The Hedge Fund Experience - Good, Bad, Ugly
Since there aren't any decent/active discussions on the HF forum, I figure I start a thread highlighting the good, bad, and ugly aspects of working at a hedge fund. This is based on my personal experiences so don't take them as gospel.
Hopefully others will contribute with their own experiences over time to add more color to the discussion. It is my hope that those getting into this game will have a better understanding of what they are getting themselves into.
Before I get started, this thread is really intended for people already in finance (current banking analysts/buyside professionals) as a way to start an honest discussion about HF. I'm not going to answer "I'm an undergrad looking to break into hf" type questions in this thread. If I'm in a good mood, I'll start a separate "You're an undergrad and want to break into buyside...this is what you can do" thread later.
This initial post isn't comprehensive and I'll add more over time. There are plenty of thoughts I have on the subject.
Background:
Work as an analyst at a multi-billion dollar fundamental hedge fund, and have been here 3+ years. I work in the special situations/event driven equities group, and specialize in long positions.
Good, Bad, Ugly, Random thoughts (in no particular order and hopefully it makes sense):
1. Be happy with the fund's/group's strategy because you will get pegged. Some of you with restructuring/hy experience are already pegged before you even step foot at a hedge fund ("Jeez these recruiters are only calling me about distressed opportunities"). I would very much like to do distressed debt, short equities, and dabble in foreign securities, but those opportunities are limited for me since I don't have enough experience shorting/analyzing credit/foreign companies.
2. Movement between funds can be very hard. Buyside is great, but it's really not easy to move around. Over time, you're going to be very particular with what you want to do, and the funds are going to be very particular with who they want to hire. Trying to find a fund that matches your preferred strategy, salary, location, culture, and career trajectory is a HUGE task. Most funds don't like paying recruiters so opportunities are usually found through the network. This is why when people move it is usually the result of a senior member branching out and taking junior people with them or networking with a past co-worker. B-school is also another avenue used to move to another fund.
3. Most new hires (ex-IB analyst) are initially hired to grind out models and help "flesh out an investment thesis" (i.e. read the footnotes) for senior guys. You become really valuable when you start to develop an investment identity and begin sourcing ideas. Keep in mind, some places don't care about developing your idea generation abilities and you're only there to grind through the numbers. Obviously places like Tiger were hedge fund manager factories, because analysts were trained to source ideas and defend their thesis. Hopefully, your buyside opportunity is with a place like Tiger.
4. Pay is volatile. You can be doing to same task at different funds and be paid vastly different amounts. Obviously pay at most places are based on fund performance, so be comfortable with knowing your financial well being is heavily reliant on the skills of your PM. As I reach an inflection point in my career, I'm starting to yearn for a situation where I can play a bigger role in killing what I eat and not be so tied to decisions beyond my control/recommendation.
This is a good stopping point...
I know what I know
5. I know what I know and I know what I don't know. I think IB encourages a certain level of BS when you don't know the answer (shit they almost encourage it during the interviews when they gauge who can work with/around random questions), and that's a habit that is quickly squashed in buyside (at least at the good places). You have to be comfortable with what you don't know and still be able to make a thoughtful decision.
I'll be the first to tell you I don't know all the finance textbook lingo, and couldn't tell you the first thing on delevering beta. I know it conceptually, but I rarely apply this stuff on the job.
This business really comes down to identifying what drives value, why the market doesn't reflect this value, and what needs to happen to close the gap.
Strongly, strongly agree
Strongly, strongly agree with 1) and 2). Current bankers, take very careful note of 1) and what that means for your career.
I disagree with 3). I think there are quite a few firms which hire you to do the grunt work but I think the implicit expectation is that you will proactively develop your own investment theses and approach and proactively "prove" it. I know there are some firms that more actively encourage this but I think it's more a matter of degree of leading the horse to water.
Also, I would add that recruiters for hedge funds are a mixed bag. Best case, they will be relatively honest (note the caveat of relatively) and have a good understanding of the specific fund and the general strategy. Worst case, they will completely BS you and have little to no idea of the specific fund and the general strategy. If a recruiter describes a fund as "quant" without being able to give many more details, it's usually a strong sign that the recruiter doesn't know shit.
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Sourcing ideas
I disagree with 3). I think there are quite a few firms which hire you to do the grunt work but I think the implicit expectation is that you will proactively develop your own investment theses and approach and proactively "prove" it. I know there are some firms that more actively encourage this but I think it's more a matter of degree of leading the horse to water.
I think a lot of funds are much more "top down" than people realize. Call it whatever you want...collaborative, team driven, militaristic, but I think one of the most important questions to ask a fund is how your work-flow/responsibilities change over time as you move up and how the buy process works.
I agree there will be opportunities to test your ideas at any fund, but there are few places where you're being groomed to be a lone wolf operator/analyst/pm. You'll get to bounce ideas off your superior but at the end of the day they have the last call. After all, you were hired to help support seniors develop their thesis. PMs can be territorial people...
It's something to look out for, but definitely not a deal breaker.
Would you say that the PE
Would you say that the PE skill set lends itself to fundamental long/short,event driven equity HFs? I assume it does as the valuation work and due diligence process are likely very similar but I would like to hear your perspective as you and I have have about the same amount of experience (3.5 yrs) in slightly different buyside shops. Ultimately, I would like to start my own shop with my current MP who comes from a PM/HF ($B+AUM)background and want to ensure that I am developing an appropriate skill set for the job.
Can you briefly describe an ordinary day...
Skills
Would you say that the PE skill set lends itself to fundamental long/short,event driven equity HFs? I assume it does as the valuation work and due diligence process are likely very similar but I would like to hear your perspective as you and I have have about the same amount of experience (3.5 yrs) in slightly different buyside shops.
Yes. Any fundamental shop is going to value modeling/valuation skills. It's probably a minimum requirement for most places.
Of course, that answer doesn't help you much. The real question is what else do these funds want to see in addition to the skills learned in PE...and that's the tricky part. Some want raw ability so they can mold you. Others want straight out of the box analysis ability. Regardless, I think as long as you can articulately explain the logic behind your analysis and the potential pitfalls, you're good to go.
Valuation techniques really don't diverge much between shops so alpha generation is really driven by the analysis underlying your valuation and your investment discipline.
Some Things you should clearly be able to explain and drill down on:
Why would a company's segments be worth more independently than together?
Why are empire building CEO usually penalized?
What factors would cause a company to lag comparable peers?
If you mention comps, then you better be able to explain why comps trade higher/differently. A lot of this stuff is rocket science, but it's very important you understand.
I'll post a case study later to show you how I think about a company and hopefully that will give you a better picture of how thinking/analysis is similar/different from your approach learned in PE.
Can you briefly describe an ordinary day...
I'll get to this when I have time, but a part of it involves coming here lol.
Good idea for a thread
I'm also a PE professional (3+ years) looking to switch to a fundamental shop (via b-school.)
The way I've thought about the differences are:
1) Finding investment (idea generation vs. deal origination)
2) Deciding if investment is good (analysis)
3) Execute investment (call PB vs. close deal)
In PE, it seems like #1 comes from a variety of sources but it can depend a lot on the industry network and relationships that are developed and is usually a more senior role. I'm not certain how this works at HF, but I have to believe it's less relationship oriented and perhaps a little less solely a senior role (depending on the firm culture as referenced by OP.)
My favorite part about the job is #2. I like reading about companies and industry research. The company data to work with is obviously better in PE which is one benefit.
In my experience in PE, I spend a lot more time on #3 than I'd like. Although the tasks are important and I think you develop useful project management type skills/experience, I find it a bit boring and repetitive. Correct me if I'm wrong, it seems at a HF you don't really spend any time on #3, unless you're a trader.
Does this seem accurate?
Ordinary day
Can you briefly describe an ordinary day...
6:45am - Wake up
7:30am - In the office
7:30am to 8:30am - Breakfast, Check inbox/messages, Read paper/blogs/etc., morning meetings
8:30am to 1:30pm - Depending on the day, read transcripts/filings (30% of time), investment meetings/calls (20% of time), build models (40% of time), investment memos/emails (10% of time). This is a juggling act since I'm usually working on 1-2 new ideas and 2-3 portfolio positions during the week.
1:30pm - 2:30pm - Lunch/Pay Bills/ESPN
2:30pm - 8:30pm - Meet with PM (ranging from 30 minutes for brief updates to 3 hours for research findings) and more modeling/reading/conference calls rest of the day
8:30pm - Midnight - Go home, dinner, gym, read paper/blogs/etc., read more filings
Sometime between Midnight - 1:00am - Bed
I'm not lying when I tell people I am a professional footnote reader.
The process
1) Finding investment (idea generation vs. deal origination)
In PE, it seems like #1 comes from a variety of sources but it can depend a lot on the industry network and relationships that are developed and is usually a more senior role. I'm not certain how this works at HF, but I have to believe it's less relationship oriented and perhaps a little less solely a senior role (depending on the firm culture as referenced by OP.)
HF idea generation is all over the place. We've had ideas sourced from WSJ, other funds, quantitative screens. Some will have a specific theme in mind (i.e. consolidating industries) and use that to guide the investment process.
2) Deciding if investment is good (analysis)
My favorite part about the job is #2. I like reading about companies and industry research. The company data to work with is obviously better in PE which is one benefit.
I would love the amount of data/access PE firms get, but a big part of the fun is sleuthing around and following the mosaic theory. There's a reason why I order my model scenarios: Management Case, Base, Bear, Nightmare.
3) Execute investment (call PB vs. close deal)
In my experience in PE, I spend a lot more time on #3 than I'd like. Although the tasks are important and I think you develop useful project management type skills/experience, I find it a bit boring and repetitive. Correct me if I'm wrong, it seems at a HF you don't really spend any time on #3, unless you're a trader.
Does this seem accurate?
Correct. The trader handles #3. Most of my time is spent doing #2. You might spend more time with #3 if you are doing short positions.
Replicating Success
Thoughts on ex- GLG/Tiger/GS guys who launch their own funds? I'd surmise that most can replicate success (see former Tiger analysts), as they already have the experience (to sniff out value) and track record (to raise $$$).
You mentioned prospective analysts would benefit from working at shops where they can develop and defend investment theses. Is it fair to say that one would one get this shot at a smaller fund (<500mm) run by one of the abovementioned dudes? benefits/drawbacks?
Great thread. Keep it coming.
Small funds
Thoughts on ex- GLG/Tiger/GS guys who launch their own funds? I'd surmise that most can replicate success (see former Tiger analysts), as they already have the experience (to sniff out value) and track record (to raise $$$).
Your opinion is probably as good as mine, but it's probably a good sign that most of these guys got their start with seed money from Tiger.
You mentioned prospective analysts would benefit from working at shops where they can develop and defend investment theses. Is it fair to say that one would one get this shot at a smaller fund (<500mm) run by one of the abovementioned dudes? benefits/drawbacks?
The main benefit with smaller/newer funds is you can sling shot up the value chain if you do well. The main drawback is the fund sucks and you can't land anywhere else when it implodes (you can mitigate this somewhat if you worked at a big fund beforehand).
Real example: There was an analyst that worked at my fund a couple years ago. He could have stayed here and slowly move up the chain (bigger funds tend to be a little more bureaucratic/institutional). Instead, he jumped over to a much smaller fund to take on more responsibility and is now a PM. This is HUGE. Instead of just being another analyst at a big fund, he has a track record of managing a portfolio and a quantifiable track record to hang his hat on. Having PM experience obviously makes him much more valuable. On the flip side, if the small fund failed, he has the experience of being a large fund analyst to land somewhere else.
Most hf professionals go through the same learning curve. Enter the industry with basics (learned from banking, school, etc.) -> Step 1. Master the art of valuation/fundamental analysis -> Step 2. Master how to source/defend ideas -> Step 3. Master how to effectively manage a portfolio (knowing when/how much to buy and sell is fucking hard)
Big/established funds are a great place to learn Step 1. Smaller funds are great for Steps 2 and 3 once you have a good idea of what you want to accomplish. Think of big funds as a workshop to fine tune the fundamentals (and to meet other talented people). Think of small funds as an apprenticeship...the investment approach of your PM will probably end up being the investment approach you use the rest of your career.
Ugh... give me global macro
Ugh... give me global macro any day.
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Talk about a hard strategy
Ugh... give me global macro any day.
You probably don't expect an actual response to this, but I'm going to give one anyway lol.
Talk about a hard strategy lol. Trying to understand the capital allocation decisions of both governments and companies in the global financial ecosystem to identify a trend worth investing in is REALLY hard. It's also (more often than not) beyond the scope of what most analysts do. I've done a little work in this space given my past international experience and I used to cover financials (see Bronte Capital Blog to get a view of what the macro thinking process looks like)...It's really hard (Did I mention that already? lol)
Even if you've made the right call, the volatility might make you insolvent before your thesis plays out. Think of the "long energy, short financials" strategy that was so popular last year and left a few funds limping after energy cratered...or the irrational tech bubble that caused Tiger to shut down...or seeing the super successful Tontine close...For every Soros/Rogers/Paulson homerun, there are plenty you don't hear about that got wiped out.
A good case study on this approach are the Chandler Brothers. They've made some good calls over time, but they have had to stomach a lot of volatility (think down 30-40%) before their thesis played out. They can get away with that b/c they invest their own money, but a fund with client money would have shut down a long time ago.
Obviously the styles within global macro vary quite a bit (I'm sure the trend following guys are fine in this volatility), but try to make sure you work at one with more internal money that can handle the ups and down (if that's the direction you want to take).
No argument here.
No argument here.
Not to nitpick, "long energy, short financials" is an equity play :) Depending on the PM's preference and specific thesis, it could have been expressed a number of ways - any and/or combination from long TED spread to long CAD/AUD to long long rates; with varying degrees of leverage, again dependent on the specific thesis, and volatility/performance targets.
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Step 1
Most hf professionals go through the same learning curve. Enter the industry with basics (learned from banking, school, etc.) -> Step 1. Master the art of valuation/fundamental analysis -> Step 2. Master how to source/defend ideas -> Step 3. Master how to effectively manage a portfolio (knowing when/how much to buy and sell is fucking hard)
What do you think is the best way for someone to master Step 1 on their own, or to at least learn enough to get into a fund post-MBA?
I've spoken with an analyst at a large HF who directed me to do the following:
1. Read as much as possible: news, filings, industry research, investment/strategy books, etc.
2. Develop a one or two really good in depth ideas into full pitches
3. Invest in your PA
I've got no problem with the learn by doing approach, and I like to work independently, but I think it would be helpful to have some guidance and good examples of the kinds of analysis and research activities that would be considered differentiated enough to really be a solid idea.
I'm looking forward to the case study you were going to create/post.
What I did
What do you think is the best way for someone to master Step 1 on their own, or to at least learn enough to get into a fund post-MBA?
Step 1 is definitely a continual process, and why I like the fundamental value approach to investing. At the end of the day, I have no idea how good my assumptions/valuation/analysis is so I need a decent margin of safety. Anyway, this is what I did to get a good foundation before my hf days...
1. Read Stock Market Genius (by Greenblatt), Margin of Safety (by Klarman), and Distressed Debt Analysis (by Moyer). I also read some of Buffett's old letter. If you don't have time, I recommend you at least read Greenblatt. Reading these books gave me a good base on how to think about investing. Also watch this video:
http://merlin.gsb.columbia.edu:8080/ramgen/video1/...
2. Reverse engineer ideas from good investors. I signed up for a guest membership to Value Investors Club and read the research reports submitted by members. There is some very good stuff on that site. I also looked at some of the older recommendations to see how the investment thesis actually played out and tried to understand why or why not an idea panned out.
3. Intern at a fund. This took some hustle on my part, but having this experience was key for my development. I got paid peanuts, but it was worth it in the long run. You should have access to the hf alumni network through the b-school you attend and you should definitely try hard to get a school year internship with one of the local funds.
I've spoken with an analyst at a large HF who directed me to do the following:
1. Read as much as possible: news, filings, industry research, investment/strategy books, etc.
2. Develop a one or two really good in depth ideas into full pitches
3. Invest in your PA
I've got no problem with the learn by doing approach, and I like to work independently, but I think it would be helpful to have some guidance and good examples of the kinds of analysis and research activities that would be considered differentiated enough to really be a solid idea.
Pretty standard advice that I agree with. I'll try to drill down a bit.
1. Reading everything is great, but it's not realistic. We're all busy people. I recommend when reading anything, always think about the potential catalyst that turns a story into an investment idea. That should help you narrow down the things you read. The Michael Price video I linked above shows how he reads a paper. I pretty much follow the same approach.
2. Given my background, I'm biased to event-driven situations. Look to pitch ideas with a catalyst.
3. Best way to see how much conviction you have on an idea is to use your own capital.
Here is a very brief example where #1 leads to #2. (I'll go ahead and use a fun example. The Video Game Industry.)
Consolidating industries tend to catch my attention so when I read that Blizzard and Activision were merging my immediate reaction was to ask myself how the other players might react. EA has an acquisitive history so maybe the 800 pound gorilla will respond with their own moves. I don't like own the consolidator so I start to sniff around and see if there were any good small names to own that might be taken out. This leads me to identify Take-Two Interactive (the makers of Grand Theft Auto). Before you know it, EA announces a hostile bid for Take Two. Boom. Profit.
Fast forward to today and we are seeing another interesting situation brewing in the space. Big media players have begun to take an interest in video game publishers with Time Warner even publicly stating their interest. EA has been battered and is restructuring to focus on its core properties. I love this type of situation. Companies with great core businesses tend to waste the money generated from their cash cow on dumb acquisitions and a bloated cost structure. So when a business like this finally decides to be more disciplined with their capital, they tend to generate outsized returns. On the flip side, if they continue to struggle/waste money, there are strategic buyers out there who would love to own the company (limits the downside risk a bit).
So these are the kind of situations you want to read about and invest in.
One word: Google.
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great post appreciate all
also i cant get the michael
bateman
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Web link
Numbers
Earlier point
IRR
The type of funds that are hiring
Generally speaking
Yep
It's tough
Let me expand
Thanks
Funds
SDW pretty much covers it
Vig
I'm a member of VIC
original
Agree
.
What was your application pitch?
My application
Good Stuff
...
...also...
Hedge fund role for fresh grad
Questions I've received
Mr. Pink,can you please
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Thoughts
BW website
Which Greenblatt book did