Slow morning for me, so I decided to share my thoughts concerning the differences between a research analyst and portfolio manager.
Think you have what it takes to be a portfolio manager? Every aspiring buy-side analyst I know eventually wants to become a portfolio manager at some point. However, what many fail to realize is the lengthy process it takes to get from analyst to portfolio manager.
I was certainly one. Before I first started working in the hedge fund industry, I had aspirations of becoming a portfolio manager after a one or two year stint as a research analyst. Now, after working almost an entire year as an analyst for two different funds, I got a glimpse into reality and realize now becoming a portfolio manager in one or two years was wishful thinking and rather naive on my part. I do eventually want to become a portfolio manager, but I recognize that successfully transitioning from analyst to portfolio manager takes many years or even a decade of valuable experience working under portfolio managers and that nothing can substitute experience. Even a talented analyst prematurely becoming a portfolio manager could lead to disastrous results. Here are some of the differences and similarities in the responsibilities assumed between a research analyst and portfolio manager I’ve gathered from my own personal experience:
Research Analyst
Researching Investment Ideas: Research duties of analysts will depend on the size of the fund. For a large fund, where distinct differences between senior and junior analysts exist, the number one objective of a senior research analyst is to independently find and put together investment ideas to pitch to the portfolio manager. Senior analysts at larger funds will also lead a team of junior analysts through the research process. Junior analysts will contribute some sort of value-add to the overall thesis of an idea. For a smaller fund, analysts will independently research and pitch ideas, as well as contribute value added information for an idea a portfolio manager is working on.
Monitoring Positions and Updating Models: As a research analyst, you must monitor your positions diligently and update your models/investment thesis accordingly when new information becomes available such as a quarterly earnings report.
Portfolio Manager
Risk Management: This is probably the main difference between portfolio managers and analysts. Portfolio managers emphasize risk management much more heavily than analysts. Whereas an analyst usually is only concerned about idiosyncratic risks related to the companies they’ve pitch, portfolio managers are concerned about:
1) Idiosyncratic risks to individual positions of the fund’s entire portfolio, as well as
2) Exposure to macro risks the portfolio is susceptible to and how to position the portfolio to minimize downside risk if shit hits the fan.
Researching Investment Ideas: The best portfolio managers are heavily involved in the research process. Think Bill Ackman and David Einhorn.
Reviewing their Analysts’ Ideas: The most important part of the research process a portfolio manager is involved in is the reviewing of the work of their analysts. It takes years of investment experience to be proficient at reviewing the work of others. With the experience and knowledge they have, a portfolio manager is able to objectively critique and attack an analyst’s investment idea from various angles in order to pinpoint potential weaknesses, flaws in logic, or other risk variables the analyst would have otherwise neglected.
Monitoring Individual Positions: Similar to the analyst, portfolio managers will also monitor positions when new information becomes available to positions in the portfolio.
Monitoring Entire Portfolio: Unlike the analyst, portfolio managers are generally more concerned about how the overall portfolio is constructed. This includes accounting for variables such as the size of individual positions relative to other positions in the portfolio from a risk/reward and diversification perspective, as well as the portfolio’s exposure to various sectors and long vs. short exposure.
Accountability: Portfolio managers will assume the same risks a CEO of a company assumes, especially for small to mid-sized funds. From the client’s perspective, its always the portfolio managers fault for poor performance since they have the final say on what goes in and out of the portfolio. Even if it was an analyst who made a poor recommendation, the liability will still fall on the portfolio manager for failing to spot the mistake beforehand. Depending on the severity of the mistake, the analyst will simply get fired and only has to deal with the wrath of an angry portfolio manager. The portfolio manager, on the other hand, will have to deal with the fallout which includes answering questions from hundreds of angry clients demanding answers and will potentially face withdraws.
Mod Note (Andy): Throwback Thursday - this was originally posted 9/2015, I saw it never made the frontpage so thought I'd add it today
A blog post on the CFA Institute website discussed the same topic.
I'd also add that another difference for PM's is the marketing/fundraising aspect. I can't imagine those regular meetings with asset consultants can be fun a lot of the time.
this is a great post dave, should be stickied!
Great write-up, cheers! However, regarding the below, in my experience it's definitely not as common to get fired over a single bad call. In fact, you're wrong at least 33% of the time anyway (if you're amazing at stock picking).
"Depending on the severity of the mistake, the analyst will simply get fired and only has to deal with the wrath of an angry portfolio manager."
Bill Ackman is a terrible portfolio manager. He basically sizes every one of his ideas as big as possible. When he's right, he makes a ton of money and when he's wrong, he loses a ton. Anyone could manage a portfolio that way - he's basically a glorified analyst
That's true. But he's had way more wins than losses, so that would make him a glorified top tier analyst?
Also think Greenlight's been underperforming Pershing Square (despite Valeant, Herbalife, JCP etc) overall so there's that.
He's an amazing analyst: He's hit multiple 10 baggers. Not sure if he's done better than Greenlight percentage wise, but there's no question than on a dollar basis he's been a nightmare recently. Losing most of the money you've ever made on 3/4 stocks (VRX, HLF, PAH) is the essence of poor portfolio management
worth a save
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