Getting set up in a MMHF/Pod
Using a throwaway but frequent the forums, don’t want to give too much away but figured this question is useful for me and I’m guessing others (though not given current performance).
Significant way through the process for setting up a desk at a MM, as a lift out. Previous b/g is SM/formerly AM. There are some pieces which are hard to penetrate (eg I used to execute but historically always had an execution trader or desk to work with)
Beyond the usual suspects on risk limits, culture, what should one look for in terms of due diligence?
What does the set up look like? (Something as basic as, desk/office space/laptops?)
So far I came up with the usual suspects:
- Risk limits and culture (risk tap on shoulder/discussion, vol/drawdown/beta)
- Cost structure (what is TOL, what is BOL), clawbacks
- Ramp up window and set up costs, potential 1st year guarantee?
- Data / technology / clearing / ops pass through and process (eg does firm have central data team one can pay to access?)
- IP? There is a level of quantitative signal generation in the strategies…supported tech stack?
- Broker wallet, execution/processing (this is the one piece I’m a bit concerned about usually had an execution guy)
More for fun, you start on day 1, will I have even a laptop to walk into? Want to get the book started with some QIS , VCON and off you go?
Based on the most helpful WSO content, here are some key considerations and insights for setting up a desk at a Multi-Manager Hedge Fund (MMHF) as a lift-out:
Due Diligence Checklist:
Risk Limits and Culture:
Cost Structure:
Ramp-Up Window and Guarantees:
Data, Technology, and Operations:
Intellectual Property (IP):
Broker Wallet and Execution:
Day 1 Setup:
Basic Infrastructure:
Getting Started:
Additional Considerations:
Execution and Processing:
Support and Resources:
By addressing these points, you'll be better prepared to navigate the transition to a MMHF and set up your desk for success. Good luck with the process!
Sources: What should I know before starting a Hedge Fund?, Q&A: HF Analyst @ $5bn+ Fund - Breaking In and Transition to Risk-Taking Role, LO to MM HF?, Starting a Private Equity Fund/Firm, Q&A: HF Analyst @ $5bn+ Fund - Breaking In and Transition to Risk-Taking Role
Execution due diligence is a major impediment whenever changing shops. If you’re used to executing but now have to send to some centralized clearing desk that has conflicting priorities across the whole PM team , guarantee you’ll see at least 20 bps of slippage versus doing things yourself, maybe more depending on how quickly they can react to your new orders and how much diligence/care they provide to your orders. If you do all day VWAP orders or straight up limit orders then you’re fine, but if you’re trying to do something more fancy such as a price sensitive long/short spread trade, then you’re easily going to face big slippage. If you do “higher frequency” stuff in the range of intraday or quicker then you could face even bigger hurdles.
Even shops that supposedly have “good tech” should be carefully assessed. Have them walk you through the whole life cycle of a trade. This includes how do you see positions/fills (not all shops have a position system - yea, quite unbelievable!!), real time risk updates, how to get stock borrows, what PB will you be using, how do you go from wanting to trade until it is executed, what their research infrastructure looks like and how you connect to it, etc.
Don’t just trust BizDev’s word that they have great tech and infrastructure, their goal is to recruit you and provide disruption to competitors. Have them prove it to you by showing you how everything works. The last thing you want is to join a firm and then be looking for another job in 3-12 months because you realize the firm is a huge misfit for your strategy.
Finally, if you have doubts about the technology, then def don’t sign a non-compete. Imagine a situation where you’re 90 days into the job and realize this firm’s tech won’t cut it for you, then you’re screwed by forcing yourself to sit on the bench with a non-compete because you didn’t do great due diligence or because you were lied to about their technology during the hiring process.
I disagree on this one. If you're joining a top 4 MM, these firms are maniacal about optimizing execution costs, and you will most likely come out a net winner.
If you're joining a fledgeling smaller MM, it could of course be different.
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