Hedge Fund Modeling
Guys,
I'm starting at a hedge fund (long/short equity) and I'm trying to figure out what kind of modeling is involved.
If any experienced folks want to weigh in that would be helpful. Also it'd be great if any of you have any examples that you don't mind sharing.
Thanks.
Well, most likely, since they're fundamentals-based, you could be building out the consolidated financial statements with any requisite supporting schedules. Also, you could expect to do a DCF or DDM model (if the stock pays dividends), along with some comps and ratio valuation (i.e., P/E, P/S).
Hey alphad7, I apologize for hijacking the thread. How did you get the job? are you a college graduate?
AgreeWitMe - No, not a recent college graduate. I interned with the fund and was offered a full-time position.
sofib09 - thanks
If it's a fairly concentrated fund, expect to build some thorough models. Just keep in mind your model is only as good as your assumptions. Other funds might not build models and will use sell-side models to play around with assumptions/scenarios. It really just depends.
Last year, I spent a good portion of my time building cash flow stress models to gauge the likelihood of companies going into default and the probability of meeting future debt tranche payments. With so many announced restructurings, I also spent quite a bit of time modeling "post-restructured" companies and evaluating what their cash-flow/earnings profile would look like in a more normalized environment.
You'll also end up doing standard DCFs, sum of parts, and break-up/spin-off models. Whatever the situation calls for, you'll build a model for it.
Where exactly do you guys learn how to build these kinds of models? Is it something that is taught in a textbooks, or did you learn most of it on the job?
It's all learned on the job.
I'm working for a larger HF straight out of undergrad and we are on the equities side. I can tell you we don't spend our time building all out models but rather take sell side notes and alter them according to our beliefs and get what we believe proper results should be in the range of.
But yes, they should definitely be teaching you how to do everything as no one enters the industry knowing everything already.
What do they expect you to know coming in?
You should be expected to know the different valuation methods and their different strengths and weaknesses. You should also have some basic accounting knowledge to work your way through the financial statements and understand what the 10Ks and 10Qs are saying. But everything else- which valuation to use and when and industry/sector/company dynamics- comes only with experience.
Sorry for another newb question, but when you say valuation, are you just referring to part 1 of the book "Investment Banking" (link below)? Or are the valuation methods you're talking about different since you're talking about hedge funds and the book is about i-banking? In other words, is the i-banking book a good place to learn the valuation methods for interviews/careers in asset management, hedge funds, etc?
http://www.amazon.com/Investment-Banking-Valuation-Leveraged-Acquisitio…
P.S. Other resources for valuation methods in the hedge fund and asset management industry would be greatly appreciated.
P.S.S. Would the WSO technical guide be sufficient for learning valuation methods that one is expected to know coming in?
Any of those resources are fine. WSO will provide a solid basic foundation, while the IB book you mentioned goes into things more in-depth. We use it as part of our training where I'm at, so it's definitely a resource worth checking out if you can.
:-)
there are a lot valuation methods. IB does prepare you well for hedge fund in a sense that you get the modeling skill and the particular industry knowledge if you are in an industry group
If you really want to learn valuation, you can either go to valuation firms/ big 4 valuation group/ IB.
Sorry for being crass, but what's salary/bonus like at a larger L/S HF a few years out of undegrad?
alphad7, Sent you a PM
DCFs/Financial Modeling in Trading or Long/Short and Deep Value Hedge Funds? (Originally Posted: 11/19/2010)
Hi,
I was wondering if trading and long/short hedge funds involve a lot of financial modeling through DCFs, comps, etc. or if that's purely investment banking stuff? I've been reading more about DCFs recently, and I think the reason that they intrigue me is because doing them allows you to learn a sector/company in immense detail, plus I think trying to forecast earnings, margins, etc. based on various things in the economy, management, etc. is interesting (I could be wrong though because it might be different on the actual job).
Would plain equities or long/short hedge funds make use of any of those models in order to make decisions about what to invest in, or is that limited purely to bankers?
Thanks
At the end of the day, valuation will give you a range of numbers to work with and a DCF is just another tool to give you a possible valuation. So to answer your question, it wont be the ONLY thing used, but a DCF could factor into the decision.
The firm where I work has an internal Hedge Fund (~200m) and the Fund Manager uses DCFs in certain, specific situations but its not exactly common...
I interned at a value HF and they ran Comps, DCF even LBO all the time. EVery one except the MD had IB background.
Do traders do DCFs? I see a lot of answers for HFs, but out of curiosity, would traders run DCFs or any models at all to value a company and decide if its worth trading it?
I wouldn't say active traders use DCF, but value, l/s and activist funds def use DCF and scale in and out. DCF is def useful especially when cashflows are broken up into business segments. I dont see a DCF being totally useless to active traders, it could trigger possible exit and entry points i guess
What kind of modeling do you do at l/s hedge funds? (Originally Posted: 11/13/2015)
So, a lot of talk around hedge fund recruiting is that you need to know how to model well. What exactly does that mean? Does it mean you need to know how to make an operating model (i.e. balance sheet, cash flow statement, income statement) and a DCF Valuation in excel and that is it? Or is the modeling more complex
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