How long does your research process take?
As someone who works in Private Equity, I'm curious how long those in the HF world typically spend reviewing an idea before you ultimately feel comfortable pulling the trigger on it (specifically those at shops that are more focused on fundamental, long-term hold ideas as opposed to shorter-term plays around quarterly results). I ask because I have a general interest in public market investing, so have been trying to spend my spare time researching ideas and building a small slug of investments in my PA. What I have found so far is probably no surprise, but in many ways building a thesis in private equity is a lot easier because we just sign an NDA and get direct access to management and can ask pointed diligence questions that elicit quick clarification around whatever happen to be the major drivers that we care about. We of course do plenty of extracurricular digging to better understand the industry, including with resources like GLG and the like which I'm sure are used in the HF context as well, but at bottom we are getting direct access to management and the ability to directly request information that provides substantially more clarity around the business.
In contrast, on the public side I am finding that it requires an exorbitant amount of time just to work your way through the last several years of filings, investor presentations and earnings transcripts (and I'm a pretty fast reader), and even then the view you get is far more obscured than in the private context (which goes without saying). Of course since this is just for my own account, I can't use my firm's expert networks to help get a quick shot of knowledge around the basic structure of an industry, but even still, it feels like in order to properly assess a company in the public context, you need to spend a significant amount of time just digging through filings on your potential target, and then need to do the same thing for its competitors, and potentially other players in the value chain to cross-validate your initial impressions about the attractiveness of the space broadly and the target company specifically.
All of this is a long way of asking a few questions:
A) How long do you typically take to work through an idea?
B) Am I missing something in terms of the general process?
Appreciate any thoughts!
I’m at a large SM doing deep value equity, credit, and some activism - all with longer term holds (1-3 years for longs, 0.5-1 yr for shorts). On average I probably work on a name for 1-3 months before we put on a position. We have all of the same tools that I had on the PE side (operating advisors, legal counsel, consultants, etc), except, to your point, wide open management access.
Thank you, that is reassuring.
I'm also curious - how long did it take for you to pull together your stock pitches for interviewing purposes (the ones you had ready to go on your own, not the case study)? To your point about this taking 1 - 3 months on the job with actual resources, it seems like it could take a year to actually develop two good stock pitches when it is in your spare time without the use of consultants and the like (particularly given not every name you spend time on will end up being a good pitch). But I also can't imagine people are actually taking that long to craft their pitches, so how did that play out in your case?
Varies by size. If it's a large deal then can take 3-4 months from signing NDA to wiring the funds. If it's straight forward and something we've seen before, can be done under 6 weeks.
Couple of hours for an idea. That's current velocity of analysts on my desk.
Keep in mind we trade volatility (non-linear products) and also linear products (e.g. futures) so it's kinda short-termism type of trading.
There are some exception, for ideas we have to sink in more hours in research. With tail risk trade, we will have to plan it out for the whole year, and take advantage whenever market provides a convex payout. The 4%+ move on S&P500 last week (left tail move) last week we had to work on it for weeks, did time it right but take a bit of a sweat.
We also do event-driven volatility as well, that subset would take into account quite a lot of fundamentals (e.g. we tradevol around M&A, or we see vol skew elevated in a certain shape around M&A then we can gauge some potential bidding war that sort of stuff, or just basically short vol after news as IV crushes if we think there's no further development). We did trade TWTR around Elon potential acquisition as well, quite interesting to trade given we have a few drama and uncertainties, along with some defence stuff (poison pill), great for event driven vol trade.
And that's discretionary side only, the systematic side is kinda different.
Hi, I’m an analyst at a prop trading firm doing event driven analysis and supporting traders. I was wondering if I could ask you some questions because i don’t find lots of information about discretionary vol trading. Could you give me a DM? Thanks!
2 weeks to flesh out an idea on whether you‘re on to something and then another 2-6 weeks to validate thesis.
I’ll just challenge your viewpoint a bit around how it is “easier” to invest when you have unlimited access to mgmt. Your job of actually investing correctly doesn’t actually get easier, it just SEEMS easier because you are basically pawning off the job of truth-finding to mgmt. You have to understand whether it’s in public or private context, management has biases and agenda just like the rest of us. Their job is to sell the story and fit the data around it.
Public investors have plenty access to mgmt to ask questions. The key is to tell who is biased or not telling the truth. You‘re also on equal playing field with other investors so the job is to be RELATIVELY closer to the truth, not absolutely. This plays out the same in PE auction processes. It’s great that you have plenty of time with mgmt, but so do the other bidders. So what’s different is that you are competing with other 100% “rational” bidders whereas in public markets there are all kinds of crazy emotional buyers and sellers.
Ultimately, any investment outcome comes down to getting the top 3 things right about the thesis and the risk. This is no different in PE. You don’t hit a homerun because you had granular data about IT headcount that you’ve verified can be cut by 10%. You win because 1. market went up 2. sector call was right 3. One or two specific catalysts were unlocked on the idiosyncratic name. In addition to working at a HF, I also acquire and run small businesses privately. It is a mirage to think that you can 100% diligence the truth by asking management and to think that more data improves your chances of winning. You win because you bet on the right sector, one or two major value unlock drivers, and use leverage/hope market is at least stable or up.
So, if you are looking to get into public investing, you need to shake this belief that detailed data leads to correct decisions. It is more about how you INTERPRET the broad arc of data that is widely available and come to a non-delusional, non-emotional conclusion. This is no different in PE.
Extremely helpful, and totally valid. I was oversimplifying when I said it was "easier" in PE - what I really meant was that you can more quickly get certain information via diligence questions that, in the public markets, may have to be inferred due to lack of disclosure. The issue, of course, is that you don't know if the information is disclosed somewhere unless you dig through a significant number of filings, most of which end up being redundant information and noise.
You are of course spot on that every bidder has the same access in a PE context, so making the right call at the right price does not necessarily get any easier. The impetus for this post was really that I felt a bit like I was hitting my head against the wall because I have been researching a particular opportunity, and the pace of working through the publicly available materials seemed to be taking an inordinate amount of time.
I fully agree that the ultimate result comes down to understanding the top couple of drivers and getting them right. In fact, this insistence on the mirage of "100% diligence" is perhaps my number one frustration in PE - people on my team are desperate to turn over every stone and believe that doing so improves the investment thesis, and I am of the view that it's mostly a combination of self-delusion and CYA.
I hear you. I’ve found that certain PE guys turned public investors actually understands this dynamic better because they’ve been on the other side chasing that 100% diligence and finding it futile.
I think on the speed of research, you get better at it with time just like any other skill. At first you might be reading a document cover to cover to make sure you didn’t miss anything, but then you get into a rhythm of how a company discloses info and get to the meat faster. Productivity tools also help like BamSEC (I think like $30/mo to subscribe) or Bloomberg to aggregate info and search by keywords. Many helpful IR departments will also be responsive to an investor’s request to just clarify something quickly so you don’t have to run around in circles.
Helpful take. Do you mind sharing more on what side businesses you buy and how doable that is on the side? Been considering it myself and gathering datapoints at the moment to flesh out what I want to do
Super cool thread. Bump!
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