Hello! Recently joined this forum for some advice.. I am a sell sider being recruited into a MM to start a new credit pod. Discussions are early but headed the right way.. and I am looking for advice on what to expect and how I should shape the discussion.
Background on me: sell sider, run a credit desk and trade own book, mostly HY / some distressed background, personal pnl of 50mm ish, desk pnl 100-125 mm on 800-1 bn gross.
This doesn't have to do with comp / pay structure for myself, or whether this is the right MM (I am sure I will ask those q's too), but more about what I should be asking with re to building a biz.
- What should I be asking about the targets that I need to deliver, expectations etc? I can design risk for different appetites.. should I be asking what %ge returns they are targeting, what is the vol expectation, are they targeting a specific sharpe ratio.. or is the answer for all of that just going to be "the higher and faster with the lowest vol is best".. which is obviously so vague its unhelpful. How can I get more precise expectations? Should I ask about median expectations?
- By the way, any suggestions on what is considered a "good performance"? What sort of RoA / RoE / sharpe or other measure is considered a "good performance".. that let's me push for additional capital? Does this differ much by MM? I assume that it does!
FWIW I would like to target 35-50 mm of initial pnl.. and grow from there. Initially probably use say 800 mm gross, mid single digits RoA, low teens RoE, low vol, mostly HY with a sprinkling of special sits.
- I understand the typical "equity / vol allocation" for a new PM.. How should I be thinking about risk limits for the pod? Should I be negotiating gross limits, net limits, draw down's? What else should I be asking here?
- What are the questions that I should be asking about getting more capital in forward years if I deliver? Is this typically pre-agreed in writing, or I should get a general understanding of what's needed for more capital and then hope for the best if / after I deliver? How long do I need to "hit targets" for before I can push for more capital? Is that 1 year, 2 years, 3 years.. any typical numbers?
- The business I'd like to build probably requires at least 1 but ideally 2 analysts as early hires. Over time, I would like to build the pod towards 100 mm of pnl, which I think requires a footprint of 5-6 analysts. What should I be asking here with re to hiring analyst resources? Should I ask for a budget? Can they fund guarantees or buyouts above the line for analysts? Will guarantees or buyouts for analysts be a draw on future pnl?
- How should I be thinking about the cost of analysts once I am up and running? What is typical comp structure or ranges? Are these a direct negotiation between me and the analyst, or does the platform pay a role here? Presumably it does, because coming from a bank + HR background, I wouldn't know where to start!
What are the questions that I haven't asked here?
Thanks so much!
Based on the most helpful WSO content, here are some detailed insights and questions you should consider when starting a new credit pod at a multi-manager (MM) firm:
Targets and Expectations
Risk Management
Capital Allocation
Analyst Resources
Additional Considerations
By addressing these points, you can shape a comprehensive discussion that covers all critical aspects of building and managing a successful credit pod.
Sources: Q&A: BlueWing Part 2: Endowments, Foundations, & Asset Allocators, (Networking) Good questions to ask?, Good questions to Ask in Coffee Chats for Investment Banking, Good questions to better gauge culture and longterm fit of a startup PE fund?, Q&A : Credit (DL, SSG)
It would take hours to answer your questions, though I believe most have been addressed in previous threads.
One thing I would encourage you to think about (and you will probably get asked) is how much of your P&L performance on the sellside can be replicated when you move to the buyside and no longer have the flow visibility that you've had on the sellside. Also, can you aspire to the same performance numbers if bound by market-neutral requirements that presumably you haven't had on the sellside.
If you can post $50mm P&L on 800-1000mm gross consistently, you will get capital thrown at you.. but frankly, it's very hard to post those numbers year-in year-out under a market neutral construct.
Any negotiation tips? Certain firms BDs told me drawdown limits are nonnegotiable. Whereas others are more flexible.
Is legal counsel necessary? I assume it's better to have more details in the contract than less. Or are these pretty standardized with a little room to negotiate.
Those that have explicit drawdown limits, they tend to be non-negotiable. For some, it is the net and factor exposures where there is some room to negotiate. But I would be careful not to ask to be able to run 60% net long, because you will raise red flags.
And yes, having an attorney review your contract is a must. Yes, it costs money, but given the $ involved, it's peanuts in relative terms.
One of the biggest shocks is technology. Every hedge fund on the street will proclaim to have state of the art technology. But the reality is most shops, including the supposed top ones, have shitty plain vanilla execution/trading platforms, sub par PNL estimation/allocation systems, weak risk reporting tools, lazy or subpar Operations teams, layers of bureaucracy to do simple stuff like turn on live Bloomberg data, and position systems that don’t always update in real time. Why? Because the focus for these mega hedge funds is to maximize AUM which therefore maximizes their bankroll, their goal is not to maximize the sharpe of their strategies via sharp execution platforms and amazing technology. They want returns that are good enough to justify their 2/20, they aren’t trying to be like Renaissance with a steady 40% annualized return.
In reality, I’ve seen prop shops with less than $250m in capital have better tech than giant hedge funds with $10b+.
Having said this, make sure you know what you truly need to be successful. It’s easy and naive to think everything will work the exact same way, but the reality is you’ll need to make adjustments to conform to the new platform/structure, so if you truly don’t know the ins and out of what you’re getting yourself into then you’re going to be royally screwed.
You're trying to run before you walk.. All of the major platforms heavily discount sell side PnL with good reason.. my first PM claimed he made 50/year on the sell side and lasted two years and printed -20m before he got canned.
Focus on making $10m with 0 or 1 analyst first before you even think about printing 50 or 100. No respectable platform is going to give you enough risk to make 30-50 your first year coming from the sell side (maybe Balyasny might and that's why they are always at the bottom of the peer group)
Sorry I can’t be of much help but do you mind me asking how you got to running a credit desk? At, I assume, a BB. Your experience/academic background would be really interesting… I’m considering credit. Thanks
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