Change in HF? SM to MM

Need some advice guys. I work for a tech focused single cio hedge fund. Like most net long funds, we are witnessing a drawdown but not as bad as some of the names that come up in the news everyday. Bonus may not come for sometime but that's beyond the point. My question is do you'll structurally feel that incremental capital will mostly move to market neutral pods? I do have friends in mm shops who are pms, who'd be willing to give me a shot as an analyst with a path to a sub pm in 1-2 years. I am also talking with a few single cio funds and would possibly get an offer from one of the well known shops. While on a short term total comp basis, mm may be a small hit but do you'll feel that it's possibly a great time to make that transition? 5 years later I can't be joining as an analyst at a mm (I am in my late 20's) and joining as a pm would be risky if I haven't run a market neutral book before. So at analyst level you get headroom to learn and will find something even if the pm gets axed so relatively less risky. It may be intellectually stimulating to take long term bets but I just think that mm is what's going to work in the future increasingly (with some exceptions of course). Like if I ever want to start a hf 5 years out, and think from an lp perspective, I feel it's going to be very hard for sm funds to raise capital going forward, as it's becoming increasingly commoditised and very hard to differentiate one from the other even if you are looking at top tiger cubs (except Viking of course, which runs a pm based model). Any advice appreciated. Don't want to take a short term view but think more of my career from a 5-10 year perspective.

Comments (20)

Jun 27, 2022 - 7:13pm
FIG newton, what's your opinion? Comment below:

I think OP is asking for insight on LP attitudes towards single-manager funds going forward. I have nothing to contribute, but has anyone else heard of LP's reducing commitments or planning to reduce commitments to SM's in favor of pod shops?

Jun 27, 2022 - 8:06pm
Silla, what's your opinion? Comment below:

Look I'm not going to opine on LP appetite in 5 years.

But if you can find the right team and PM to learn from, I genuinely think the ability to make money consistently market neutral will be ever more desireable over the long term. Call me crazy but I think the next generation of star fund managers (like the tiger cubs in the last generation) will be those that thrive under the tier 1 MMs and strike out on their own (we're already starting to see some of them).

  • Research Analyst in HF - Other
Jun 27, 2022 - 11:19pm

that's what melvin and candlestick are, right?

melvin blew up - can argue weird freak event but still horrible risk controls

candlestick does not seem to be operating well this year, not really living up to the promised return/risk profile, though it's nothing disastrous and they've done well last couple years so they could be an example of what you're talking about

any other high profile ones?

  • Consultant in Consulting
Jun 28, 2022 - 2:07am

Having had the perspective of a professional LP (HFOF)

yeah, the MM funds are where LP capital is going to flow.

From a theoretical perspective, a more aggressively risk managed book should be table stakes. You are not getting paid 2 + 20 to hold market beta, and you shouldn't be for factors either, although I am skeptical factors actually produce value over time.

Plus MMs are better able to provide capital efficiency - there is a classic problem that for a single CIO fund, the CIO will be expected to have his own money in the fund. This often makes him run the book more conservatively than the LPs, who have their money spread across multiple funds, would like. at a MM that PM is not setting the gross, so you crank up the vol of the book to the level that actually suits a diversified HF portfolio at a desirable vol

Most Helpful
Jun 28, 2022 - 9:06am
Telemachus, what's your opinion? Comment below:

There's two topics posted here:

1) MM vs SM from the LP side

2) Would you do better at a MM or a SM?

I'd focus on where you will do better first, then on the capital flow.

Yes, LPs are piling into MMs because it's lower vol / lower risk than SMs. But not everyone is cut out for the MM life. It's a totally different style of investing compared to most SMs. Its more about risk mgt than investing. I recall speaking to the head of BD at MLP who told me Warren Buffet would do a horrible job at MLP. That's totally true, the style is 100% different. The question is what are you good at?

Times and LP flows change,  LPs are flowing into MMs today but that may change in 5 years. I wouldn't solely base your career on where LPs are putting money to work today. 

I'd also add there will always be successful SMs out there that can gain LP capital, regardless of where capital flows. 

I understand everyone wants to work at a MM, but it really comes down to what you are better at. MM seats will always be there, but good SM seats are much harder to find. 

Best of luck 

Jun 28, 2022 - 5:52pm
herzyherzy, what's your opinion? Comment below:

Agree largely with @Telemachus - less about following capital flows as that can change pretty substantially over time (we did see Tiger raise an insane amount of $ in the last 10 years). If anyone had the crystal ball to capital raising, there'd be probably ~half as many funds in existence today. There's risk parameters and styles that suit allocators differently, regardless of where we are in the cycle. But that's largely besides the point of the question.

Would just emphasize two things that I haven't seen shared yet: job stability is roughly limited in both but in different ways. Sure you feel the pressure perhaps now at an SM experiencing drawdowns in a meaningful way for the first time in a while, managing in a sector that's facing some tricky obstacles and a less visible forward path. I'd caveat the thought process around your current gig with the PM - will he be able to raise capital again? Can he (or she)/has he managed through this drawdown successfully? Has he learned from it and is better prepared to manage risk as a result, going forward? I don't know how tough the drawdown has been, but seems as if you've fared better than peers in the same realm, which is a positive sign for LT allocators looking to allocate back into the tech SM space.

Secondly, the MM model can be ruthless. As I've suggested on other posts, 2-3 consecutively underperforming quarters can result in your PM getting chopped on the block, which means you're chopped on the block. The style tends to be dramatically different as I'm sure you know and so if you're willing to adapt what was likely a duration-based, LT, secular & S-Curve style investing strategy and morph into a super deep, bottoms-up analyst trained to synthesize data and pick quarters while maintaining market neutrality, then go for it. I've found certain analyst peers I have at other SM prefer the model because it's a style they both enjoy and accel at, and while I'm sure you'd be able to conform to the MM model it's more a function of 1) the PM you're under and 2) if you even like the style of investing/trading.

Would also add that it seems easier to go from SM to MM than the other way around - likely just due to # of seats more than anything. But if you get there and hate it you've somewhat limited your options, just food for thought.

  • Quant in HF - Other
Jul 2, 2022 - 8:12pm

I've posted my thoughts on the broader topic before, not going to rehash it here. But in short, if you have a good SM seat or on the track to get one then it would be downright stupid to switch to an MM.

Why do people do it? Hubris, mainly. Everyone thinks their success is a reflection of themselves and their skills. They believe if they've gotten this far, they must be good enough to make it in an environment less forgiving of non-performance. It generally is a stupid idea to take that bet but people do because of their ego.

You can optimize your career for intellectual purity or "love of the game" but the smart people understand it's just a way to make money - and they optimize for that.

  • Analyst 3+ in HF - Other
Jul 4, 2022 - 11:45am

I don't think this is true. I've seen a lot of people make the jump from SM to MM because the politics in an SM construct can. be horrible and there's a ceiling in terms of how much you get paid. Also after awhile, you actually want to manage a portfolio instead of looking at e-commerce or whatever boring sector for the rest of your life. 

  • Analyst 3+ in HF - EquityHedge
Jul 4, 2022 - 11:49am

You spoke my mind, I'm the op :)! I'm just worried that I won't be able to make the transition later (successfully), so might as well do it now. It just seems to me that it's relatively less risky to make that transition at the analyst level vs later. Any thoughts?

  • Quant in HF - Other
Jul 4, 2022 - 11:53am

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