Are small cap hedge funds worth it?

I'm one year in an IB stint at one of the big Canadian banks, and I have an offer from a small hedge fund. When I say small, I mean $100 mm AUM, it's basically two portfolio managers and I would be the only analyst. They have a good strategy but they buy extremely volatile microcap companies; when returns are good, all-in will be easily six figures, and if bad, well base is $60k so you can get by but you won't exactly be living it up. The fund has historically done well, with returns averaging about 30%. Hours are good too; maybe 45-50 hours a week.

Perhaps more important than the money is the future career trajectory. Where do I go from analyst if the fund only has a couple people? Associate PM? Do I hop to another hedge fund? Yet I am miserable in my current spot and there just aren't many hedge funds in Canada, and I'd ultimately want to work in a hedge fund one day. Do I take the offer? I know this is a personal decision but would love to hear if anybody else has any relevant experiences / recommendations.

Comments (40)

7y
pktkid10, what's your opinion? Comment below:

Microcaps are an obscure pocket in the market where there is opportunity for value add (plus larger funds can't put on positions in a 10MM company. Well, they could - it just isn't worth their time).

Personally, this is the only type of shop I seek out. No reason to go to a place where they closet index with large caps. Plus, there are some real interesting mgmt teams in the small/micro cap space

I'm on the pursuit of happiness and I know everything that shine ain't always gonna be gold. I'll be fine once I get it
  • 1
7y
Cries, what's your opinion? Comment below:

Regarding where you go from this $100mm fund:

Plenty of analysts effectively become mercenaries. They are happy specializing & jumping around as they are needed at other shops. Most people become career-analysts.

I would just recommend that you understand what you will be doing & why you even want to work at a HF. Based on the way you describe their mandate, it doesnt sound like you know what you are getting into

Array

  • 1
7y
bluerlion, what's your opinion? Comment below:

From the perspective of developing investing acumen, small cap is much more interesting. I think almost everybody would agree that coming up with a variant view on a company like MSFT, covered by dozens of analysts, is much more difficult than coming up with a variant view of some tiny company with 0 sell-side coverage and too small for HFs/AMs. If the PMs have consistently good performance, that makes it even more interesting.

7y
MMmonkey, what's your opinion? Comment below:
bluerlion:

From the perspective of developing investing acumen, small cap is much more interesting. I think almost everybody would agree that coming up with a variant view on a company like MSFT, covered by dozens of analysts, is much more difficult than coming up with a variant view of some tiny company with 0 sell-side coverage and too small for HFs/AMs. If the PMs have consistently good performance, that makes it even more interesting.

what view already exists on a "company with 0 sell-side coverage" that is "too small for HFs/Ams?"
7y
bluerlion, what's your opinion? Comment below:
MMmonkey:
what view already exists on a "company with 0 sell-side coverage" that is "too small for HFs/Ams?"

There are still investors, obviously these firms are not too small for everybody. Their collective views on the stock/business determine the price.

7y
NESCAC, what's your opinion? Comment below:

This might be a little tangential, but you might want to ask about capital locked-in since the fund is small.

  • 1
7y
One2Three, what's your opinion? Comment below:

Have you considered other money managers? Asset Managers? What about the equity strategies at the pension funds? Best of luck.

My posts will be fraught with grammatical errors since I post from my phone. I will try my best not to post an incoherent babble.
7y
FinanceBrah, what's your opinion? Comment below:

Let's say you take this offer; if you try to sell yourself to another HF down the line do you want to go to a place with a similar strategy? How big do you expect that space to be if/when you leave? Look at the funds you think you want to work in one day and ask yourself; "if this doesn't work out will xyz HF hire me compared to the guy who stayed in IBD?"

7y
Pokemon Master, what's your opinion? Comment below:

It really depends on the fund itself and your personality. One thing I will say though is that guys that outperform over one decade in the small-cap space are more likely to do it the following decade. I can name dozens of small cap guys who have had a 20%+ IRR over the last 20-30 years. So the 30% you state is good depending on how long they have done it for. I also see a lot of the guys who work for one of the funds I mentioned and then go on to start their own find and repeat the same process. Small caps are a lot less efficient and smart guys can continue to be smart for decades at a time.

The only questions is can you settle for being a big fish in a small pond or do you want to sell your soul to mega fund with the unrealistic hope of one day becoming a billionaire?

7y
NESCAC, what's your opinion? Comment below:
Pokemon Master:

It really depends on the fund itself and your personality. One thing I will say though is that guys that outperform over one decade in the small-cap space are more likely to do it the following decade. I can name dozens of small cap guys who have had a 20%+ IRR over the last 20-30 years. So the 30% you state is good depending on how long they have done it for. I also see a lot of the guys who work for one of the funds I mentioned and then go on to start their own find and repeat the same process. Small caps are a lot less efficient and smart guys can continue to be smart for decades at a time.

The only questions is can you settle for being a big fish in a small pond or do you want to sell your soul to mega fund with the unrealistic hope of one day becoming a billionaire?

This doesn't really make much sense.

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7y
Rags to Hermes, what's your opinion? Comment below:

If the buy-side is your end game then this sounds like a great opportunity.

For one, you will most likely be a generalist so you will learn much more about the overall markets and develop a baseline knowledge of all industries. Additionally, at a tight knit firm you will have the opportunity to learn directly from and be mentored by experienced PMs with a good track record.

Two, small and micro caps are the most exciting space to be in. The size of the universe and lack of coverage make the opportunity for out performance much higher than working for a large cap firm.

Three, the work-life balance on the buy-side is much better and if you were to look at earnings on a per hour basis I am sure it would be similar or better than your current IB salary.

7y
THISINAM, what's your opinion? Comment below:

Offered a job for a small hedge fund (Originally Posted: 11/11/2015)

Hi,

I was offered a full time job as a junior trader for a relatively new hedge fund with currently 25$ million under management, last year this was only 5$ million. The returns of this hedge funds has been 12% annually over the past 3 years and they seem to be doing quite well.

I am currently almost done with my degree in Economics, with not a superb GPA nor any relevant work expierence. I am not sure if I want to start looking for a job after finishing this study or start a new study, physics or even med school were on top of my mind.

Eitherway the new school year has just begun so that will take at least another yeah before enrolling.

I was wondering would it be a good idea to take this job offer? It offers 6 months of intensive training, starting salary is $40k with a variable bonus.

Does equity trader for a relatively unknown firm, a hedge fund, look good at your resume?

7y
THISINAM, what's your opinion? Comment below:

I wanted to add that this hedge fund is expanding, currently the hedge fund only has 5 employees. The job is for a new location, working closely together with a senior trader and says to offer a lot of responsibility early on.

7y
VolSurface, what's your opinion? Comment below:

It will look good on your resume if you're a good trader. A job (or education) is what you make of it.

Physics and medical school? Why? I have a background in applied physics and many of my friends are doctors. All I can say is, you need to really be in love with those fields if you want to do well in them. Medical school is insanely hard to get into if you don't have a 4.0 GPA and an almost perfect MCAT with good research experience, and as a physicist you'll need to live off 30k/year for almost a decade as a post-doc before you get to be a professor.

It really comes down to what you want out of life, but if you're "not sure" about whether you want to go into physics/medicine, don't do either of them. Make some money in finance, work for a few years, and if you really don't like it you'll have the capital and the life experience to accomplish other things.

Then out spake brave Horatius, The Captain of the Gate: "To every man upon this earth, death cometh soon or late. And how can man die better than facing fearful odds, For the ashes of his fathers, and the temples of his Gods."
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7y
Chewie, what's your opinion? Comment below:

Since you are finishing up your degree and it will be another year before potentially starting med school or phsyics, this seems like a great opportunity for you to explore trading.

You might discover trading is 'the' thing for you, in which scenario the med school/physics route won't matter anymore and you'll never look back. If you end up deciding that trading is not for you, you can still do whatever you want a year from now without having to second guess whether you should have given it a try when you had the chance.

What other options do you have to spend time on between now and then ? If nothing concrete, I see no downside to accepting the offer and giving it a try.

7y
THISINAM, what's your opinion? Comment below:

Thanks a lot, I think you are right with the trying.

My other options are to stay in school and get a better GPA in order to be more competitive for good graduate programs/analyst functions at large banks.

Best Response
7y
derivstrading, what's your opinion? Comment below:

Some people on this board will sh1t on the fact that its a small firm (25m AUM is VERY small and in start up territory). 25m, if you make 15% and have a 2 and 20 structure that is like 1.25m to cover all the fixed costs plus salary/bonuses etc.

HOWEVER, i actually quite like the idea of this sort of path early on. You are young enough that if it fails you have some experience but a) youare young enough to do an MSF or MBA or find another role etc and b) you are young enough so its not like you blew up, but the fund you worked for blew up. On the other hand, being this early if it does take off can sort you up for life if you play your cards right. The only way to make real money in this biz is to take a risk at some point and get in early. And if you can get in early (first 10 employees) this young then you get a certainamount of optionality with it. Maybe im not as risk averse as most of this forum, but id rather go for gold early when i still have time to try again if things blow up. I think a lot of times people on this board think if you arent on the "the path" by the time you are 25 then you are fcked. However, at the end of the day great things can always happen quickly.

7y
THISINAM, what's your opinion? Comment below:

Thanks a lot for replying.

Part of the reason for posting this is indeed because of your last few sentences. I am a very insecure about what the right path in my life is, and as I have made some bad decisions in the past- I have become extra insecure about decisions I have to make for the future.

7y
Dingdong08, what's your opinion? Comment below:

Do you have a better offer for another hedge fund or something else? Or do you think an offer is forthcoming? And in reality, can you just decide you're going to pursue an advanced degree in physics or go to med school? The people I knew in college who went to med school had basically prepared starting in high school to have all of the relevant science courses, did internships and had perfect grades. Same with an advanced science degree but instead of internships had study programs and things like that (I honestly don't know the correct terms for academia but they'd spend lots of time in labs or sketching shit on a chalk board), did a thesis and had an undergrad degree in that field. And perfect grades.

7y
VolSurface, what's your opinion? Comment below:

Precisely. You can't just say "oh I feel like being a physicist!", you're competing with thousands of people who slaved over this shit for the last 10 years.

Then out spake brave Horatius, The Captain of the Gate: "To every man upon this earth, death cometh soon or late. And how can man die better than facing fearful odds, For the ashes of his fathers, and the temples of his Gods."
  • 1
7y
THISINAM, what's your opinion? Comment below:

Thanks for replying.

No I do not have any other offers, I get rejected by Credit Suisse, Barclays, Private Equity firms, and others for just internships.

In reality I can just decide to do physics (undergraduate) or med school (after passing a test). It has become more tough lately, but still the it is way easier to enroll in medschool than in the US for example.

7y
Sandy Chamois, what's your opinion? Comment below:

Take the offer, the benefits outweigh the risks...at your age, just getting your foot in the door is usually the hardest part. You will get good experience and start building a valuable network... And the fund could take off, who knows...

7y
THISINAM, what's your opinion? Comment below:

I am from a country where I can enroll in medschool quite easily, have to pass 1 test (which is kind of hard but doable if you prepare 3-6 months in advance), physics I can just register as well. I feel like a dick saying this, but yeah that is how easy it is in this country and that leads to attracting people who not really know what to do be able to make ''decision''.

7y
alphabeta100, what's your opinion? Comment below:

Pros/Cons of Working in a Very Small AM/HF ? (Originally Posted: 04/17/2015)

Hey all,

I may have the opportunity to work as an analyst for a very small asset manager (half a billion AUM). The opportunity sounds amazing in terms of learning their process of top-down analysis. Furthermore the hours are good, and I am willing to accept what it is to pay. The firm is small (about 5 people) and so I would wear many hats.

However should I be concerned about job security in such a small company, and furthermore would having such a name on my resume greatly negatively impact chances of moving around the industry in the future, or for b-school apps?

Are my concerns warranted in your experiences, or am I over-thinking an excellent opportunity here? My long term goals are to be an equity analyst or strategist.

Thanks in advance

7y
Iverson3, what's your opinion? Comment below:

Hard to say without knowing what other options you have. If you are confident something better will come along or is in the pipeline, the decision is more difficult, but in a vacuum, it sounds like a good opportunity. The small team should give you exposure to lots of aspects of the business. At times, you may find that in a very small shop, your team will be pretty busy as they are running very lean, so there might not be a lot of hands-on "teaching" and training will be unstructured. However, this is not to say that the experience won't be good, just that there may be times where you are expected to learn with limited guidance.

Some things to consider.., How is the fund doing? Do the managers have a solid track record/background? How long have they been around? (are they small by design -limited by strategy? poor performance? new?). These questions will help you decide on the job security aspect. Honestly, my view is that as long as it isn't some shop with a horrible reputation, you will be able to use this experience to find something else if things were to go south.

Feel free to PM me if you want to discuss a bit more or provide more detail, as its hard for me to truly give an opinion without more knowledge of your situation

Best of luck

Array

  • 4
7y
Dingdong08, what's your opinion? Comment below:

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7y
alphabeta100, what's your opinion? Comment below:

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