Green flags that your PM might be successful later on
Hello Everyone,
I'm a current undergrad considering an offer from a small (500M AUM) long oriented fundamental hedge fund that has been around for just over 4 years. I interned there previously as an experience builder before trying to secure an IB SA offer for the next summer. I really enjoyed my time there, got to work on everything I had hoped for once they saw I was capable, and had a really good feeling about my PM (who was the founder). When they told me they would consider taking me post-grad, I was kind of shell-shocked as I was not expecting a buy side shop (albeit small), to be willing to take on an undergrad.
I have a really good feeling about the firm but I know the dangers of smaller younger funds and worry about the exit opps I would have open should redemptions kill the place in 2-3 years. At the same time, getting in early stage (AUM is ramping) could garner me some nice upside. I know there are a lot of other components that go into my decision making here, so my question is more focused: What are some green flags that would tip you off an individual PM could be successful besides just their past performance? (historical out-performance is nice but I'm not betting my career on just 7-8 years of solid returns in a decade-long bull-run lacking a major paradigm shift, especially now). I don't have much experience with high level investors and fund managers, but what traits/experience takeaways have you guys seen as indicators to longevity later on for people who have managed money?
At a fund this small, a LOT of the future success is dependent on the PM, it's really a one-man show with some support in the background. So it's imperative for me that I judge this guy right.
Thanks for reading through! Any input would be helpful.
The most important green flag is basically the analogue to the most important red flag. That is, the ability to stick to a process/investment even when that process appears to be performing poorly. This doesn't necessarily mean be stubborn and never re-evaluate your thinking/investment process. But PMs that change their mind a lot or sell an investment that is underperforming but have good reason to think it will come back tend to get blown out.
Every investment strategy has periods of underperformance. How a PM handles that underperformance both in terms of the investment strategy and communication with clients is vital. A PM should generally have strong conviction in their strategy and not be swayed by the day to day or month to month movements in the markets. If they didn't believe that their strategy works over a full economic cycle or they can't handle the ebbs and flows then they should not have ever gotten into this business.
It's great that the fund has had good performance recently but as you wisely mentioned it is more important how managers handle underperformance because it isn't a matter of if but when that happens.
Probably a good proxy for this for a fundamental manager is how they handled underperforming individual investments. If they cut their losses and got out of the position, why did they do so? Was there a disciplined process they went through that lead them to the conclusion that their thesis was not correct or did they sell merely out of an emotional reaction to the investment performing poorly?