I have accepted a job offer at a top sell-side institution to be an equity strategist. I come from a bottoms-up, long-short HF. I understand the sell-side role would involve making allocation recommendations using a top-down analysis (and in a different capacity/purpose to buy-side).
Here is what I don’t understand:
How is this analysis done? There is a dedicated macroeconomic team, so do they sift through the data (such as CPI/PPI/PCE, manufacturing data, inflows/outflows of foreign capital) and then inform the strategists in order for the latter to develop a view? Otherwise, how do the Macro and Strategist teams avoid redundancy/overlap?
How do I develop a forward-looking view (as opposed to just assuming history will exactly repeat itself)?
Please help, I really don’t wanna fuck up this opportunity.
Note: before anyone asks “why HF bottoms-up to ER top-down?”, the fund was performing badly and people (myself included) got cut. This opportunity is exciting as it allows me to learn a very different side of investing (philosophically, capacity/purpose). Also, I am going to be working in a renown team, so great learning opportunity in that front too.
Can't answer most of your questions but broadly the macro teams responsibility is forecasting around economic events and data rather than making investment recommendations. The equity strategists assign sector preference or lack thereof through a lot of other things than pure macroeconomics - definitely plays a part though. Macro guys don't consider stuff like valuation.
I am confused cause they definitely look at valuations for indexes (ex: SPX, NDX). They have a recommendation list with specific sector weights and stocks picked. I am almost positive they work with the sector-specific (bottoms-up) teams to get more color, but not sure to what degree (stock picking aspect perhaps?).
I'm confused here, are you saying the macro research guys at your firm make equity sector recommendations? That definitely doesn't align with my firm or what I've seen other firms do.
If you misinterpreted me and you're referring to equity strategists here then yeah they work with sector teams but I'm pretty sure they're not doing stock picking from bottom-up. Our guys run a lot of screens across the universe but they're not drilling into idiosyncratic things as far as I know, that's for the sector guys.
1) The macro team's output can be your inputs which forms your discount rates for your asset classes. Compare your own discount rates with the Street's view and the rate that the market is pricing in
2) For macro factor models, macro surprises are all that matters. (When a macro factor comes in as expected, that does ntg to move your names since it's already priced in). So the independent variables in macro factor models are expectation surprises rather than the macro factor themselves. The macro team works around quarters to forecast macro data and you build your factor models to predict returns for your names/ asset classes next quarter. Intercept of this model is the expected return to the asset (since if everything comes in as expected, the surprise is zero). This work can be done reasonably easily on spreadsheets even by a discretionary analyst with no quant background
YMMV obviously. Lots of sell-side shops just use 'strategist' as a literal synonym to (sell-side) analyst, maybe to make things sound more impressive or smtg
Thank you for the quick response! This makes perfect sense. Do you have any literature you recommend in order to learn about top-down strategy processes? I know of literature for the bottoms-up ones, but unsure where and how to look for this top-down one in terms of names (Soros would be one I guess, I have The Alchemy of Finance)
Unfortunately I don't know of any literature on this process, truth be told I don't even believe in top down philosophically, I'm currently juggling traditional bottom up deep value (which even then, I think probs is in secular decline) and factor investing. I just have a cursory understanding of how things work in the top down world thru things like the CFA, talking to people and reading a bunch of research in general.
Btw I read Alchemy of Finance years ago and altho at the time I thought it was amazing, over time I became less impressed with that philosophy as I got more reps in my own trades. But that's obviously just my own experience
I feel you in terms of investment philosophy - covering TMT, I adopted Laffont’s “long disruptor, short disrupted” mentality with a GARP perspective. I, for now, tend to favor more of a hybrid approach, but perhaps more skewed towards bottoms-up. This new position is such a radical change for me, that it is as exciting as it is daunting, but I believe it will be essential towards my development as an investment professional. On deep-value, I think it was Greenblatt who stated a while back, during his book tour, that value investors will need to become more thorough like growth investors. Btw, if you want some literature, a great hub is richard toad on instagram - he posts biographies, news, tons of stuff. Has really helped me expand my awareness of the successful people in the industry, to then checking out their interviews and reports so I could understand their philosophy
edit: it appears the instagram dude is also on here as rich_toad, he is great
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