How small is too small?

I am currently speaking to multiple funds and I am trying to figure out how viable it is to move to a fund that manages between $0.5bn and $1.0bn. So let's say PM + 4 analysts managing $0.7bn. I am not sure how reliable whalewisdom is but allegedly the annual average return has been between 15-20% over the past 10-Yrs.

My understanding is that 2 and 20 is more like 1.5 and 15 now, regarding the fee structure. Perhaps a fund with strong returns can demand more but then again if AUM is that low with only a few clients, maybe not. Doing the math, a $0.7bn fund would have $14mn (best case) in management fees and $17mn (assuming 8% threshold and 20% profit for the year). So in a best case scenario there'd be $30mn (ignoring any kind of expenses and I am not sure how the tax works on this) to go around. How would the split be for a PM + 4 analysts if the fund has let's say $10mn/$20mn/$30mn to go around.

Another big question is obviously if you go to Citadel you can more than likely land any job you want afterwards (assuming you're not messing up big time). Just how hard is it going from a top 4 research team to a no-name and then wanting to move to a top buy side name? If trying to get a PM role then obviously you'd need risk exposure which is limited in a SM, I understand that. But let's say, you interviewed for a senior analyst role at a top HF?

The reason I am asking all this is because I am more inclined to move to a SM for a variety of reasons but mostly because I get excited for coming up with actual ideas rather than making up a reason why all of the sudden AMD is better than NVDA (referring to someone watching only the same 20 stocks for a decade). I'm not saying there is no value in the prior example, but sometimes you can find opportunity in other places too and I want to work with a PM who is open to pursuing other avenues as well.

I would greatly appreciate any comments or insights on any of the above thoughts.

Comments (13)

  • Investment Analyst in HF - EquityHedge
2mo

I would very much argue with the contention that you can go anywhere you want from Citadel. Rerecruiting can be very difficult from pods if you are there for 2+ years.

Also most HFs don't have hurdle rates, so the performance fee in that 20% year you are assuming is much higher. I don't think assuming 20% on gross as a normal year for any fund is smart tho. Would use 15% instead.

I'll let others chime in on how fees are split since I am rather Junior still.

Most Helpful
  • Investment Manager in HF - Other
2mo

Assuming 15-20% gross on a consistent basis is probably way too high (what volatility are they running? What asset class?). As an example, if equities, are they L/S? How are they doing this year? This is all important because without proper risk management, one bad year (or even quarter) and the fund blows up. Also, do the partners have their net worth in the fund? How sticky is the capital?

As for AUM, I think $1bln is where I would draw the line but obviously number of investment professionals, overall costs of the fund, vol, stickiness of capital all matter. 

As for comp expectations just depends if they cut you in on the PnL. My guess is they won't want to and so you should expect a more stable pay and probably not massive upside on a big year. 

  • Analyst 2 in ER
2mo

From what I can tell performance is consistent over last 3-Yrs and significantly outperforming in 2Q. Fund is +15 years old and has both Long and Short positions but not Market Neutral. Not sure on stickiness of capital but realistically if returns are 20%, part of me just wonders why they don't take on more money. Is there any argument to not want more? I assume more money would mean needing to add more staff, responsibilities and I know the strategy is focused more on small-caps. Not quite sure. 

For AUM, all else equal, would you choose a 5 person fund with $500mn over a 10 person fund with $1bn, or vice versa? 

  • Investment Manager in HF - Other
2mo

From what I can tell performance is consistent over last 3-Yrs and significantly outperforming in 2Q. Fund is +15 years old and has both Long and Short positions but not Market Neutral. Not sure on stickiness of capital but realistically if returns are 20%, part of me just wonders why they don't take on more money. Is there any argument to not want more? I assume more money would mean needing to add more staff, responsibilities and I know the strategy is focused more on small-caps. Not quite sure. 

For AUM, all else equal, would you choose a 5 person fund with $500mn over a 10 person fund with $1bn, or vice versa? 

How reliable is that performance? Whalewisdom can be hit or miss. While 3 years isn't all that impressive, being around for 15+ years is a good sign and means they are doing something right. 

The reasons to not add capital are basically what you describe (although more staff shouldn't be a problem as I'm sure the variable cost is worth it). Usually it is 1) strategy can't scale (needs to be very fast, only deals in very small names, etc) 2) they don't want to deal with the added burden of more clients, costs, and changing their client mix or 3) no one wants to give them money. I'm sure there are other reasons, but some mix of this usually covers it. 

As for the $500mm vs the $1bln, I'd take the $1bln: probably higher margins as fixed costs are probably similar and higher likelihood the strategy can scale. 

2mo
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