Ho-Hum to Hedge Fund
For instance:
You're 25, have an Economics B.A. from a ho-hum state school, good math/stats/coding aptitude (but no formal training) and are working in NYC for a prop shop doing accounting and operations. No certifications/exams of any kind passed. You have no seed money right now/minimal connections.
You want to be the major partner in a hedge fund with a strategy of your design with $100 million+ (in today's dollars) AUM by 35. You would also settle for $5-$8 million liquid cash (once again in today's dollars) for yourself by 35 as well.
How do you do it?
If you haven't figured it out by now, "You" = "I".
Do your worst.
Let's start with the basics.
Nothing is impossible.
Hope is not a strategy. At some point, the probability for a given event is low enough that you should consider it impossible. For example, I could tell you to go win the lottery which would give you the funds to start running an investment strategy.
Those are not the odds you're contending with, but given the fund raising/hiring environment for folks with solid credentials and applicable experience...they aren't far off.
Let me reiterate. If you were a third year analyst at Baupost with a Harvard degree, your odds of running a $100M hedge fund by age 35 would be pretty slim. Slim as in 1 in 100. Maybe. If you're lucky. Given your late start, the difficulty is magnified by a thousand fold.
The reason why folks come into this business is not because they want to be a hedge fund manager, though that's the end goal for many of us.
You only survive and advance in this business because you love the day to day of your work. For me, that love is understanding how companies work, finding undervalued and underappreciated ones and investing in them. For others, it is understanding the structure of economies, spiderweb of currencies and macro events that create trading opportunities. For still others, it is understanding the order of operations on a workout and selecting a specific tier of debt security because it gives them the maximum payout under the largest range of outcomes.
In the real world, these are considered idiosyncracies and personality flaws. In our profession, they are the obsessions and fixations that create investment outperformance.
No one succeeds because they "desperately want to be a hedge fund manager." Very few succeed because they "have a knack" for it because the investment world is wide and there are a ton of specialists out there who pore over all the runty little areas of the financial markets you're dabbling in.
I'll give you the same advice I gave the last guy who came by asking for advice on how to be a hedge fund manager. Sit down and learn about the business first. Read a ton of books, ask a ton of intelligent questions. Figure out why you want to go into this business and figure out WHERE you want to play in this business.
Do you have a security in mind? A strategy? A philosophical bent? If so, then go apprentice yourself to someone who is managing money in the area that you want to learn. Work cheap if you need to.
The money and positions will come after, if you're good at what you do. If you're awesome and make your bosses money, they come faster.
But targeting an age and an accomplishment is a mistake in my mind. It obfuscates the really important goal, absorbing as much knowledge about your chosen area as you possibly can. My view is that's the only way to make money over the long term.
This is a great post. What you want to do is not impossible, but you will need to be very entrepreneurial to make it happen and work EXTREMELY hard. Maybe harder than you have ever imagined working. I went to a state school (better than the one you went to but nothing to brag about) and didn't take any finance courses as an undergrad. I got interested in the market in my last semester in school and decided to drop my plan to go into engineering, talked my way into an entry level ER job at a shitty regional firm, passed the CFA 3/3 in 18 months, read another 20-30 books on the side about investing, and then (amazingly) landed a job at one of the premier small cap funds in the country. After two years of killing it seven days a week, I moved up to Director of Research.
Anything is possible, but you have to be willing to sacrifice pretty much everything. It's tough for people that have been on "the path" since a young age, and it's practically impossible for those not even close to the path such as yourself. The first thing you should do is drop your arbitrary time and financial goals and just get in somewhere. Nobody cares if it's millions by 35 or whatever -- just get in. There is no advice that anyone can give you on how to do that, but if you want it badly enough, you will make it happen eventually.
Uh, wow. 12 SBs and a Certified User tag from one comment. I'm torn on whether to have a Sally Field moment ("You like me, you really like me!") or whether to figure out if that's some sort of WSO record. Thanks guys. It's nice knowing that my rambling posts are appreciated.
This attitude is dangerous.
The first thing you need to realize about investing is that you learn by doing and learn by watching. This is an apprenticeship business. To a great degree, you are paid to learn, (ideally from a great investor). That's a ridiculously good deal.
The second thing you need to realize is that you are doing no one a favor by accepting a job in this world. They are doing you a favor by offering it.
The third thing you need to realize is that the only way you're going to get rich in this business is by making other people rich. I'm pretty underpaid compared to the value I generate. I'd wager Ravenous is criminally underpaid. Most people in sub-PM roles at a fund are going to be underpaid vs. their value generation. That's simply the price of entry.
The fourth thing you need to realize is that your worth to a fund manager today is optimistically zero, probably negative. That's okay , every single one of us, on entering the business, added absolutely no value to their bosses and probably detracted from it. Working at a fund is fundamentally different from any other job in finance because the focus is not transactional.
When a banker completes an M&A deal, it doesn't matter whether or not it's the right deal to make. He gets paid regardless. When I buy and own a stock, everything rides on whether or not it's the right buy to make. It's a constant cycle of investment thesis development, validation and invalidation that you get no where else in this industry.
I talk to MBA students every so often from Wharton and Harvard and Columbia and the topic of where they would come into the business from a hierarchical level always comes up. The hardest thing from them to accept is the fact that despite their years of banking or consulting experience and expensive educations...they come in at the bottom because the don't add any value for the first year or two they join.
Get into the business, prove yourself a money maker, a great trader, a top stock picker, whatever. This process will take years. When you get that credibility, then you can talk the big money commitments to a fund. There will be people willing to give you capital to do it.
But until then, it's just empty talk. Decide which side you want to be on.
EDIT: Wow, I sound like a dick in this, don't I? Sorry about that, not my intention. But this is the harsh reality of trying to enter the hedge fund world. Better to have your eyes wide open right?
+1
This is another fantastic post. All prospecive monkeys should read and internalize this, because this is exactly how it is. I agree with everything in here. Hedge funds are an apprenticeship business. I don't know what the number is, but there may be 100 people in the US who are really good investors. Maybe it's higher than that, but it's not 500. There are thousands of funds of course, but most of them aren't any good. At the fund I work for, I don't know of any analysts that have survived the first year and not made at least $5 million by the time they were in their mid-30s at this shop or somewhere else. Most of them now run multi-hundred million dollar hedge funds or are partners at larger funds. Every one of them that I have talked to attribute their success to having worked here -- and it's no surprise, because the fund is in the top 1% of returns worldwide over a decade plus period.
That being said, it is brutal. Really, really brutal. The first year failure rate is around 80%. Second year is close to 50%. You add nothing in your first year here and can only hope not to detract too much. The best strategy is to come in, shut up, sit down, and do whatever you are told while trying not to screw anything up. If you're not working 7 days a week, you are doing it wrong. I don't care where anyone went to school, that's just the way it is. I've seen people with near perfect SAT scores and elite, prestigious backgrounds flame out in less than three months. And getting a job here is nearly impossible. HYPS + GS M&A + elite hedge fund? You might get an interview, but probably won't get in. I have seen people with some of the sickest backgrounds you can imagine get shown the door after 30 minutes in the hot seat -- usually not because of skill, but because of the attitude of entitlement ("I have to make X, come in at Y, and be promoted based on Z schedule or I'm not taking the job").
To me it has always been a net present value proposition. If this is the trade I want to learn (and make no mistake about it, it is a trade, not a job) and there are only 100 people in the country I could learn it well from, then what is that worth to me? I have no idea, but the answer is a lot -- I don't know how to calculate something specific, but even though I am criminally underpaid, I must be making at least a million dollars a year in deferred "knowledge compensation" that can be monetized at a later date. A lot of people don't really understand that. I made an offer to this kid out of an elite group at a BB and he passed to take a job paying twice as much at a mega fund PE shop where he would be 8th man on the deal team. I understand his decision, but I'm glad he did not take the job, because he obviously doesn't understand NPV -- we were literally trying to put him on the PM track within 12 months (mainly because of language skills we needed, not his investment skill, which was zero). He had the chance to work directly with a very skilled PM and he passed based on short-term earnings. It could prove to be one of the most expensive decisions he's ever made.
The way to succeed is to make your boss successful no matter what. Get a call at 8pm Saturday night because your boss needs something for the Asia market open the next day? You're on it. Need to pull three all nighters in a row because it's Russell rebalancing week and there a million ideas to look at? You're on it. Two month non-stop road trip across the country to meet dozens of companies? Better get on it. Road trip across Asia where you don't speak any of the languages? Make it happen. There's a block up for sale on a name you've never heard of and you need to give the PM an answer in under an hour (including getting the CFO on the phone to answer questions)? Don't fuck it up. If you want to move up, never say no and kill whatever is put in front of you.
Buffett has said you need an IQ of 120 to do this work and anything above that is wasted. That's probably true. What separates people in this business is 1) acquiring good training, and 2) wanting it more than anyone else. It's not a job, it's a lifestyle. If your goal is to make as much money as possible as fast as possible, this is not the place for you. It takes probably a decade of really, really hard work before you get anywhere close to "hedge fund money" (millions a year). As Penn noted above -- you have to have a personality defect to really want to do this. I don't mean that in the most negative sense of the word, but you have to willingly shut everything else out and just work. You have to be obsessive.
My advice to anyone wanting to break in echoes Penn's. It's pretty simple: Be humble, be smart, and work as hard as you can imagine. If you do that and get a couple of lucky breaks, you might have a shot.