Which HF offer to take?

Hi WSO,

I would like some advice on next steps in my career. My background is typical 2 years BB IBD and 2 years PE.

Recently received two HF offers, both are long/short fundamental shops that are focused on long-term and not quarterly/momentum runs (1-2 year+ holds). Unfortunately, I can't give much information due to confidentiality reasons but the choices are:

A: Large prestigious HF most people have heard of, think $10 to $30 billion in AUM. Will focus on one particular vertical and work with a team of 4 (very similar to the old SAC except it's not SAC). Base & bonus are competitive with what you expect from a top 3-5 long/short fund.

B: Startup HF that's technically a tiger grandcub that will launch with ~$100mm. I'll be the first hire and join prior to launch so lots of upside and I will get equity on the carry. PM and I get along (very important) and he's got the marketing part down and actually doesn't need my help on that part. No industry vertical, focus is on anything under the radar as long as we make money. I trust his abilities and he has very high audited returns, almost a decade of experience. Can't really say anything more but the base is a lot lower than choice A but bonus will be higher and obviously there's upside with fund performance.

Thanks in advance for any thoughts or opinions.

 

If you go with option B, some comments:

  • Make sure the $100m is actually there
  • Make sure your economics are in writing
  • Make sure that your economics are in writing in such a way that, if a few years from now the guy decides to fire you because your start-up economics became way too expensive on a much larger fund, you have some sort of payout upon exit.

All that said, stay in private equity :)

 

Username: I don't really like focusing on the hours, I do what needs to get done and since I love the public side it doesn't always feel like work to me. If I had to give you an answer I'm guessing 60-70 hours for choice A.

For Choice B, probably ~60 hours but it's one of those things where I will be thinking of ideas non-stop given the ownership I have in the fund.

RLC1: Yep good points. I'm diligencing that now. The thing is, even choice A has the possibility of being let go if I pitch bad ideas to the PM, so as long as I get 2 years of good experience under my belt I'm okay with that. In terms of PE, I think it's great for certain people but not having immediate exposure to ideas is really bothering me.

 

Not to sound cynical, but which would you rather join with the market pushing all-time highs? Established top tier HF that will probably see some draws in a downturn but should survive fine, or start-up that has significant launch risk if we see another recession? Obviously this depends on the strategy at the two funds, but I'd probably take A given the current environment. There will be lots of opportunities to jump to start-ups down the road if A is as well recognized as you say.

 

if u r tight with the principal i would probably take the smaller fund. at a 10b shop u r going to be tossed into the shark tank with many other young, smart people and you will be fighting to get into a spot where you are as close with a PM as u already other with the other guy. I would say your chances of it not working out for you personally at the big shop are pretty similar to the chances of the small shop blowing up so i dont the risk as meaningfully different either way...only thing is that if you end up leaving big fund u have a better name on the resume.

 
Best Response

I'd also say B, but I also know from experience that AUM growth never goes to plan. Institutional investors want to see a 2-3 year track record, and then you also have to meet their AUM hurdles (can't be too small or they won't be comfortable in allocating you meaningful dollars).

I would also talk with the PM of Fund B about his capital raising plans. He/she may be quite content with $100m and want to spend the next few years focused solely on returns.

So I wouldn't get myself too excited about what your equity carry means if AUM goes from $100m to $1B. I would suggest you base your comparison on what you think experience and pay will be like should you help generate above average returns on asset basses similar to where they stand now.

What tips the scale, in my opinion, is that since you did get offer A they think / you are a high caliber candidate. That limits the downside to B - if in 2 to 3 years, Fund B just doesn't work out, you can probably secure another offer from a reputable firm like Fund A. Fund B does come with that optionality

 

Thanks for the responses.

Janky: Yep, A is definitely well-known. However, not sure if the market concerns me since these aren't long-only funds. If anything I'd probably be happy with a recession as I got the offers through my short pitches and both PMs agreed and shared some of their shorts as well.

Bondarb: Good point, thanks.

Grosse: Yep, I mean the guy is reputable but I am conservative on the upside. I'm was about to take A but the revolving door reputation of A makes me hesitant. He definitely wants to grow internally & externally, but said that he'd rather take $200mm of good capital than $500mm of flaky capital.

 
finance_king:

There will always be opportunities to go to a Choice B type place.

I disagree.
"I do not think that there is any other quality so essential to success of any kind as the quality of perseverance. It overcomes almost everything, even nature."
 

One thing to keep in mind is that managers at smaller AUM funds may be more inclined to take greater risk to 1) generate returns to raise more investors, 2) cover the fixed cost of running the fund as management fees may not be sufficient (fees may be lower -- it's rare to command 2 and 20 for a new fund due to tight competition in HF space and the lack of a solo track record). Also one bad year can wreck/shutdown the fund as money will dry up and people will quit. So it really depends on your risk appetite. That said I would go for the smaller fund unless the long/short fund is something legendary like Lone Pine or Pershing Square; AFAIK those funds are really hot. If the L/S hasn't had great performance recently I'd pass up on it. You can probably get into something similar again having got into it once. You can always talk about operating with fewer resources and I think you would work much harder and do better work at the new fund.

 

Thanks guys. I can't release much info but I know the fees and fund structure and its similar to choice A given A is a multi-manager structure where the parent takes a decent portion of fees and provides back office support.

One thing is that the seed capital for B is on a long lock-up (think 3-5 years).

With that said, the risk is there. I'm surprised most are leaning towards B rather than A. I haven't been on WSO in a while but it used to be quite prestige oriented.

 

I joined a start-up HF earlier this year in a situation much like yours (was the first analyst hire) and although I didn't have the option of A, I'd still take B if I was in your shoes. As long as you like the PM and believe in what he can do, I think it's a risk worth taking while you're in your twenties. Not often you get to work for a start-up in the HF industry and have that kind of upside, especially with a proven manager.

A few boxes I'd check before you decide are: 1) Which place offers the better mentorship? Might be tough to tell right now since you're not full-time at either place but I'd try to get a sense of that before you decide. 2) What kind of capital does B have? Is there a seed investor with a multi-year lock? That's important especially as you try to establish a young fund and attract other quality LPs.

DM me if you want to discuss further/ask any questions.

 
moose3:

I joined a start-up HF earlier this year in a situation much like yours (was the first analyst hire) and although I didn't have the option of A, I'd still take B if I was in your shoes. As long as you like the PM and believe in what he can do, I think it's a risk worth taking while you're in your twenties. Not often you get to work for a start-up in the HF industry and have that kind of upside, especially with a proven manager.

A few boxes I'd check before you decide are: 1) Which place offers the better mentorship? Might be tough to tell right now since you're not full-time at either place but I'd try to get a sense of that before you decide. 2) What kind of capital does B have? Is there a seed investor with a multi-year lock? That's important especially as you try to establish a young fund and attract other quality LPs.

DM me if you want to discuss further/ask any questions.

Same background as this user and love where I am. I think points given by moose are really good. I would personally focus on the following:

1) Background of manager (you have to trust his ability) and level of mentorship available. I personally speak w/ my boss for hours each day on each investment idea which I believe to be a rarity. Also, does is his investment philosophy similar to yours? Any nuance in philosophy will clearly show with time and hopefully they aren't too far apart. For example, although my philosophy with my boss is very similar I'm a bit more focused a little bit more interested in entering into a position to play the next 6 months as opposed to 2 years.

2) Make sure a lot of the capital is "permanent" capital or very close to it. Myself and the other people I know in startup hedge funds have boss' who had enough money to cover expenses for the fund with their capital alone.

3) Along the lines of 1), but make sure you and your boss get along very well and that he treats you fairly at the very least. Since you will be in the same room for most of your days you better get along well.

My comp is below that of a megafund but still very reasonable. I get the same sense from others who are in the startup business. However, what I will say is that one of my friends who joined a fund that basically started in 2013 and has crushed it since it started says he got a real disgusting bonus. I don't know the exact number, but it sounded like something much more than what you could make at a megafund. Culture of small funds seem to be much better also (mine included). I actually enjoy coming into work.

OP feel free to msg me if you have more questions.

 

Choice B. After that, Type As will be easy. But no matter how much "prestige" you have, chances like B are extremely rare. I have a feeling you'll regret if you don't choose it. The risk/reward payoff potential is huge.

"When you stop striving for perfection, you might as well be dead."
 

Not true at all with regards to Type A's being easy after being IP # 2 or 3 at a startup fund or chances like B being extremely rare. You underestimate the difficulty of jumping back to a blue chip fund if your fledgling fund struggles/shut downs and the number of funds started each year by founders with impressive backgrounds and track records.

OP, I agree with westsider's points regarding benefits of established HF vs the startup. Ultimately, you're weighing those benefits against what is really a bet on a single man, the latter of which you know far more about than we do. Personally, I'm not a fan of the multi-strat multi-manager model so would take B regardless. If A was a 10-20 IP 5B+ aum fund a la Greenlight, Lone Pine or ValueAct, I'd prob lean toward A barring strong conviction about the founder of B. I'm guessing this is one of the recent Viking/Maverick spinoffs (Junto, Foxhaven, Herring Creek, Three Corner)? GL regardless, you're in a good spot

 

I will play devils advocate here.

I had the exact same offer, albeit a little more established choice B ($500-$1bn fund with 3 yr track record), and went with mega HF (choice A). My reasoning was incredibly simple, and comp/prestige had nothing to do with it (A did pay marginally more). I felt that in the tiger cub model, i.e choice B, I had no ability to ever be the one calling the shots on my own, the final decision would always come from on high and roll over whatever I wanted. Choice A for me, being a multi-pm model, gave me a lot more flexibility, and on a 5-7 year horizon, a much higher shot of being my own PM, or at the very least managing a large swath of capital inside of the multi-pm model ($400-500mm). A tiger cub model is built around ONE individual, and ONE individual only.

Also, you say you mesh with option B PM really well, and that is enormous too. I felt little connection to my option B, and so with the call option of managing large chunks of capital, in addition to really clicking with the team at option A, I found the megafund route much more suitable for my personality and risk temperament.

Just my 2 cents, I wish you the best all the same.

 

ke18sb: Yeah pretty much always market. Usually HFs get your total current comp number upfront from HHs or they will ask you early on if there is no HH.

Your concern is the same anywhere (check out the hedge fund economics thread), since at the large multi-managers, the PMs will get ~1% of AUM to pay themselves and their team and a split of upside, say 10-15%, to pay bonuses with. Each dollar they pay in bonuses is out of the individual PM's pocket as well. Of course, the risk there is alleviated by the fact that there is more structure. It's highly unlikely that 1 PM is going to screw over his team when every other PM is compensating their team highly given good performance.

Negotiations are mostly around expectations, just be extremely direct about what you expect and be willing to reject the offer and keep looking. I turned down two offers prior to this because of various aspects. If you're in a hurry you will probably get screwed, though usually through a lack of diligence.

Bonuses everywhere are usually discretionary until you get equity stakes. 1 P&L shops are extremely transparent. The main thing you have to diligence is the PM and his character, performance, and reputation. You know the fund structure, you know the fees, you know the AUM, and you know the relative costs of the office and Cap IQ/Bloomberg & T&E. It's not in the PM's best interest to fuck you over unless the fund is doing poorly or you're in a junior replaceable role and he's an asshole. Personally, I wouldn't really consider option B unless it was a senior role that has equity and a strong mentor/mentee relationship.

 

Thanks Francisco. Unfortunately, I couldn't get Greenlight or the other names you listed so these are the only two options I have. Not a big fan of the multi-manager model either since unlike westsider's offer, I'll be starting from junior analyst and it is highly unlikely that I'll hit PM within 5 years at Firm A. You're right though, the structure is really important and Firm A seems like a "safer" bet.

 

Confused when you say you would be coming in at a more senior role in Option B - could you extrapolate? You have no public markets investing experience, so I'm assuming the PM will be hiring 2-3 other analysts with more L/S experience than you? This would still make you the "junior" guy. Not doubting your story, just trying to understand the decision making there.

 

I think a lot of people here underestimate the difficulty of making it as a fund in these markets. While I do think that the risk is mitigated in B by the fact that he's starting off with an insane amount of money and he must have some sort of track record, the fact remains that being your own PM and running your own fund is a whole different ball game.

Statistics aside, there are a lot of additional risks associated with B. I would go with A because you'll have the name brand within the industry that will allow you to lateral to other funds easier. If you go with B and things don't really pan out, no one will have heard of that fund and you're more of a question mark. With A on your resume, you're in a pretty good situation with regard to moving around within the industry.

Go with A.

 

Value: Good question, I actually do have some public markets experience, as my current firm is not a traditional PE firm. However, what I'm referencing to is more of the carry/equity and the culture in terms of being more valued & senior rather than a job title in particular. And no, he would not be hiring anyone above me, it'll be someone on the same level and upon hitting AUM milestones, hiring of junior analysts.

Bmchrino: I agree though and this info might reveal Firm A's name, but the Firm A PM is new as well with and has built out his team of analysts/associates only recently under the multi-manager model. I think there's definitely less risk of the overall team going under but his own P&L (starting at $500mm) is at risk if he doesn't perform within the first year.

Definitely easier to transition to another fund from A given the prestige but given all the other pros of B (biggest of all is a better culture & PM and enjoying coming to work) I think I'll take the risk.

I finished my diligence of B and will probably take it.

Thanks all for the advice!

 

If this was my choice I'd definitely go with A. $100mn AUM is barely large enough to be considered an "emerging manager", what is that from like 2 LPs? Friend and family money? If you have a really bad month and they both decide to redeem the fund is wiped and you get nothing. Plus you have undeveloped infrastructure, little team camaraderie, reputation risk for whatever you do after, etc.

 
<span class=keyword_link><a href=/resources/skills/finance/going-concern>Going Concern</a></span>:

If this was my choice I'd definitely go with A. $100mn AUM is barely large enough to be considered an "emerging manager", what is that from like 2 LPs? Friend and family money? If you have a really bad month and they both decide to redeem the fund is wiped and you get nothing. Plus you have undeveloped infrastructure, little team camaraderie, reputation risk for whatever you do after, etc.

Dude would know better than either of us but I would venture to guess that there's probably a decent lockup period
 
Going Concern:

If this was my choice I'd definitely go with A. $100mn AUM is barely large enough to be considered an "emerging manager", what is that from like 2 LPs? Friend and family money? If you have a really bad month and they both decide to redeem the fund is wiped and you get nothing. Plus you have undeveloped infrastructure, little team camaraderie, reputation risk for whatever you do after, etc.

lol @ you having no idea what a lockup is, especially when OP explained it in this thread. little team camaderie? i bet u have no idea what that means

stop trying to give advice. looking at ur past posts i'm guessing ur in the back office.

http://www.wallstreetoasis.com/forums/insurance-industry-primer

http://www.wallstreetoasis.com/forums/anyone-have-access-to-wf-equity-r…

http://www.wallstreetoasis.com/forums/stock-ideas

 

I work for a start-up with around ~150 AUM. I think the hardest part is pitching my boss idea since its basically only one person deciding yes/no, rather than a committee. Can be frustrating at times, but I prefer working at smaller shops because of less red tape and the 'getting it done whatever it takes' attitude. Eat what you kill, right?

 

Let me play devils advocate here

Just a Q for thought, why is B taking you with no HF experience when they could probably get a rockstar analyst from another firm and pay more via equity etc.. I know plenty of sell side analysts and buy siders who want to move into a HF.

I'd go with A and build a track record to see if your actually good at investing. If you suck oh well your secure, because if you suck at B your fucked and with 0 HF experience your essentially patting yourself on the back a bit too much thinking you'll succeed at B.

My friend recently joined B, after developing a track record at A. It's risky and he's pretty stressed out, but hey he was a rockstar at a mega HF so now he's taking the risk cause he proved himself

 

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