Average investment horizon for L/S equity funds?
My confusion on this is: with all those fantastic books telling you how to identify great companies over a longer term, how do you work at a hedge fund whose investment horizon is like a couple months?
Most single manager hedge funds are long-term, it's just they do care about quarterly because their investor capital is NOT as long term as mutual fund investors.
Hedge fund is a very broad term: Everyone knows the pod shop / multi-manager platforms are unapologetically trading quarters and events. The single managers are where variance is so large that it's hard to generalize because of founder lineage: I assume Citadel cubs like Woodline and Holocene are very short-term (I might be wrong) and a hedge fund started by a long only PM can be significantly longer term than the pod shop cubs.
How Lee Ainslie puts it, I think this sums up very nicely:
There’s really no average, very wide spectrum of risk profiles and strategies.
But gun to my head the best answer to your question is 6-18mo. Most fundamental equity funds can execute a 6-18mo idea. That idea may be based on a longer term valuation - I.e over the next 12mo x/y/z catalysts will make people realize this biz could do 5x higher eps in 5yrs. But mostly you want to be there for the 6-18mo period where the perception of long term value shifts
While I can’t verify personally, a pod shop guy who was ex big-LO (think T rowe/fidelity/Columbia) told me they actually traded quite a lot of short term events with decent turnover on the LO side - there’s just so many PMs crossing trades w each other and no flipping short, that the aggregate looks more stable. Second hand.
The short side process and horizon is fairly similar in most equity models - for longer term single managers, in most cases the short side is much more timing/trading focused and diversified than the long side and not much dif from pods. And since each short idea tends to be smaller, you’ll spend an outsized portion of your time on shortish term ideas in most roles
Your comment makes me curious about EPS as a reference point for PMs to make decisions or analysts to recommend stocks. Jim Chanos recommended a book called the Number written by a reporter, which gives an introduction over how EPS can be easily manipulated. Financial Shenanigans also narrated a longer list of potential methods.
What are some other quantitative metrics fundamental guys use ?
Even pods often don’t care so much about the current quarter eps, but rather the next quarter guidance released during the earnings report and what the various trends imply for longer term earning trajectory/power.
Short term funds are trying to focus more on timing the perception shifts around mid/long term stories, not ignoring mid/longterm stories
Multi manager: 6 months or less
Typical single manager L/S fund: 6-18 months
Long-term, long-biased hedge fund that practice “real” value investing (very few of these): 3-5 years
Mutual fund: 3-5+ years
The type of investing you see in books is rare in HF world. HF is mostly picking stocks with catalysts that drive upside through changes in earnings estimates. “If they beat earnings, long term earnings estimates go up, mutual funds will buy.” That’s very different from the few funds that try to pick stocks that are intrinsically undervalued. Berkshire Hathaway, Select Equity, and ValueAct are a few that do the latter. Hard jobs to get, most hire from PE shops.
Would it be possible to go from IB to Large Mutual Fund/Long-Only Research Analyst?
Yes, very doable. You don't see these moves often because most junior bankers typically look for the most financially lucrative exits (e.g. PE and HF).
Why do people like long term investing so much? It’s awful having to go through drawdowns in hope your thesis plays out. Also so much nicer to lock in PnL once it plays out within a couple months and move on. But I guess people like understanding businesses?
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