic analysis of next quarter's or next year's projected EPS numbers, focusing on P/E ratios or EV/EBITDA ratios. EBITDA is the metric that Wall St. uses to justify excessive valuations, and P/E can be somewhat helpful but is too simplistic IMO. And neither of these metrics give enough credit to the company's balance sheet (which IMO is the most important financial statement for value investors when looking at the majority of companies), and don't do enough justice to the cash flow statement, either. SS ER is basically, "Here's this company, and here is what mgmt said was going to happen in each segment, so I'll model that and then apply some arbitrary multiple, and it if looks cheap relative to the current price, rate the stock buy." There is no value add in that, and you develop a lot of bad habits along the way. Of course there are some good SS analysts, but not many. And that's before you consider the impact of some companies that use SS ER as their personal mouthpiece to try to manipulate the stock price. It's financial journalism, at best, not investing.

    The firm I work for has a style that could be described as private market value with a catalyst. We don't use the GAMCO models and there are some important differences, but the styles are somewhat similar. We look at whole business ownership and the entire business as an entity, not just the stock (the "stock" is actually the least important part of the analysis). It's sort of a private equity approach to the public markets, even though we don't buy entire companies. So to the extent that bankers spend more time looking at the balance sheet and transactions across the capital structure in general, as well as how to create or unlock value in a company, that is helpful for what we do. It's hard to produce alpha looking at the same short-term numbers that everyone else is looking at. We make money by understanding the company's value engine and likely range of value in the future based on a variety of factors.

    As for skills, I was not a business or econ major either. I'm almost entirely self taught, with a hat tip to a couple of important mentors. There is no silver bullet. You have to read extensively and look at hundreds of companies. If you can master basic corporate finance, intermediate accounting, and some valuation, you will have a good start. I learned a lot when I was starting out by reading the Buffett FAQ, Margin of Safety, Greenblatt, and the McKinsey books. I also spent a lot of time trying to reverse engineer successful stock picks that I heard about at work or from other sources.

    If you ever played baseball, it's kind of like that. You can read every book in the world about swinging a bat, and that would be helpful to some extent, but it would be a lot less helpful than actually swinging at a million pitches. After a while, you would start to differentiate between a curve ball, a sinker, and the fat pitch over the middle of the plate.

    I don't know anything about the WSO courses.

  • WallStreetOasis.com's picture

    ...just to clarify, we don't have any courses in house. We are partners with Wall Street Prep which gives WSO users 15% off on their self-study financial modeling training and 35% off on their live IB Bootcamps if you're a student.

    We do have Wall Street Mentors which also helps match young professionals and students with senior executives, as well as a Resume Review service, but no courses.

    Just wanted to make sure that was clear so there is no confusion.

    -Patrick

  • D M's picture

    Always great having you around Mr. PM! Look forward to reading through this thread at some point

    "You stop being an asshole when it sucks to be you." -IlliniProgrammer
    "Your grammar made me wish I'd been aborted." -happypantsmcgee

  • In reply to Ravenous
    oracle's picture

    Ravenous wrote:
    I personally like doing ER because the way I TRY to do it is I like to actually get "down and dirty" with the company and not just spit out Buy/sell/hold and price targets. What I really want to learn is how to value assets (stocks & bonds, real-estate, hard asset, etc. I chose ER simply because I thought it would help me learn/refine my process/mindset for evaluating all of the things mention above. You mention that you've seen technical skills in banker that you didn't see in ERs, I wanted to ask what are those skills and what would you recommend doing for someone not from a finance/business/econ background in order to gain those skills? and are the courses from WSO worth looking into and would they actually teach me something I couldn't learn from books?[/quote]

    I didn't mean to thread jack on Mr. Pink's thread (his input is awesome), but in the spirit of trying to help people...

    I have a SS ER background so I am not trying to bash it. But in my opinion, it is finance-lite at best. The vast majority of SS research is focused on very simplistic analysis of next quarter's or next year's projected EPS numbers, focusing on P/E ratios or EV/EBITDA ratios. EBITDA is the metric that Wall St. uses to justify excessive valuations, and P/E can be somewhat helpful but is too simplistic IMO. And neither of these metrics give enough credit to the company's balance sheet (which IMO is the most important financial statement for value investors when looking at the majority of companies), and don't do enough justice to the cash flow statement, either. SS ER is basically, "Here's this company, and here is what mgmt said was going to happen in each segment, so I'll model that and then apply some arbitrary multiple, and it if looks cheap relative to the current price, rate the stock buy." There is no value add in that, and you develop a lot of bad habits along the way. Of course there are some good SS analysts, but not many. And that's before you consider the impact of some companies that use SS ER as their personal mouthpiece to try to manipulate the stock price. It's financial journalism, at best, not investing.

    The firm I work for has a style that could be described as private market value with a catalyst. We don't use the GAMCO models and there are some important differences, but the styles are somewhat similar. We look at whole business ownership and the entire business as an entity, not just the stock (the "stock" is actually the least important part of the analysis). It's sort of a private equity approach to the public markets, even though we don't buy entire companies. So to the extent that bankers spend more time looking at the balance sheet and transactions across the capital structure in general, as well as how to create or unlock value in a company, that is helpful for what we do. It's hard to produce alpha looking at the same short-term numbers that everyone else is looking at. We make money by understanding the company's value engine and likely range of value in the future based on a variety of factors.

    As for skills, I was not a business or econ major either. I'm almost entirely self taught, with a hat tip to a couple of important mentors. There is no silver bullet. You have to read extensively and look at hundreds of companies. If you can master basic corporate finance, intermediate accounting, and some valuation, you will have a good start. I learned a lot when I was starting out by reading the Buffett FAQ, Margin of Safety, Greenblatt, and the McKinsey books. I also spent a lot of time trying to reverse engineer successful stock picks that I heard about at work or from other sources.

    If you ever played baseball, it's kind of like that. You can read every book in the world about swinging a bat, and that would be helpful to some extent, but it would be a lot less helpful than actually swinging at a million pitches. After a while, you would start to differentiate between a curve ball, a sinker, and the fat pitch over the middle of the plate.

    I don't know anything about the WSO courses.[/quote]

    Ravenous,

    Thanks for taking time out to write up this detailed response, very informative.

    Clever got me this far
    Then tricky got me in
    Eye on what i'm after
    I don't need another friend
    Smile and drop the cliche
    'Till you think I'm listening
    I take just what I came for
    Then I'm out the door again

  • KarateBoy's picture

    Can you explain what you mean by "EBITDA is the metric that Wall St. uses to justify excessive valuations"?

    I feel that EV/EBITDA can you give you more holistic view of the company's value, especially if you consider its capex requirement, interest expense, and tax rate.

    Thanks,

    KB

    Follow me on Twitter: https://twitter.com/_KarateBoy_

  • In reply to KarateBoy
    Kenny_Powers_CFA's picture

    KarateBoy wrote:
    Can you explain what you mean by "EBITDA is the metric that Wall St. uses to justify excessive valuations"?

    I feel that EV/EBITDA can you give you more holistic view of the company's value, especially if you consider its capex requirement, interest expense, and tax rate.

    Thanks,

    KB

    Don't want to answer for the other, more experienced professionals in the thread but to me the number one thing that EBITDA doesn't convey (which you touched on) is the capital intensity of a business.

    There have been many great comebacks throughout history. Jesus was dead but then came back as an all-powerful God-Zombie.

  • BigHedgeHog's picture

    EBITDA is cheating - income taxes and interest taxes are real expenses that must be accounted for. A lot of people substitute EBITDA for cash flow, which is misleading.

  • Ravenous's picture

    The problem is that EBITDA doesn't consider those things. It is supposedly a proxy for cash flow, but it ignores capex, interest, tax rates, and working capital changes, which are all real uses of cash. FCF can differ materially from EBITDA.

    Also, some companies put forth "adjusted EBITDA" guidance which includes a bunch more garbage in there. At the end of the day, a company's worth is the present value of discounted cash flows. To the extent that a lot of buy outs are predicated on EBITDA, it is often a metric used to justify over valuation. IMO this is especially true in tech buy outs which can go out at crazy multiples like 15x adjusted EBITDA (including options expense, which should be considered a real expense and not a freebie). When you strip out all the add-backs, many such companies lose money, sometimes a lot. Outside of hot LBO markets (like the buyout frenzy of 2005 / 2006, or the mid-1980s), you're less likely to see egregious EBITDA multiples applied to "old line" businesses, but it can happen when "synergies" are considered an important part of the deal (interestingly, more often than not, these synergies fail to materialize fully (or are even sometimes completely absent) post-deal).

    If you're going to add everything back, you might as well use EBITDARDSGACOGS, more commonly known as "revenue" -- I use EV/sales multiples a lot depending on the business and operating structure of the company. But seriously, FCF is the metric, and if you want to look strictly at the P&L, EBIT would be a better metric than EBITDA (DA should approximate capex over time for most businesses unless they are in high growth mode). If the company is losing money / burning cash or is in a high growth phase, or some other "non-traditional" situation, you could then resort to other valuation metrics. I also use book value a lot, but prefer cash flow metrics.

    I'm not saying the EBITDA metric is totally worthless, but you should be skeptical if that is the metric a company prefers to employ (especially if it is a capital intensive business, as someone else noted). And I agree with you if your point was that EV multiples lead to a more holistic picture of the company because such multiples capture the state of the capital structure.

  • Gray Fox's picture

    “I think that, every time you see the word EBITDA, you should substitute the words “bullshit earnings” - Charlie Munger

  • whatwhatwhat's picture

    What's the biggest downside to not going through BB training and instead starting at a hedge fund straight out of undergrad? Assuming it's a decent fund, is there much of a downside?

  • gamenumbers's picture
  • BigHedgeHog's picture

    1) a combination of reading the news, listening to conference calls, reading the Ks/Qs/filings, speaking with management, speaking with the sell side, coming up with new ideas, testing new ideas, and more reading

    2) a superstar is someone who works quickly to uncover new ideas and will give the PM an intelligent yay or nay on an idea before digging deeper

    3) models can be complicated or simple, pretty ad hoc (but you need to know the basics incl building one from scratch - no templates)

    4) most likely some arcane tricks that will help the L/S fund uncover value

    5) HF analysts will get paid more if the fund is successful, ER is lower risk as long as you maintain a good relationship with the companies that you cover (and obviously your boss)

    more fund at a HF since everyday is truly different, in ER you cover the same companies again and again (and too many at once for that matter)

    6) every fund is different - it depends on the founder(s) and how much you want to do (sometimes). if you're not a true market junkie than you may not like that randomness / lack of structure

    IMHO

  • grosse's picture

    long time reader, first time poster.
    My background - 2 years in M&A group at boutique, now 5 years buyside equity research at two different smaller hedge funds. I will try to avoid saying "it depends" and share my experience.

    1) Day in the life
    The time you arrive in the office is dictated by when your morning meeting or call is.
    Before this, it is your job to round up all the news (company and industry) and sell-side notes from the prior evening or out that morning. You'll want to do a lot more than re-hash the headlines - providing commentary on industry news and how it affects the portfolio is what a good analyst does. You'll also want to see where the names you cover are trading pre-market, in case there is something you missed.

    Morning meeting - go over news/ events with team. Discuss new ideas, research you've completed, or update your PM / the team on where your research is pointing to. Also discuss how you will be spending your time. PM may add new names to your list, re-route your research, or re-prioritize your efforts. Meetings tend to be under 1 hr, so this is where it is important to "communicate effectively".

    Back to work - check portfolio for any dramatic moves and why. Be prepared for a call at any point in the day - "XYZ is down 4%?! Why? Find out!". You'll also be getting calls throughout the day from your sell-side brokers pitching you on ideas, lunches, conferences.

    What is actual work? The basics are reading filings, transcripts, flipping through presentations, speaking with management, attending both industry and wall street conferences. Modeling is more of a "check the box" in most cases. I don't mean to be dismissive, but the best models I've seen from people I work with are ugly and simple. Quick quarterly models with a few key drivers that can give you a upside/base/downside EBITDA/FCF/EPS/Cash EPS number.

    In my roles, I've also spent a lot of time generating "primary" / "proprietary" research. Channel checks, calling people throughout the industry to get the latest scoop, supplier/customer calls, former employees, etc. This tends to be difficult work for a lot of people and can really make you stand out. As i've talked to others, this seems to be growing in importance (perhaps b/c everything I mentioned before this is publicly available and looked at by thousands of people).

    Having said how important it can be, in reality, I think it's more confirmatory due diligence. Occasionally you can get a gem, i.e. customer says "we haven't ordered in 2 months, got 4 months inventory", but more often then not it is very qualitative - dealer/salesperson says "business has been slow, but good pipeline". You need to use that, along with the rest of your work to figure out if that is priced in. In my experience, this kind of work is never handled with enough rigor, but I'd be interested to see what others have seen.

    If you come across a gem, or complete your work on a name, you'll probably circle back to your PM to see if they have free time (often after the close) to discuss, get feedback, make plans to answer new questions, etc.

    After the close, it's more research. Make due diligence calls to west coast. Keep an eye on the calendar and know what is coming tomorrow and what you'll need to be prepared for.

    2) Superstar - being prepared/not missing anything. The worst is when a stock has moved 5% and you tell your PM it's b/c of a conference they are attending nearby that you missed and you don't know what they said that is making the stock move.

    Low level analyst - provide data (headlines, regurgitate sell-side research, etc.)
    Superstar - provide insight from data, have an educated opinion, do differentiated work, understand what the street knows and what they are focused on

    3) modelling - unless you are talking about some type of corporate event, models aren't that hard. The key is understanding the catalyst in the stock, and if/how you can incorporate that into your model.

    4) maintain models - I do. Even if it is a name we've passed on, I try to keep them up to date. Best case is that the stock of a company you know well tanks one day and you can buy it cheap. You need to be ontop of your PM at 9:30am getting him/her to buy and have all the up to date info

    5) Pay - I did 2 years banking, now in my 5th year buyside. I make ER associate makes. Anyone else care to share their comp?

    6) Hours per week - typically, I would say I work 8am to 630pm. It moves around. I see my peers online and go offline and get the sense they work similar hours (maybe a bit later).

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

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    There have been many great comebacks throughout history. Jesus was dead but then came back as an all-powerful God-Zombie.

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

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