AUM declines from 1.7 to 400mn
Kind of a crazy question, but there is this hedge fund that has been around for 30 years and had a decent reputation for a while at least at one point (I am prepared for mockery though). With their value tilt, performance has been a bit inconsistent more recently (last 4 years), but not terrible by any means. Unfortunately through my sleuthing and digging, I got my hands on their investor letter and their AUM has declined from 1.7bn to ~400mn as of this quarter, after a large institutional advisor withdrew their money. Prior to this, they were fluctuating between 1-2bn for the last two decades.
I have been trying super hard to break into the industry from small LO side, and I have been interviewing with the fund. I would be the 5th IP on the team. My sense has always been it is easier to move between funds once you are "in", and the people on the team have really amazing experience including prior to this firm.
Would I be stupid to join this firm? I don't have an offer yet, but I am in later stages of interviewing with them. My comp expectations aren't crazy -- outside of that I just want to learn from super experienced investors. These guys are the exact investment style that I want to pursue / currently practice, and I know for sure it would be an amazing opportunity from a day to day and learning experience / professional growth perspective.
Would this be a stupid move and I should just move on? Has any fund ever made it out alive from a decline this bad? Value could make a comeback! lol
OP here: As a follow up, they were up down mid single digits last year, so not shitting the bed, but not great either for being value - they tend to be a long term investor. I know I know we are all market neutral fans these days so anything other than 10% consistent every year is crap, but just giving some color here...
I think it’s obviously a tough situation for the firm, but if you don’t have any other option, why not go for it and see what happens. They’ve obviously been around for a long time and are hiring for one reason to another. That being said, if you can get another offer, it’s always best to compare a couple of different options when making decisions.
How hard have you been trying from small LO? I.e. how long? How many years of experience as an analyst?
My 2c: If this is the only offer you’ve received in 5 years, take it. If this is the first one within 6 months of a tough market, wait for a bigger/better shop.
Started I’m November/ December- actually got to final round with another shop and just lost out. This is 3rd of pretty solid opportunities so far but it has been tough so far to get in front of many opportunities.
Gonna be real hard for that fund to ever come back. Any investor will see "used to be 1.7 billion, now only 400 million, obviously something bad happened, not worth my time to dig deeper." At 400 million aum, a 2 and 20 model barely covers the rent and the bloomberg terminals and an account and a lawyer. Not much leftover for the workers...Only way for that fund to come back is to gamble big on some high-risk stock and hope they get lucky with a huge return.
On the other hand, what are your other options? Avoid if if you have anything better, but if this is your only option, then its better than nothing...
That was my thought. Not running 2/20 AFAIK as well... so yea... really tough position to be in. I am surprised they are still hiring despite all of that honestly, although the letter I have is dated as of February so maybe they got some new investors on board again? Guessing the 2-3 decades of 1.5-2bn are enough to keep the founder/the GP going into his own pocket to fund things. As a learning environment for the resume does it look bad or no? The people I would be working with have great pedigrees. They used to be backed by some legendary investors back in the day, and with value factor coming around... but yea you're right still very tough lol
To be completely honest, it seems like a really decent spot for someone with your background. Given your experience, it’s going to be pretty hard landing a big HF offer so you don’t want to be in a spot where you can’t find anything better and ultimately regret not taking this one. Even if the fund that you’re going to hit a rough patch, it’s very difficult to even last 20-30 years in the industry so the founder / team must be doing something right (go see how many funds have lasted 20+ years and you’ll be hard pressed to find many of them).
The only thing that I would vet is the founder’s willingness to go another 5+ years. If they’ve been around for as long as you said, they are likely nearing 60+ so it’s probably about time they retired in which case the fund shuts down / returns any remaining external capital.
How much do you think Bloomberg terminals cost, $2mm a year? 2 & 20 on $400mm is plenty for 4 IPs. In an average year of say 5% of absolute return, they're making $12mm in fees. I'd say minimum viable scale for a 2&20 fund with 5 IPs is in the $200-300mm AUM range. If a fund can't break above that level after a few years, it's probably time to hang them up.
Agree with this people on here seem to think larger firms just cause they make more fees have more generous leadership. Would not shock me this founder/owner is paying his people close to those at a larger firm.
The real risk here is if the firm has a true 5 year plan forward or if they are trying to transition to a family office and cut scale over time.
A fund that's existed for 30 years and go from 2b to 400m most likely means that 50% or more of that AUM is internal, non fee-paying capital and the other half has much lower fees to keep them on as the last few remaining clients when everybody else left for the exit.
You have to ascertain if founder/inv team is going to keep going at it, what motivates the 2nd-4th guys on team (is there enough money to go around to keep them happy) and how generous the founder is with comp
I think expenses may run higher than your estimate (auditors and compliance lawyers aren't cheap; plus rent, and taxes, and technology budget, and 5 IPs will need a support staff, and generating alpha often requires buying proprietary datasets or paying a lot of broker fees to get research, etc). Your estimate of $12 million in fees will cover the firm's overhead with enough to pay the IPs decently, but nobody's going to get rich.
But even ignoring that -- you have to plan for occasional flat or down years. If there's no performance fee, 2% of $400mm has to cover all the expenses, which doesn't leave much left for the 5 IPs. And with only $400 million aum, if a single investor withdraws their funds (or an employee with money in the fund leaves) then that alone could tank the fund.
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A decline in AUM like that is more common than you would think. There are (or were) quite a few firms floating around that did well in the 90s/00s on high fee loads that failed to perform in the 10s. Some were able to persist and turn things around with a period of better performance, a lot didn't.
what are some examples?
Take it. A job is better than unemployment. Also are you single? Even better reason to take the job.
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