MF PE to Hedge Funds
(Orangutan, 340
Points)
on 12/22/12 at 12:19pm
In the 10xleverage MS/KKR thread, it was said that a lot of pre-MBA associates at places like KKR/BX are trying to move into hedge funds after their two years.
Why is this? Is PE not the holy grail in the minds of the top performers?
Also, which hedge funds and what types of hedge funds are these people trying to get into? Which HFs require PE experience?
Great topic - i am interested
Great topic - i am interested in a discussion as well
Holy grail? Of what? You
Holy grail? Of what? You sound like a very big tool, brother.
The HBS guys have MAD SWAGGER. They frequently wear their class jackets to boston bars, strutting and acting like they own the joint. They just ooze success, confidence, swagger, basically attributes of alpha males.
SonnyZH: Holy grail? Of what?
Holy grail? Of what? You sound like a very big tool, brother.
Not saying I agree with the tunnel-vision prestige-worship mindset. It's not like only one path is legit. Was just wondering what the general sentiment is and the reasons that people have for choosing to head to HFs after PE rather than going to B-school and going back to PE.
I mean, I imagine you can
I mean, I imagine you can answer this yourself, right?
Why go to a hedge fund?
A: You like public markets more than working on (mostly) private transactions. The challenges involved in a HF are different than those involved in PE. PE is very process oriented. HFs are to a degree, but the kind of thinking required is different since the public markets are a completely different animal.
Also, it's entirely possible to go to PE, learn a bunch, but still not really like it enough to want to make a long-term career of it.
Side note: the junior guy that worked on the Herbalife presentation / thesis with Bill Ackman is an ex PE guy (from Blackstone, I believe.) Probably about 30 - 31 years old now, joined Ackman's fund back in like 2008.
Check out my WSO Blog
To be honest, I don't know
To be honest, I don't know many people who want to go to a megafund PE job with the expectation that it'll be a great job. The hours are still tough (though usually better than banking), the due diligence process can be grueling and boring at times, and it's extremely difficult to move up. Yes, the pay is good, but the pay at the top hedge funds is often better than at the megafunds especially in a good year. Many people are interested in HF/VC after a megafund but will got to a megafund out of banking because it represents 1. another strong, visible brand on the resume (KKR/Blackstone still has more name recognition than a comparable hedge fund, e.g. Eton Park/Glenview even though they're really both equally respected for those in high finance) that keeps doors open 2. a much more structured process, and represents a less risk averse path after banking. Afterwards, however, many MF PE associates leave for greener pastures, having gained another 2 years of a structured program and another top name on the resume
wso_user: To be honest, I
To be honest, I don't know many people who want to go to a megafund PE job with the expectation that it'll be a great job. The hours are still tough (though usually better than banking), the due diligence process can be grueling and boring at times, and it's extremely difficult to move up. Yes, the pay is good, but the pay at the top hedge funds is often better than at the megafunds especially in a good year. Many people are interested in HF/VC after a megafund but will got to a megafund out of banking because it represents 1. another strong, visible brand on the resume (KKR/Blackstone still has more name recognition than a comparable hedge fund, e.g. Eton Park/Glenview even though they're really both equally respected for those in high finance) that keeps doors open 2. a much more structured process, and represents a less risk averse path after banking. Afterwards, however, many MF PE associates leave for greener pastures, having gained another 2 years of a structured program and another top name on the resume
What makes it a less risk averse path? As in, HF's are more likely to go under than PE funds?
Also, I've heard that statement about it being hard to move up in PE. An analyst at a bank told me that the dudes in the partner/MD roles in the PE funds don't want to leave so there aren't as many slots open for people trying to move up in the ranks, whereas there is more of a chance for mobility in a HF. Is that the general sentiment?
This kind of perspective
This kind of perspective makes me laugh and is fairly reflective of how prestige-driven and myopic students/junior bankers tend to be. There are two main reasons why there is a bid for HF jobs from ex-PE guys.
First is that PE tends to be a 2 year gig, after which you go to b-school, and then participate in a knife fight for a VP position post-MBA. The key here is that there are significantly more pre-MBA associates than there are post-MBA VP positions. Think about it. People often end up moving to a smaller fund, or leaving b-school empty-handed. Yes, there is no need to respond with your anecdote that your friend's friend was ex-BX and is now a VP at KKR. Anything can happen, but just look at the numbers, and this will only get harder in light of the following point.
Second is that PE is in decline. There is way too much AUM chasing a shrinking universe of LBO-able businesses. Think about the drivers of PE returns. A low entry multiple, leverage, cash flow expansion (through revenue growth or margin lift), and exit multiple. The increased competition is making it more difficult to make money through multiple lift, any decent business will run a process that maximizes valuation, and the run in the S&P doesn't help either. Cash flow expansion is also more difficult in this environment of low growth, close-to-peak corporate margins. Not trying to say that margins will necessarily turn down, but a lot of the benefit from labor market slack and general efficiency have plateaued out. Also, a lot of the easily fixable businesses have been picked clean. The LPs are aware of all of this, and for funds with weaker returns, it is getting more difficult to fundraise, so there will be a lot of sunsets over coming years.
Yes, the second point is somewhat relevant to HFs as well. Returns are being driven down across all asset classes. Risk premiums are very low and there is a massive amount of money that needs a home. But on a relative basis, the HF world is better able to withstand this than PE. You can think of PE as one particular strategy, long-only illiquid investing, just like long/short equity, market neutral equity, long/short credit, distressed credit, event-driven, capital structure arb, fixed income RV, macro, EM, quant, etc. At varying times, the potency of different strategies waxes and wanes based on market conditions, macroeconomic environment, and the amount of AUM in the strategy.
I won't go into the fact that HF jobs are likely to be more dynamic and interesting than a process-driven PE job (though this depends on strategy and also strategy fit). This is subjective and I'm sure there are people that like the PE environment more. Also, I believe that PE is less stressful, honestly the extreme stress is probably the biggest downside of a HF job, not everyone can thrive in this kind of environment.
Can anybody talk about skill
Can anybody talk about skill sets you pick up in PE that are valued at HFs - or lets call it public equity? Which strategies and examples of firms would value a PE experience (say for example a Greenlight)? Lets set aside the megafund auction machines and assume we're talking about PE funds that only do "proprietary" deals.
You can view career risk at
You can view career risk at two levels: the firm and you. PE firms are much more stable because their capital is locked up for a very long time. The honey pot may not be growing, but it won't disappear either. A HF's capital can flee at any time (for the most part, some firms have 1-3 year lock-ups). Jobs within PE are more protected because it is more difficult to evaluate your performance. Judgements are relatively subjective, because the success of your investment won't be known for several years (unless it falls into bankruptcy or something). At a HF, your performance is marked to market every day. There is more tolerance at the junior level, but once you have P&L responsibility, a string of money-losing trades/ideas and you are done.
Honestly it is hard to move up in all areas of the buyside. In PE, given that it is a process-driven hierarchy, the low turnover at more senior levels makes it difficult for junior guys to move up. Being a partner in PE is a cushy, easy, stable job, why would anyone want to leave? The big money in PE has already been made.
At a HF, PMs (if a multi PM shop) or senior analysts come and go, so there is room for advancement. The difficulty in HF land is the big gulf between analysts and PMs, which is very difficult to breach. As an analyst, you are not taught a lot of the risk management and portfolio construction knowledge that is required to become a good PM. Furthermore, at single PM shops (which are pretty common in equity land), a senior analyst is inherently the furthest you can go. Yes, idea-generating analysts can sometimes make millions if they are good. It just depends. Making generalizations about the HF world is difficult because there is so much variability.
I know that a lot of ambitious junior guys would probably find this depressing, but I would be doing you all a disservice to convey anything but the reality as it is.
slowdive: You can view career
You can view career risk at two levels: the firm and you. PE firms are much more stable because their capital is locked up for a very long time. The honey pot may not be growing, but it won't disappear either. A HF's capital can flee at any time (for the most part, some firms have 1-3 year lock-ups). Jobs within PE are more protected because it is more difficult to evaluate your performance. Judgements are relatively subjective, because the success of your investment won't be known for several years (unless it falls into bankruptcy or something). At a HF, your performance is marked to market every day. There is more tolerance at the junior level, but once you have P&L responsibility, a string of money-losing trades/ideas and you are done.
Honestly it is hard to move up in all areas of the buyside. In PE, given that it is a process-driven hierarchy, the low turnover at more senior levels makes it difficult for junior guys to move up. Being a partner in PE is a cushy, easy, stable job, why would anyone want to leave? The big money in PE has already been made.
At a HF, PMs (if a multi PM shop) or senior analysts come and go, so there is room for advancement. The difficulty in HF land is the big gulf between analysts and PMs, which is very difficult to breach. As an analyst, you are not taught a lot of the risk management and portfolio construction knowledge that is required to become a good PM. Furthermore, at single PM shops (which are pretty common in equity land), a senior analyst is inherently the furthest you can go. Yes, idea-generating analysts can sometimes make millions if they are good. It just depends. Making generalizations about the HF world is difficult because there is so much variability.
I know that a lot of ambitious junior guys would probably find this depressing, but I would be doing you all a disservice to convey anything but the reality as it is.
Great explanations. Post like yours are the main reason I follow WSO. Many of the junior guys on this board may not be able to appreciate it (yet), but the gems contained in your 2 posts here are arguably the best Christmas/Hanukah/Kwanzaa presents they can expect for sometime.
I can tell you how I made each of my millions - but not where I got the very first
slowdive: You can view career
You can view career risk at two levels: the firm and you. PE firms are much more stable because their capital is locked up for a very long time. The honey pot may not be growing, but it won't disappear either. A HF's capital can flee at any time (for the most part, some firms have 1-3 year lock-ups). Jobs within PE are more protected because it is more difficult to evaluate your performance. Judgements are relatively subjective, because the success of your investment won't be known for several years (unless it falls into bankruptcy or something). At a HF, your performance is marked to market every day. There is more tolerance at the junior level, but once you have P&L responsibility, a string of money-losing trades/ideas and you are done.
Honestly it is hard to move up in all areas of the buyside. In PE, given that it is a process-driven hierarchy, the low turnover at more senior levels makes it difficult for junior guys to move up. Being a partner in PE is a cushy, easy, stable job, why would anyone want to leave? The big money in PE has already been made.
At a HF, PMs (if a multi PM shop) or senior analysts come and go, so there is room for advancement. The difficulty in HF land is the big gulf between analysts and PMs, which is very difficult to breach. As an analyst, you are not taught a lot of the risk management and portfolio construction knowledge that is required to become a good PM. Furthermore, at single PM shops (which are pretty common in equity land), a senior analyst is inherently the furthest you can go. Yes, idea-generating analysts can sometimes make millions if they are good. It just depends. Making generalizations about the HF world is difficult because there is so much variability.
I know that a lot of ambitious junior guys would probably find this depressing, but I would be doing you all a disservice to convey anything but the reality as it is.
These 2 posts are absolutely fantastic. Thanks so much slowdive. A lot to think about here. Do you know what HF strategies look to hire ex-PE guys? Is there any benefit to doing the 2 year pre-MBA PE gig if you want to eventually work at a hedge fund? Are there any hedge funds that only hire ex-PE guys?
Also, correct me if I'm wrong, but given the bleak odds for moving up to BSD-status on the buyside (as you pointed out), aren't there more options for a PE guy than a HF guy for moving into other areas of finance/business if things don't work out? I would assume that the operational/business building experience at a PE fund would be more applicable to finance/operational roles at portfolio companies/F500's/etc than straight up trading/investing experience at a HF. I haven't even started my sell-side job yet so you're obviously way more knowledgeable about this than me; is there any truth to what I'm saying? Where do ex-HF guys go when they get kicked out vs PE guys?
Any hedge fund that invests
Any hedge fund that invests in companies in a fundamental manner would be a relevant target for an ex-PE guy. Long/short equity is likely your best bet given that it is one of the most prevalent strategies. Long/short credit would be another. The Tiger complex likes ex-PE guys, as do many other fundamental managers. While the skills you learn in PE are valuable, if you really want to work at a HF, it would be better to jump in directly. If you have the raw materials, everything you need can be learned on the job. After a year or two, there won't be any material difference between an ex-PE guy and a direct recruit, and if anything ex-PE guys can be weighed down by their lack of experience with liquid markets. Remember, everything you do for a significant period of time leaves an imprint on you, unlearning things can sometimes be as important as learning them. One of the reasons that HFs like ex-PE guys is because they essentially get those extra two years of experience for free (not to say that comp would be exactly the same, but you are entering at a similar level). Also, it goes without saying that the longer the time horizon of the fund, the more likely it is that they will value PE experience.
Ex-HF guys tend to go to other HFs. I am always amazed at how guys who have lost money manage to resurface at other funds. I suppose they can spit a good game. Of course, at some point, continual losers will get run out of the HF world completely. They could then go to equity research, a FoF/pension/real money, or leverage their relationships to become a sell-side salesman. I've seen a few become professors (but by choice, not because they got fired).
But generally speaking, I view the lack of options as being similar. Honestly, the idea that you get material operational experience in PE is mostly false. PE firms like to hype this up when they are recruiting, but rarely is this actually true. Think about this from the PE firm's point of view - would you trust a 25 year old who doesn't know anything other than playing on a spreadsheet and stroking his dick to manage a real business? Why would you do this when you could hire a seasoned operator with decades of experience? At most PE firms, the role is somewhat similar to banking, just on the other side, with one notable difference. That is due diligence (tearing through a business to make sure it is a good investment), which will occupy a lot of your time, and this is the experience that HFs find valuable.
I will repeat myself because this seems to be a common misconception among college students (not necessarily talking about you Newspeak, just going off on a tangent here). There is very little about working in ANY finance role that will prepare you to operate a business. If you want to run a business someday, then work at a real business. For some reason, students often want to "have it all", but the real world doesn't work like that. The best game plan is to figure out what you want, find the path of least resistance to get there, and be willing to do whatever it takes. It is important to be open-minded about unconventional opportunities that come by unexpectedly, but why take intentionally take a circuitous route that distances you from your goals? Just like how a good business will grow profitably by generating strong returns on invested capital, I believe that successful careers are forged by generating strong returns on invested time. If you eventually want to be an entrepreneur, you could probably learn a couple of relevant things by being a banker, but it seems obvious that those two years will be much more effectively invested by working at a startup or a larger company in the targeted industry.
Wow! Slowdive, those posts
Wow! Slowdive, those posts were excellent. Thanks for that, it's some of the best stuff I've seen on this site in a while. +3
Slowdive, excellent insight.
Slowdive, excellent insight. Very helpful.
"The HBS guys have MAD SWAGGER. They frequently wear their class jackets to boston bars, strutting and acting like they own the joint. They just ooze success, confidence, swagger, basically attributes of alpha males."
hf over pe is a very very
hf over pe is a very very easy choice, the two are very different, also lol at PE being the holy grail of anything, your comp potential in a hf is about 10000x higher (again potential, averages probably even out, mf pay initially is better ofc and also less risk).
what I dont understand is ppl that go mf-> HF, doing 2 more years of 120 hours a week more than neccessary seems bad. You do collect another brand on your CV but if you are that risk averse you should probably stay out of the public markets entirely and just go back to banking...
Despite everything that I
leveredarb: hf over pe is a
See my WSO Blog
slowdive: This kind of
slowdive: Despite everything
SanityCheck: leveredarb: hf
Looks like this thread got me
slowdive: Looks like this
A lot of ignorance in this
Bernanke23: Great posts above
Thanks slowdive. Would you
zee4: Thanks slowdive. Would
slowdive, thank you for your
For what it's worth, as
Comparing megafund PE to the
mrb87: Comparing megafund PE
.
wso_user: mrb87: Comparing