Routes to Buyside PM

brotherbear's picture
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Mod note: This comment was in response to this thread: Best Entry Level Job for Running Future Hedge Fund

Wait...you think b-school is going to teach you 'in depth modelling skills'? B-school teaches you advanced undergraduate-level finance. It does the same for marketing, accounting, organizational behavior, etc. It definitely does not teach you advanced modelling skills that are beyond what you're going to learn on a desk.

If you're a sales professional within S&T, maybe b-school adds some quantitative skills you wouldn't have picked up on the job. But so would the CFA. If you want to run your own fund, I'd say the best background is in research, not S&T.

Historically, there were but a few paths to becoming a portfolio manager. Firstly, you could start within S&T (as a trader, not as a salesman), move from a market-making desk to a prop desk, and then take your track record with you to the buy-side. Or, you could start as a trader, move to a small hedge fund or asset manager, convince them to let you run a small portfolio, and take your track record with you to a larger fund (or use it to start your own fund). Or, you could start within the portfoilio management group at a large asset manager and work your way up, eventually having P&L responsibility on a fund of your own. And finally, you can start in research (on either the buy-side or the sell-side), publish your ideas, run a shadow portfolio based on those ideas, keep track of your own performance, and parlay your track record into a junior portfolio manager position on the buy-side.

There are ups and downs to all of the paths. There are definitely more entry-level trader and research positions than there are entry-level portfolio management positions. If you're taken onto the buy-side immediately, you're going to be doing more menial work than your peers on the sell-side. You will not be running a portfolio or making any decisions within JPMAM, PIMCO, GSAM, or BlackRock for several years. You're going to start out doing portfolio attributions, portfolio construction, and (maybe) some cash management. On the other hand, you don't have to leave your team or find a new job to eventually run money yourself. It's a slower (but safer) path.

Prop desks are largely dead now. Dodd-Frank killed them or molded them into something entirely different. You're not going to be sitting on a Goldman prop desk any time soon. That doesn't mean you cannot take proprietary risk as a market-maker. But how do you capture that? How can you prove your Sharpe Ratio? Your IRR? Your BPS per trade? It's going to be difficult. And there is a real difference between understanding liquidity constraints in the market, managing flow, and taking real proprietary risk based on solid fundamental or technical research.

That's why I suggest the following: start in S&T as a trader. Try to rotate onto a couple of different desks in your first two years. Learn the business as fast as you can. And then, transition to research. Specifically, aim to become a 'desk strategist,' whose responsibility is to create fundamental or technical trading ideas for the desk on which they sit. Be a good strategist, and circulate your research amongst traders on several different desks. Make your salesmen aware of your ideas. Have them promote your thoughts to their clients. Have them introduce you to their clients, and you might find yourself on the buy-side sooner than you think.

That would be the ideal background for a macro PM. For an equity long-short PM, research is better than trading. If you're going to learn trading, though, be sure to sit on both the long and the short desks. Learn how to fund yourself. Stock lending is the more esoteric field. Pretty much everyone knows how to buy stocks. Did you notice how you never mentioned a cash equity trader becoming a PM? That's because they're not stock-pickers, and that's what is required of a long-short manager. Research requires that skill set. So does strategy.

Everyone focuses on S&T because Goldman's traders made a fortune leading into the crisis. Is that going to continue? Perhaps at some banks, but not all. The real money in finance is to be made on the buy-side, but only if you're a competent risk-taker. If your skills are 'hand-shaking' skills, be a salesman. That's what all partners at consultancies and law firms are. That's what all MDs in IBDs are. That's what capital raisers within PE funds or hedge funds are. You can make a lot of money as a salesman if you're good at it, so don't disdain the profession because you simply do not understand it.

It took me longer than I would have liked to learn these things. No one told them to me in any case, so don't get so fixated on a particular field. It's not really possible to plan 5-10 years out. Not really. Think of what you'll do for the next 3 years, no more. Your life changes a lot between 20 and 30. Be open to what comes to you, position yourself for success, and see what happens. That's all you can really do.

Comments (58)

Mar 10, 2014

Would you have the same advice for a trader at a prop trading/market making firm? Do you think it is any more or less difficult for them to break into the buy side?

Mar 10, 2014

I'm pretty sure OP doesn't go on WSO anymore. I'd wait for someone else to chime in, or pm someone in prop trading

Mar 11, 2014

Ok, thanks.

Mar 12, 2014
zeroblued:

I'm pretty sure OP doesn't go on WSO anymore. I'd wait for someone else to chime in, or pm someone in prop trading

He was here a few weeks ago:
brotherbear PE (Senior Gorilla, 856) on 2/20/14 at 12:18am

If the glove don't fit, you must acquit!

Mar 11, 2014
Bobbington:

Would you have the same advice for a trader at a prop trading/market making firm? Do you think it is any more or less difficult for them to break into the buy side?

"Hold on a sec...you mean they made all this money without doing IB --> PE --> HBS --> PE --> God?
How is this possible?!?!?!!??" - TheKing

Mar 16, 2014
Bobbington:

Would you have the same advice for a trader at a prop trading/market making firm? Do you think it is any more or less difficult for them to break into the buy side?

Dude you're already on the buyside. If you're doing well and want a larger book, there is always DRW, Jane Street, Jump, and the like. Nobody knows what their true AUM is but I suspect all of these firms have about the same number of decimals as a large hedge fund.

I suspect that if we knew what Getco cofounders Tierney and Schuler were really worth, they'd be on the Forbes Billionaires list.

Bottom line is that the prop shops probably treat traders the most fairly on total comp as a percentage of PNL. Traders at banks want to move to the buyside to get a cut of the PNL rather than salary + bonus, but if you're instead at a prop shop getting paid 30% of net PNL, that's a lot better than any hedge fund will give you.

Mar 16, 2014

The PnL distribution might be better at the prop shops but I think you could be overestimating the relative size of books and even AUM when comparing these to mid to large hedge funds. But on top of that, at their core, these prop shops are market makers, so for someone interested in more long-term risk/positions, that would be the appeal of a hedge fund. I'm just wondering whether someone at a firm similar to the ones you've mentioned could make that jump to HF

Mar 12, 2014

Why would you rotate from S&T trader to research or a desk strategist? That's like three steps backward.

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Mar 16, 2014
justin88:

Why would you rotate from S&T trader to research or a desk strategist? That's like three steps backward.

On the one hand, you're absolutely right in the sell-side trading environment, but on the other, it's a fairly straightforward move for a desk strategist to make the jump to a QR role at a hedge fund. This is a jump that for whatever reason happens less often for traders. I'll get to my guess at those reasons later in the post- my suspicion is that desk strats are a little bit cheaper and that there are some cultural factors at play.

The reason the desk strats leave for the buyside is that it's less expensive for a hedge fund to offer them more money than their current role, and they already spend much of their day doing a lot of coding, stats, and analytics work. For many of them, certainly for me, it's also lot easier to thrive in the geekier research-oriented environment of a quant fund where you're surrounded by Finance and Econ PhDs.

I think that if you're doing well as a trader on the sell-side, there's no need to move to a hedge fund. There's also going to be a huge culture gap. Of course, hedge funds do need folks to execute trades; many of these guys are former sell-side traders. And some people can do extremely well in both environments. Many of these people have STEM degrees and INTJ Myers-Briggs personalities. They're the quietly competent folks that everyone enjoys working with and only shout when they need to.

I think the route to a hedge fund is either to get hired into an execution or trading role there, or if you're looking for more of a research role and have a STEM or quant-heavy undergrad, maybe think about an MFE or spending a few years doing a PhD and then leave with an MPhil. There's a lot of stuff that a STEM undergrad, even one who has spent a few years in trading, doesn't know he doesn't know. There are also a lot of statistical tools for tail analysis in finance that have been developed in response to 2008/09. That could be worth the first year of the program. And if you want to work on a team of research folks, adapting back to the culture of being understated and indirect, and graciously and humbly stating the facts and evidence could be worth the second year.

But I think that in the second case- the direct to QR route- the sell side trader has to take too many steps back, or at least spend too much time largely treading water, to make the jump to a research role at a hedge fund. The best way forward is to go for a buy-side execution role. And maybe in your spare time, take a graduate level behavioral finance course and maybe start being in the room when the PMs and researchers develop a behavioral strategy. A desk strat can bring some insights on execution and market behavior into these strategies, but I think a sell side trader who can understand what everyone is talking about would be even more valuable on that front.

In reality, these days, a PhD and a JoF publication or two isn't an absolute prereq to become a PM at a quant fund, but it sure helps a lot.

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Mar 21, 2014
IlliniProgrammer:
And some people can do extremely well in both environments. Many of these people have STEM degrees and INTJ Myers-Briggs personalities.

This made me think: what MBTI type best describes each major position in finance? And is that necessarily the best personality type to SUCCEED in that role (or better suited for some other role)?

Mar 15, 2014

Among the two people in macro that I know who took the route that OP proposed, both of them first started in economic research, then strategy, macro prop and then became a PM. While it is anecdotal, OP's suggested path seems inverted.

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Mar 19, 2014

nice

Apr 1, 2014

I do still come here (though admittedly not as much as I used to). I have actually done a few different jobs in finance, and there are a lot of different paths to every job. Private equity is the most clear-cut, but there are still plenty of people with non-traditional backgrounds floating around PE. Managing money at a hedge fund or asset manager, you'll find PMs with loads of different backgrounds. There was a profile today on Bloomberg about Andrew Balls at PIMCO, who used to be a journalist for the FT for 8 years before moving to a strategy role at PIMCO. Now, he runs serious AUM.

It seems awfully short-sighted to me for someone to say that moving from sell-side trading to a research/strat role is like 'taking three steps back.' It's absolutely not. While you'd no longer be running your own book, there is a limited amount of upside to doing so. And the skills of a sell-side trader are less applicable to buy-side decision-making than you might think. As a sell-side dealer, you are managing client flow. Your book is going to have some natural positioning. Sure, you get to help dictate the structure of your portfolio, but at any given time, you'll be managing a series of positions you don't want. At least, you wouldn't have chosen to put the position on. And you'll have access to information you won't have on the buy-side. It's a lot harder to make decisions in a vacuum than you might imagine. Creating trade ideas from nothing (without any access to knowledge of client flow or what other traders are doing on your desk) is more the province of strats than sell-side traders, so their skills are more transferable.

Don't get me wrong--sell-side trading is a great place to start your career. You learn a lot, and there is probably no role in finance that gives you as much responsibility as early in your career as trading. Transitioning to the buy-side, however, is less clear. Taking an execution role at a fund is not a great path to managing risk. You want to be integral to the process of trade generation, not just trade execution. And given that research analysts, strats and quants tend to have better modelling skills than sell-side traders (unless, perhaps, we're talking about exotics dealers), they are more useful to PMs, especially those who already have execution guys to handle questions about liquidity and market timing.

I have moved on from trading, but I have several friends still in the game trying to figure out how to move from the sell-side to the buy-side. It's more difficult than you might imagine because they don't have definable track records benchmarked against an index, so they can't move straight into a PM role. It's hard to become a PM with no history of managing assets successfully. Sure--you have a P&L, but that's not the same thing at all. Anyone who thinks so, hasn't tried to raise a fund. The two former heads of MS EM Prop found this out when they went to GLG after Greg Coffey left. Admittedly, they did so at the height of the credit crunch, but the point still stands. LPs want to invest in funds managed by teams with 3-5 year (minimum) track records. Even coming from a prop desk, Bart Turtelboom and Kareem Abdul Mottal had a hard time even though they had kept all of their trade data. If you're a sell-side guy not sitting on a prop desk, you don't really have any sort of track record.

You can claim to have made whatever you like. Let's say you made $20 million for the bank last year making markets in equity derivatives. That's great, but how much of that is really yours? And how much capital did you risk to generate those figures? If I gave you $100m in AUM, could you generate $20m this year? What sort of risk would you have to take? And do you have any proof whatsoever that you can do what you claim?

I think this is why you see a lot of guys on the buy-side coming from a strat/quant/research background. They are better able to transition to the sorts of roles that are available in our current climate than sell-side traders who believe themselves capable of being a PM today without having ever really done the job.

Apr 1, 2014

I am turtle. You need to know people or know stuff. If you need to know stuff, figure out what you need to know and how to get to know it. Make a 5 year plan. Also a 3 year plan. And a 1 year plan. And a quarterly plan. If you don't hit your targets, you know that you are not serious about reaching your goal or your targets were misspecified.

Your employment gap is ok. Explain it humbly and honestly. Nobody expects perfection. It just makes it 10x as important that you are 100x more serious than every other joker that wants to be a PM.

Lots of people looking at maps. Not so many people walking the route. I am turtle.

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Apr 1, 2014

Fishing instructor - Greenlight Capital according to some older thread on the forum.

Apr 1, 2014
humble_dude:

Fishing instructor - Greenlight Capital according to some older thread on the forum.

I thought this story was from Pershing Square/Ackman:
http://www.forbes.com/sites/monteburke/2012/06/29/...
Networked with many PMs who leave military service at age ~30, and have made it.

DELETED_ACCOUNT

Apr 1, 2014

Dr. Michael Burry - the subprime guy. That's pretty odd. MD -> PM

Didn't Jim Simmons work at the CIA initially? Or was it the NSA?

Apr 1, 2014

NSA, I am pretty sure. But math guys can make that switch easier than most

Apr 1, 2014

The subprime Dr. was a Stanford educated neurologist, but his head was all numbers and he never would have gone far in medicine. So he said.

Apr 1, 2014

Baha Fishing Instructor, no way!

Apr 1, 2014

Selling purses on the streets of London after graduation to breaking the bank of England.

Apr 1, 2014

I don't really see why philisophy is such a strange start; it teaches you to think critically about everything.

Besides, Soros studied Economic Theory at LSE

Apr 1, 2014
Walkerr:

I don't really see why philisophy is such a strange start; it teaches you to think critically about everything.

Agreed

Apr 1, 2014

I wouldn't say it's strange - just not what the average person would think a HF manager would study.

Apr 1, 2014

The two most accomplished people I have met in finance both happened to be Religious Studies majors in college.... I thought that was interesting.

"That dude is so haole, he don't even have any breath left."

Apr 1, 2014

Analyst at my old firm was a poet

Apr 1, 2014

Hedge fund manager I interned with managed a retail store in a mall and for some reason took a chance and opened a fund. He manages over 100m and trades mostly consumer stocks

Apr 1, 2014

Working at a deli counter -> analyst at a top l/s value fund. No steps in between

Apr 1, 2014
Gray Fox:

Working at a deli counter -> analyst at a top l/s value fund. No steps in between

You gotta be kidding me. Did he just know the right people?

Apr 1, 2014

A guy at the country club I worked at won the lottery and went and opened a HF.

Apr 1, 2014

I have heard alot of crazy ones...probably the two most non-traditional I have seen are a guy who was a personal trainer and another guy who recognized a well-known macro hedge fund manager waiting on a lift line at a ski resort and talked his way into a PM job right there on the line.

Apr 1, 2014
Bondarb:

another guy who recognized a well-known macro hedge fund manager waiting on a lift line at a ski resort and talked his way into a PM job right there on the line.

Any idea what his background was? I would find it extremely intriguing if that person lacked experience yet was allowed to run money rather than transition via trading assistant role or the like. Then again, if he managed to recognize a macro manager prior to their 'More Money Than God' era, he probably already had some industry experience or a deep desire to enter. I'm also curios to hear what they discussed, and particularly if he pitched any ideas.

Apr 1, 2014

Not that I'm advocating it, it would be unethical, but has there been a case of someone bribing themselves into a PM position? I find it hard to believe that it hasn't happened, but I can't remember a scandal of this nature.

Apr 1, 2014

My dream is to be sitting down at a sick hotel bar in some exotic city and have Mark Mobius sit beside me by himself and talk my way into a job with his team.

Apr 1, 2014
Unforseen:

My dream is to be sitting down at a sick hotel bar in some exotic city and have Mark Mobius sit beside me by himself and talk my way into a job with his team.

Just hang out at homosexual pedophile bars in Phnom Penh.

Apr 1, 2014
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Apr 1, 2014

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