HF Analyst: The Things I Know For Sure

Mod Note: Each day we'll be posting the top WSO forum posts of 2014. This one was originally posted on 5/28/14 and ranks #24 for the year by total silver banana count. You can see all our top ranked content here.

My background is posted in my Q&A ("Q&A: Credit Analyst at +$5B Distressed Shop") - just wanted to pass along a few thoughts as I think about my own career.

1. You are never the smartest guy in the room.

Conviction is one of the most important things you can have in investing, but it's alter-ego, arrogance, can devastate your career. Knowing from day one that you will never understand, say, the gold mining business better than someone who has been in the business for twenty years is a strong competitive advantage. That's why I think industry conferences are so underrated. You spend a few days drinking and socializing with some of the smartest executives in their industries, robbing them blind and looting that invaluable source of knowledge. This information arbitrage isn't just about industry knowledge - I know that I will never understand CDS as well as the BlueMountains or Sabas of the world. When I invest, I stick to my strengths (problem solving, pattern recognition, and financial analysis) and supplement that with the knowledge I've gleaned from others - that's how conviction is built.

2. You have to enjoy the day-to-day.

I like to tell people that my job is like military intelligence: you're briefed on a situation (sourcing), you do all the required reconnaissance work (financial modeling and channel checks), you travel and liase with local contacts (on-the-ground due diligence), you draft a plan or strategy (risk management and how to technically execute the trade), and then you pull the trigger (deploy capital). But it's all bullshit. The reality is decidedly less sexy: I spend all of my day thinking about how companies generate cash, why the market is under or overvaluing the health of those cash flows, and finally identifying an event that will bridge the valuation gap. This means I have to read a lot: Ks/Qs, transcripts, research reports, technical industry reports, local newspapers, and govt white papers. I also spend a lot of my time going through financial statements, understanding changes in accounting methods and gauging the health of the company. Good times and bad times never last - you can be up 20% one year and down 20% the next - so the guys who have longevity in this business are the ones who take pride in the day-to-day work.

3. Don't ever get married to your trades.

There's no such thing as a "bad" or a "good" company, so getting married to a long or short is a bad idea. Investing is more or less about taking a view on the intrinsic value of a business relative to its current market price. I've met so many analysts who label a company as "bad" and will always be short the stock or bonds, even if the trade has gone significantly against them. One of the most painful lessons I've learned is how to cut my losses when there is a change to the thesis. The best analysts can U-turn and understand at what price it makes sense to go long (after making money on a short) and vice versa.

4. Know the price of loyalty and ambition.

I know plenty of guys who are great analysts and who have been devoutly loyal to their funds, but that loyalty oftentimes comes at the price of slower career growth. When you think about your own career, you have to have a goal of where you want to be in the next 3 to 5 years, and you'll have to make realistic decisions about whether or not you can accomplish these goals at your current fund. Oftentimes, the best way to get a better seat is to to leave for another fund, which is why turnover in the industry is so high. If you had the option to stay at your current $10B fund or take an offer from a growing $3B fund with a pay increase and a brand spanking new "Sector Head" title, many would opt to take the new role. The number of strong buy side analysts looking to make the transition to PM will almost always exceed the number of PM opportunities available. That's why the most attractive upside is when you start your own fund. However, doing so is incredibly difficult. LPs want to see a minimum of a 3 year track record before you can start growing assets in a meaningful way.

Comments (45)

May 28, 2014 - 11:34am
ricyan, what's your opinion? Comment below:

great post.

Progress is impossible without change...
May 28, 2014 - 11:34am
ricyan, what's your opinion? Comment below:

great post.

Progress is impossible without change...
May 28, 2014 - 11:57am
kidflash, what's your opinion? Comment below:

Thanks so much for all the giving back you've done on the forums, man. Your posts rank along with BH, SA, and Mr. Pink Monkey in my book.

May 28, 2014 - 2:15pm
oreos, what's your opinion? Comment below:
ST Monkey:

What if there's no one else in the room, am I still not the smartest?

With comments like that...probably not.
"After you work on Wall Street it’s a choice, would you rather work at McDonalds or on the sell-side? I would choose McDonalds over the sell-side.” - David Tepper
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May 28, 2014 - 2:08pm
One2Three, what's your opinion? Comment below:

"There is no such thing as a bad company." Pretty interesting that you said this. Did you mean it literally? Nice post, I can't wait to start at my value shop this spring.

Thanks for all of your insights.

My posts will be fraught with grammatical errors since I post from my phone. I will try my best not to post an incoherent babble.
May 28, 2014 - 5:34pm
Illuminate, what's your opinion? Comment below:
One2Three:

"There is no such thing as a bad company." Pretty interesting that you said this. Did you mean it literally? Nice post, I can't wait to start at my value shop this spring.

Thanks for all of your insights.

There are definitely bad companies. I think what OP was trying to say is that a bad company is not necessarily a bad investment.

"My dear, descended from the apes! Let us hope it is not true, but if it is, let us pray that it will not become generally known."
May 28, 2014 - 6:21pm
oreos, what's your opinion? Comment below:

And a corollary, risk can be framed in the context of price. The risk associated with buying a bond at 80 and 60 of the same company isn't equal. With the ultimate conclusion being everything is a great investment at the right price. For a much more eloquent and more comprehensive explanation see Howard Marks.

"After you work on Wall Street it’s a choice, would you rather work at McDonalds or on the sell-side? I would choose McDonalds over the sell-side.” - David Tepper
  • 1
May 28, 2014 - 7:04pm
One2Three, what's your opinion? Comment below:
Illuminate:
One2Three:

"There is no such thing as a bad company." Pretty interesting that you said this. Did you mean it literally? Nice post, I can't wait to start at my value shop this spring.

Thanks for all of your insights.

There are definitely bad companies. I think what OP was trying to say is that a bad company is not necessarily a bad investment.

Yeah, that's what I was thinking. "There is no such thing as bad assets, just bad prices."

My posts will be fraught with grammatical errors since I post from my phone. I will try my best not to post an incoherent babble.
  • 1
May 28, 2014 - 2:22pm
SenhorFinance, what's your opinion? Comment below:

"The best analysts can U-turn and understand at what price it makes sense to go long (after making money on a short) and vice versa".

Correcto, but with 10 years spent across 3 continents in this business, I have never - and I repeat, NEVER - seen anyone who can do that in a consistent and statistically convincing way. That being said, it's a skill level that everyone in this industry should (and to a certain extent, does) aspire to reach, but more of a holy grail then a common trait, if you ask me.

May 28, 2014 - 3:12pm
naivekid, what's your opinion? Comment below:

Great post, thanks for the insights. Quick question on loyalty; is loyalty valued differently on the buy-side than in any other field (i.e. corp finance, restaurants, clothing retail, etc.). From what I see, generally, loyalty means little in the job world. I happen to be a somewhat loyal person, and I was wondering whether I should just change my mentality starting day one (i.e. be ready to jump ships when opportunity exists).

thanks

Best Response
May 28, 2014 - 9:34pm
tempaccount, what's your opinion? Comment below:
naivekid:
Great post, thanks for the insights. Quick question on loyalty; is loyalty valued differently on the buy-side than in any other field (i.e. corp finance, restaurants, clothing retail, etc.). From what I see, generally, loyalty means little in the job world. I happen to be a somewhat loyal person, and I was wondering whether I should just change my mentality starting day one (i.e. be ready to jump ships when opportunity exists).
Your username is appropriate, as is some cynicism born of experience in this industry. The thing is, investing is a mentorship business. Almost every successful investor you'll meet had someone who showed them the ropes early on. Unfortunately, it can also be a ruthlessly short-term performance-driven business. The two are incompatible. Funds that are judged solely on their short term returns provide no job security and can expect no loyalty. I'm not just speaking about individual short-term performance; even loyal people with great picks can get fired from certain funds in a bad year. Loyalty is extremely valuable and amply rewarded within the context of a mutually respectful, long-term relationship. That's just harder to find. I think if you talk to most analysts, you'd find all but the most jaded would gladly trade some extra money or prestige for the relatively rare opportunity to learn from someone they truly respect and admire.

In short, I wouldn't change who you are at heart, but you should be a realist about the dynamics of the labor market.

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May 28, 2014 - 10:52pm
naivekid, what's your opinion? Comment below:
tempaccount:
naivekid:

Great post, thanks for the insights. Quick question on loyalty; is loyalty valued differently on the buy-side than in any other field (i.e. corp finance, restaurants, clothing retail, etc.). From what I see, generally, loyalty means little in the job world. I happen to be a somewhat loyal person, and I was wondering whether I should just change my mentality starting day one (i.e. be ready to jump ships when opportunity exists).

Your username is appropriate, as is some cynicism born of experience in this industry. The thing is, investing is a mentorship business. Almost every successful investor you'll meet had someone who showed them the ropes early on. Unfortunately, it can also be a ruthlessly short-term performance-driven business. The two are incompatible. Funds that are judged solely on their short term returns provide no job security and can expect no loyalty. I'm not just speaking about individual short-term performance; even loyal people with great picks can get fired from certain funds in a bad year. Loyalty is extremely valuable and amply rewarded within the context of a mutually respectful, long-term relationship. That's just harder to find. I think if you talk to most analysts, you'd find all but the most jaded would gladly trade some extra money or prestige for the relatively rare opportunity to learn from someone they truly respect and admire.

In short, I wouldn't change who you are at heart, but you should be a realist about the dynamics of the labor market.

Thanks. I will keep this in mind if/when the situation occurs.

May 29, 2014 - 9:57pm
WpgJets, what's your opinion? Comment below:
tempaccount:
naivekid:

Great post, thanks for the insights. Quick question on loyalty; is loyalty valued differently on the buy-side than in any other field (i.e. corp finance, restaurants, clothing retail, etc.). From what I see, generally, loyalty means little in the job world. I happen to be a somewhat loyal person, and I was wondering whether I should just change my mentality starting day one (i.e. be ready to jump ships when opportunity exists).

Your username is appropriate, as is some cynicism born of experience in this industry. The thing is, investing is a mentorship business. Almost every successful investor you'll meet had someone who showed them the ropes early on. Unfortunately, it can also be a ruthlessly short-term performance-driven business. The two are incompatible. Funds that are judged solely on their short term returns provide no job security and can expect no loyalty. I'm not just speaking about individual short-term performance; even loyal people with great picks can get fired from certain funds in a bad year. Loyalty is extremely valuable and amply rewarded within the context of a mutually respectful, long-term relationship. That's just harder to find. I think if you talk to most analysts, you'd find all but the most jaded would gladly trade some extra money or prestige for the relatively rare opportunity to learn from someone they truly respect and admire.

In short, I wouldn't change who you are at heart, but you should be a realist about the dynamics of the labor market.

This was great, thanks.

May 28, 2014 - 5:19pm
John Paulson, what's your opinion? Comment below:

+1 to your post... you describe it perfectly.

Money never sleeps.
May 28, 2014 - 7:32pm
PeterMullersKeyboard, what's your opinion? Comment below:

Great post, thanks so much for sharing. Definitely seems to fit in well with what we've seen from other professionals in the industry.

"When you stop striving for perfection, you might as well be dead."
May 29, 2014 - 12:38am
Dingdong08, what's your opinion? Comment below:

I really like #3. Although it's a different industry than HF's or even what I now do, I started in REPE out of college and we did a JV with a pretty well known California real estate developer who would get involved in whatever made money: didn't matter if it was a gorgeous office tower or a bunch of shit ugly warehouse buildings. His advice, and this is real estate development so you can be in a deal for a decade from the time you acquire the land, zone & permit it, finance it and build it so it's easy is easy to fall in love with an asset, but his advice to me as a 23 year old was to never marry a building because there's no chance you're gonna fck it but it can definitely fck you.

May 29, 2014 - 1:32am
UnclePanda, what's your opinion? Comment below:
valueisoverrated:

1) Conviction is one of the most important things you can have in investing, but it's alter-ego, arrogance, can devastate your career. Knowing from day one that you will never understand, say, the gold mining business better than someone who has been in the business for twenty years is a strong competitive advantage. That's why I think industry conferences are so underrated. You spend a few days drinking and socializing with some of the smartest executives in their industries, robbing them blind and looting that invaluable source of knowledge.. When I invest, I stick to my strengths (problem solving, pattern recognition, and financial analysis) and supplement that with the knowledge I've gleaned from others - that's how conviction is built.

2) The reality is decidedly less sexy: I spend all of my day thinking about how companies generate cash, why the market is under or overvaluing the health of those cash flows, and finally identifying an event that will bridge the valuation gap. This means I have to read a lot: Ks/Qs, transcripts, research reports, technical industry reports, local newspapers, and govt white papers..

3)One of the most painful lessons I've learned is how to cut my losses when there is a change to the thesis. The best analysts can U-turn and understand at what price it makes sense to go long (after making money on a short) and vice versa.

1) Really great advice. One of the first portfolio managers I worked for (averages a 20% compounding annual return since 1992) - pity about his arrogance gets in the way of his business model - anyway, he said that you don't learn through sitting at a desk, you learn from speaking to as many people as possible. Will never forget this because its so true. At a recent conference, I met a geologist (CEO) that discovered the Eagleford Shale, he told me about how the sell side got it wrong and what the company's strategy was from day 1.. priceless (non-inside) information that you couldn't learn from anyone better.

2) You sound exactly like me, except my boss tells me the business is boring and speculators like to have a punt on the story. Needless to say, in long term investing its often the fact that boring is better. I'm a big cash flow guy - cashflows tell the true story of a business in my opinion.

3) Cant agree more. It's painful cutting losses but it must be done if the thesis changes. Furthermore, its remarkable that speculators can come in and drive the share price of a poor company up in a matter of days. Seen this happen on companies with very little cash and a lot of debt that could send them under. So, I think, when it comes to cutting losses.. its a lot about timing as well. At the moment, I'm sitting one a position with a loss of 40%... saying this, the reason why its down has been because of a director selling who subsequently left the business (yes red flags all over but as always, you dont get the full news until later). Anyway, this company has huge catalysts in 6 months time. So i see the company's share price making a come back over this time. I think, I'll minimise the loss by holding the stock and potentially even make a gain. Obviously there is more to this story but my point is, its very important to have a very strict investment thesis at the start. In this case, the company in question pushed back its timetable by a year and the market didn't like it. I generally have a three year investment horizon for stocks - my mistake this time around (so far anyway) was that, even though the thesis didnt change for my investment time frame.. the thesis changed for the markets. I think its important to work out 1) whats your investment thesis and 2) whats the market's investment thesis. Its important to understand if they don't align, then why and if it does change, does your investment thesis still make sense or should you sell and wait and buy later..

May 29, 2014 - 1:49pm
tempaccount, what's your opinion? Comment below:
UnclePanda:
At the moment, I'm sitting one a position with a loss of 40%... saying this, the reason why its down has been because of a director selling who subsequently left the business (yes red flags all over but as always, you dont get the full news until later). Anyway, this company has huge catalysts in 6 months time. So i see the company's share price making a come back over this time. I think, I'll minimise the loss by holding the stock and potentially even make a gain. Obviously there is more to this story but my point is, its very important to have a very strict investment thesis at the start. In this case, the company in question pushed back its timetable by a year and the market didn't like it. I generally have a three year investment horizon for stocks - my mistake this time around (so far anyway) was that, even though the thesis didnt change for my investment time frame.. the thesis changed for the markets. I think its important to work out 1) whats your investment thesis and 2) whats the market's investment thesis. Its important to understand if they don't align, then why and if it does change, does your investment thesis still make sense or should you sell and wait and buy later.
From the sound of it, this is a situation where your thesis hasn't broken, even though the price has changed, so you're (ex ante) right to hold (or even buy more). It still might not work out they way you hope, but the important thing is to have the discipline (within risk management constraints) to differentiate between mark-to-market and fundamental changes in either direction and react accordingly. Also, if this is in a taxable account, you have an opportunity to take a tax loss and reset your hold period from this lower price. Sometimes M2M changes are big opportunities. Care to share the ticker (via PM if you prefer?).
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May 29, 2014 - 2:24pm
kidflash, what's your opinion? Comment below:

i'm curious, but isn't having drawdowns like this still an issue even if your thesis is intact due to real world frictions (fleeing capital).

obviously as value guys, if your thesis is still intact, you'd just want to load up even more, but if your capital isn't locked up longterm, you need to take those concerns into account, don't you? particularly in more senior PM roles.

i'd love to hear your thoughts on the risk management aspect of this/if you have any reading material suggestions?

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May 29, 2014 - 6:37pm
Bloyd, what's your opinion? Comment below:

"1. You are never the smartest guy in the room. "

smartest in what tho?

  1. "The best analysts can U-turn and understand at what price it makes sense to go long"

too many of these "smart" guys out there who think there's a "change" in their thesis all the time, hence u guys are fucking clowns

markets don't give a shit about what u know "for sure"

May 30, 2014 - 6:32am
curiosity killed the cat, what's your opinion? Comment below:

Thanks for the great post, obviously agree that the industry veterans being a great source, but doesn't dealing with them also involve a bias (for their firm/way of doing things or against those that are different) that you must watch out for? How do you deal with that?

May 31, 2014 - 5:05am
Casanova, what's your opinion? Comment below:

Great post.

1 is spot on - you can't be an expert at everything so speak to those that are

Strength & Honour Lads pass exams
May 31, 2014 - 10:30pm
soundlink, what's your opinion? Comment below:

great post. My only comment is that you seem to share the common fantasy of military intelligence. Most of the works you described as that of military intelligence is actually carried out by other bureaus of military (i.e. Risk management (contingency plan) is done by operations). Military intelligence bureau may be more fun than the other positions, but it's nothing like the 007 as some media portray.

Jun 6, 2014 - 5:49pm
VCPEORIB, what's your opinion? Comment below:

thanks for the insight

It's all about bucks, kid. The rest is conversation. -Gordon Gekko
Dec 16, 2014 - 2:45pm
TraderDaily, what's your opinion? Comment below:

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Dec 19, 2014 - 11:50pm
Pecunia, what's your opinion? Comment below:

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Dec 19, 2014 - 11:50pm
Pecunia, what's your opinion? Comment below:

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