Let’s talk about institutional investment management. Doing a quick search it looks like there have been a few more allocators on the site since I was last here — feel free to chime in if you have other experiences. It’s been quite a while since I was on WSO and did my last Q&A. I apologize to all of you who have sent me pms over the last year and a half that I didn’t respond to. My inbox is flooded so I probably won’t get to all of those, but happy to answer questions here. For background here is the last Q&A did. I worked at a large endowment for 2 years and am currently doing something totally unrelated to finance for fun temporarily and plan to go to bschool next. I feel like I have a lot more info than I did last time I did one of these and have had some time to reflect on my time in the industry as well. I do have two biases for the record. First, I like this industry so my overall comments will be positive though willing to talk about the cons as well. I intend to return to an E&F after bschool. Second, I worked for an endowment > $5 billion. The E&F world can vary greatly so most of what I say will be biased towards larger endowments. Happy to answer anything! If I don’t know the answer I’ll do my best to figure it out.
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Thanks for doing this. 1. Just curious why have you decided to go back to bschool if you already have worked at a good sized e&f and that’s what you want to return to after bschool? 2. Have you noticed e&fs allocating more towards passive investments or has the industry stayed more with active managers and alternatives?
I probably don’t need to do the MBA it’s more of a want. I only plan to apply to MBA business schools">M7 + Yale and think I have a shot at H/S for various reasons. The rationale for going back to school is that 1) I went to a non target undergrad and if I want to be a CIO one day I think the pedigree of a top MBA will help; 2) Since E&F is the only finance thing I’ve done I would like to talk to people and see what else is out there; and 3) I think it will allow me to hone certain interpersonal skills and give me the opportunity to develop professionally in a way I can’t in other environments. I’m hoping to intern at the investment office wherever I go and do my summer at something else to get a feel for what’s out there.
For all the noise in the media about this, I didn’t experience it. Some E&Fs have always had certain asset classes passive and some have never indexed. Whatever your philosophy was before it probably hasn’t changed. We didn’t change any of our active vs passive positions based on anything in the last 5 years. This shift has occurred with some smaller (less than a billion) endowments and pensions who were never sophisticated enough to do alternatives in the first place and learned the lessson the hard way.
Thanks for doing another AMA! You add a lot of good insight and I also really appreciated your old post on Qualities of a Good Investor.
What do you think makes someone a good junior person at an Endowment? Like what makes one stand out?
What is a key question or area you like to ask/look to know more about the investor? Do you focus on his/her qualitative? His/her performance? What value he or she adds?
Understand you know very little and don't be afraid to ask questions. You're dealing with a global portfolio of investments across the capital structure and asset classes. There were a lot of hedge fund strategies I wasn't as familiar with coming out of undergrad so I would just sit down with the senior guys and pick their brain and ask for reading suggestions. Other than that, I would say the same things that make a junior person good anywhere. Be humble, work hard, and treat people well.
Unfortunately there isn't one universal question I found that nails it. The answer I'd give here isn't that there is a key question, but rather a key type of question. If I ask a primarily long/short equity manager if he/she would ever invest in credit the answer will be a short "No" or "Yes, but very rarely and only in a very special circumstance." If I ask "tell me about a time you went outside your lane, invested in credit, and the details surrounding that investments", I will get a much more detailed response. Both of these questions are asking the manager to discuss how/when/why they would invest in credit, but one of them is much more effective at getting the detail I want. So to answer a different question than you asked, open-ended questions are the type of question I found most useful.
Yes. All of these things are important. When evaluating an investment there are two key things to look at: the specific manager and the market they are investing in. The best investments are those that involve a fantastic investor in a fantastic market, but they aren't both necessary for success. The qualitative is important in understanding firm dynamics, their process, etc. and is crucial. Performance is important, but the absolute numbers don't really matter. What matters is does the performance line up with the story we're being told. Performance could be terrible due to any number of reasons that wouldn't stop us from investing and there are plenty of reasons that we wouldn't invest with someone who's performance is amazing.
Hey thanks for doing a part II AMA. I have a bunch of scattered questions below, so please feel free to answer whichever ones suit your fancy.
Aside from Swensen's book, what are other resources for learning more about E&Fs?
What are some of your favorite finance books/blogs/sites?
I know your old firm used a headhunter, but what would be the best resource to find E&F job openings. Outside of networking, is the best tactic to look at their respective sites?
Did you sit for the CFA?
How common is a transition from sell-side equity research --> E&F? What about E&F --> security picking role?
What qualities differentiate the best E&F allocators? Similarly, what skills are needed at the junior level compared to the most senior?
If you don't mind sharing, how does E&F fit into your overall MBA story outside of your next job (does it even?).
Thanks!
1) Swensen's book is definitely the best by far. A lot of the big university endowments put out annual reports which can be interesting reads. Otherwise I stick to books that most other investment professionals would read. I think Swensen's book is just so good at discussing the industry that no one else has really tried.
2) WSJ and FT are my go-to, with twitter being a good third source. Nothing too exciting here I know. As for books, I don't think I have anything that hasn't been said before. All the standard finance books apply here. MITIMCO had a reading list on their site of books they found helpful for their team which may be worth checking out.
3) Most E&Fs use headhunters and a lot will post them on their sites -- especially the universities. I typically use LinkedIn to keep track of them all and I still watch the job postings pretty closely. Since the start of the year I know that Dartmouth, Boston University, Cleveland Clinic, Harvard, Georgetown, University of Florida, and Rice University were looking for a junior person, University of California and Texas Children's Hospital were looking for mid-level people (either E&F or other finance), and Case Western University, University of Pittsburgh, Howard University, Boston Children's Hospital, and Tuft's University were looking for senior people. For an industry that is pretty small there are a lot of opportunities out there.
4) I did. Currently in the process of finishing it up. Would recommend it as it's seen as or more important than an MBA in the industry.
5) There is no common anything to E&F. Sell-side research is a path that you could do as it shows you have interest in markets. Most people don't come to the industry with experience already, they come with an interest in markets and some type of finance experience that you can spin as to why it's applicable. As for the E&F to security picking, this is less common without using bschool for the transition. At a junior enough level you could probably make it work, but the skillsets aren't identical so it'd be an uphill battle. Definitely not impossible.
6) The best investors I've worked with are constant students of investing. They take everything they do and they learn from it whether it went well or poorly. Another key thing is having a process and redlines is important. There are countless opportunities out there don't do one that requires you to go outside your lane or that makes you uncomfortable. I talked about the junior level skillset in a response above, but I'd say across the board you need to be thoughtful and have conviction in your work. You can see your returns so you know if what you're doing is working or not.
7) Without giving too much away, it fits into my story two ways. First, since I want to return to the industry I can use it to show that I have already done this, know what I'm getting into, and should be more employable since I have the experience. Secondly, it fits into the story I'll be crafting for my essays. I chose the E&F job over IB at a lower BB and plan to use that as part of my story about doing the right thing. Don't want to give away too many other details as it'd be somewhat revealing.
Hope these are all helpful!
Really appreciate the detailed response to all my questions. Best of luck!
Thanks BlueWing for doing another AMA. Didn't get a chance to participate in the last one, but have some stuff I am curious about.
Can you walk me through how you guys decide to make allocations to the active management segment of your portfolio, specifically PE/HF holdings?
In my experience, while it is sometimes the case that an E/F has a personal connection to a fund manager and allocates based on that "in", it seems that E&F's primarily find their way into funds by way a of a placement agent. Can you first give me a sanity check on whether that's a fair generalization? And second, if so, can you explain to me the process undertaken by E&F's to decide which placement agents to partner with, and within each relationship which funds to pursue among the many that are pitched?
Secondly - I have noticed, across the course of several fundraises, that a new fund is often raised in a telescoping fashion - the first LPs to commit are friends and family with small investments, followed by E&F's with a few million each, which are then finally followed by the big fish (i.e. a few hundred million from a state pension plan). I understand the rationale underlying the big fish investments - from their perspective, I imagine that early commitments by smaller LPs give some comfort that (a) people trust the management team and (b) there is enough market appetite that the fund will hit its fundraising target relatively seamlessly. Can you opine at all about whether these optical considerations are ever at play for an E/F?
Responding to let you know I need to run, but will get to this question tomorrow. Really good questions that I'm excited to tackle.
I somewhat answered this above so check that out. If you want more detail happy to try and provide more context without giving away my old firm's specific dd process.
So placement agents and consultants are used by some E&Fs, but typically not on a regular basis by the larger, more mature, sophisticated ones that you hear about. When somewhere starts an investment office these are helpful to get the portfolio started or if you have a smaller endowment where you can't afford a full staff these come in handy. Placement agents will reach out consistently trying to pitch you funds. We rarely took their calls if we didn't specifically know them. There were a few placement agents that our guys knew, knew us, and understood the types of opportunities we'd be interested in. Rather than sending every fund they are working with they would only send a select few our way if they thought it matched our interests. These are the good ones. That being said, I'd guess that significantly less than 10% of our portfolio came from placement agents. We would find funds through a few ways. 1) Our current managers recommend another manager, 2) Another E&F we know is working with someone and suggests them, 3) We meet someone at a conference, or 4) We read about someone somewhere and reach out to them ourselves. We would probably invest in 1 out of every 50? that we looked at and we were pretty active about commitments.
I'll start by saying that the best funds in term of fellow LPs are 90% top quality E&Fs with the remaining consisting of GP and friends and family money. The order you described for how you typically see the various groups invest is accurate. Typically when a fund starts its the GP capital along with f/f and then they try to get some E&Fs in. We like to know who else is invested because if an issue comes along we'll need good partners. That being said, we never would invest in a fund because someone else was in it. I can think of multiple times we didn't invest in funds that top E&Fs like Yale were in because we didn't feel comfortable with it for whatever reason. I can't say the same about pensions. Typically by the time multiple pensions are committing large amounts of capital it's because the fund has gotten too big and the pensions don't have the most thorough dd process so they do use the signaling effect.
Again, all of these responses are just my experiences at one E&F. They could be different at other places, but I do feel this is pretty accurate for top performing firms. We were consistently top quartile vs our peers so I feel pretty comfortable saying that.
What's your view on all-in comp coming out of B-school? Are you taking out loans?
Also curious on your view of all-in comp for an analyst or associate (depending on the place I've seen titles vary quite a bit) w/ 3-4 years of experience in an E&F in the alts space.
Thanks for doing the AMA by the way. It's great to see allocators on this site.
Hoping to get some kind of scholarship money for bschool, but yes I will primarily be funding my education through loans. Titles are far from uniform in the industry so I'll bucket comp in what makes the most sense from my experience. These are all approximations based on major east coast markets and assuming a large E&F. Obviously some of the places in the South and Midwest with lower COL will probably scale comp down some.
Junior, Junior Person (Straight out of undergrad): $70k + $5k-$20k bonus
Junior Person (After two/three years of E&F, IB, PE, etc): $90k + $10k-$30k bonus
Senior, Junior Person (After business school/direct promote): $125k + $20k-$40k bonus
Junior, Senior Person (Making some decisions under a senior): $150k to $175k + 25% to 75% bonus
Senior Person (Runs or Co-Runs an Asset class typically): $200k to $400k + 50% to 100% bonus
This is really good perspective. Any thoughts on how CFA/CAIA/etc. affect these ranges? Do they generally open more opportunities, speed up progression, etc. or are they more of a nice to have?
Again, thanks for the contribution to the topic and the forum. It's great.
A fellow allocator here (name probably gives it away). Thanks for doing this! I have a few questions:
1) How do you feel about working your way up in the E&F world without having worked at a fund? It seems like a lot of the current CIOs had prior careers as buy-side analysts or worked in PE/VC. It's something I'm thinking about as I want to stay in the industry but am very curious to hear your thoughts.
2) How valuable do you think technical skills (SQL, R, Python, etc.) are in the industry? I imagine they become much less valuable as you move up in the organization but am wondering whether or not to spend the time to build them up while in a "junior" role.
3) How is the quality of people among your organization/in the E&F world? I have only worked at two places but I have noticed a distinct difference between the top people and the middle/junior level. At my organizations, the top-level (run an asset class, CIOs) seem to be incredibly sharp, whereas the mid-level people have sometimes been able to skate by without that same level of interest/background.
4) What is your dream job coming out of B-school? I'm considering a similar path in a year or two and would love to get your input. A post-MBA associate at Yale/Harvard?
Thanks again!
Always happy to see a fellow allocator!
So I've definitely thought about trying to do l/s, LO, IB, or MC right after bschool for 2-3 years just to get a different perspective. Not because I think it's necessary, but because I think the best investors can look at problems from different perspectives. That being said I don't think it's necessary or that the experience is directly transferable. I look at fund investing as a different type of "security selection" from equity, credit, fx, etc. and don't necessarily think the skills are the same. I think there's overlap and that it can be helpful. Most of the people I consider to be top CIOs have spent all or most of their career in E&Fs and I think that if you look at the longest tenured ones that tends to be the case as well.
I think the skills you mentioned along with Tableau are valuable, especially at the junior level. Not as crucial as you move up, but I think the senior guys that can crank stuff out are much better to work with/for and seen as more valuable.
I was fortunate that everyone I worked with was phenomenal. Our top people were all incredibly sharp and had been in the industry forever. Our mid-level people all joined post MBA and had done varying things before. One of the mid-level guys is for sure going to be a major CIO one day and the others were all people I think will make it in the industry. I think the reason the most senior guys seem so sharp is that the good guys tend to stay around and the ehh mid-level guys get pushed out to something else like IR, placement agent, FoF, etc. So I understand your point on the difference between senior to mid, but I think that's more due to attrition.
Dream job would be Yale's endowment, probably followed by MIT over Harvard. I personally think Swensen and Alexander are the two best CIOs out there right now even though the latter doesn't get a ton of publicity. Narv did some great things at Columbia and I'm really interested to see what he's able to do at HMC. My only concern there is that there governance has been so poor for the last decade and that's probably the most underrated part of an endowment's success. As I mentioned above I've considered doing something else for a few years post-MBA before returning to E&F and am considering trying for IB/Restructuring or L/S Equity & Credit. Still have some time to decide on this, but if Yale endowment is an option I will forgo anything else.
What are you doing for fun before bschool?
Something unrelated to finance, but is valuable life experience. Not willing to give more details as it could identify me, sorry.
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Definitely possible. I know a few people who have done IB->E&F. Typically IB analysts wants PE/HF, but E&F is definitely available if that's something you're interested in.
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Did you consider investment management roles outside of allocation during your MBA? What was IM recruiting like at your program?
I would also appreciate any details you'd like to share on why you made the shift to IBD from E/F.
This is all great stuff! Was interested in reading on your shift to IB post MBA as that's something I've considered doing for a few years.
Fellow allocator here from the corporate pension world (between $3bn - $10bn). CFA charterholder + attending a Top 10 business school this fall. Question: What’s the best way to position myself for a transition to E&F post-MBA coming from a pension background? I have thought a lot about this but would like your opinion. My goal is similar to yours—work at university investment office during the year and intern elsewhere over the summer. I have 5 years of experience as a generalist and currently hold a senior title on my team. Thanks for your help!
Currently work in the asset management world but in a non-investment role. Do you happen to know how hard/see a lot of people do E&F post-MBA? Is it only possible to break in from MBA business schools">M7 or is outside that range possible at some of the smaller E&F's? Thank you for doing this AMA!
Thanks for doing this. Recently graduated from a public university with virtually no presence on the buy side. Doing due diligence alongside short-biased HFs in NYC (but is admittedly more of a qualitative/sales role). Passed L1 and am sitting for L2. Have had zero luck with networking and applications; suggestions on how to get into a role that eventually leads to research?
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