How to build the HF skill set?

Question: what is the gold standard set of books or classes or whatever it is to learn and understand how to be an HF analyst and then PM? I wouldn't leave PE for HF before significant paper trading to determine whether it's really for me. Not really asking about the business analysis and modeling - lifelong learning in that department of course but I am asking specifically about the HF specific stuff that I have had no exposure to so far. For example: trading within controls, portfolio strategy, how a book works, structure and components of an idea, identifying catalysts, etc. I'm sure there is a lot that I don't know I don't know. I know a lot of this is apprenticeship driven I'm sure, and I'm not ruling out the possibility that I am asking a dumb and broad question, but I'd be grateful for your perspectives. It seems like it should be easier to build this skillset outside in than one of the more transaction focused areas of finance. Thought I'd ask before spending time potentially inefficiently.

Context: currently a 2nd year PE associate at a MF and have been told there is room for me to grow here.

I really like my job and team and would be fine doing this the rest of my life tbh, even tho the hours are crazy.

That said, since it is PE, we of course do a lot of stuff that is not investing. I certainly wouldn't call it "process work" like in banking, but things like strategic value creation and slamming add ons are at times not as interesting to me as investing / evaluating / reading / learning.

So there is a chance I go to a HF or even AM at some point, probably long only or L/S.

That said, I feel that I don't really know what HFs do beyond that it is a vehicle whose value add is that it provides a return within certain controls as it relates to risk, volatility, etc. Compared to PE / LBO strategy where I have a relatively deep understanding and can engage with a lot of the intricacies.

I understand that a lot of this is apprenticeship driven, but for two reasons, I want to first get to a higher degree of skill as it relates to this different type of investing before I make any sort of transition into the industry: 1) I like the level of expertise I have gained in PE don't want to start from square 1 at a new firm; 2) I would want to paper trade for a while before going to a HF, for obvious reasons.

I did a search in the forum and didn't see anything holistically responsive to this sort of question, so would be grateful for perspectives.

Comments (9)

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AFoldingChair, what's your opinion? Comment below:

I'll take a stab at your question.The book management / risk sizing / portfolio stuff is usually best for apprentice stuff. (Or CFA I guess, but I wouldn't bother)

For idea generation / catalyst identification stuff I think the best way to build this skill set is through practice. You've gotta love the public markets though.

I've managed a PA for ~4 years, am wrapping up a year-long internship at a boutique LO, and am hitting the desk in IB after I graduate in the spring. I've learned more in the last year than I thought possible. I hope to move to L/S in a few years as well.

I've read dozens of books, and they're all useful. The names that get tossed around are being mentioned often because they're good. Only one not in the usual group of Buffet & Greenblatt I'll mention is "The Manual of Ideas" as it takes a look at bunch of special situations type stuff and some historical case studies that allow for you to build up some pattern recognition.

Reading other people's pitches is a great way to understand what to look for. ValueInvestorsClub is best for this IMO. You can get a guest account to view write-ups with a delay. You can also sometimes find some of the public write-ups from the popular managers online.

But I can honestly say that just doing it is the best way to learn. Open up a margin account, and toss 5 grand in it. Do research on a few companies, value them, come up with a thesis if you can find something and open a position. Then, just follow the news flow. Track your thesis. Are you right/wrong? Why? What could you have done differently? Don't just set it and forget it, but use it as a learning opportunity.

  • 7
SOFRsoGood, what's your opinion? Comment below:

Nice, thank you. Appreciate the time and energy.

I think interactive brokers or something has a software to do what you mention re: margin account on paper (due to regulations I have deep restrictions on my trading activities, so wouldn't make sense to do it for real unfortunately).

Maybe the CFA is an idea - I work like 90+ hours a week usually and it doesn't really offer me any career benefit, but I do really want a deeper knowledge base in public market investing and portfolio construction, so maybe something to think about.

Definitely agree on the book list - I've been working my way through and that stuff is helpful to my day to day in PE as well. Knowledge anyone can benefit significantly from.

  • 1
AFoldingChair, what's your opinion? Comment below:

Trading restrictions makes sense. I was questioning your hesitancy to put a little bit of skin in the game as it helps with commitment (at least for me)Honestly, the CFA is a giant time sink. Especially if you're only looking for a small part of the curriculum and given the time commitment with your work load.

I'd almost recommend just seeing if there's a course at a nearby university on portfolio construction and buying the textbook. Networking with PM's could also yield some resources on that front or perhaps someone with that skill set sees this post and replies.

  • 1
prosry94, what's your opinion? Comment below:
[Comment removed by mod team]
  • Intern in ER

Obviously ntg original I can offer you given my experience but I can drop some links that are well regarded as some of the GOAT posts on WSO regarding public equities investing:

Research process GOAT post

Thinking like an investor

Reflections from Year 4 as an equity analyst : Personally the most GOATed post on public equities I've ever read at least on this site. It helped a ton in forming a solid, comprehensive framework using the EMH and mosaic theory as the center of it all, always evaluating your stocks in how they stand in relation to that framework. Carried me thru an ER internship. A VP sent me this piece lol

The mechanics of a mispricing: This one builds on the above post - I love how the guy builds an airtight framework around mispricings and how the role of the investor is to step in when EMH breaks down at times, and triangulate that timing

The only post about active investing you will ever need to read: Not specific to your question, but just a general primer on active management

  • 4
  • Investment Analyst in HF - Other

I'll leave you to check out the resources posted by the others but there's only true way you can "build" the HF skillset:  practice.  Upon repetition, you'll develop pattern recognition and soon enough you'll be able to process info much faster and develop a thesis.  

  • PM in AM - Other

1) Read as much as possible: Start with the WSO posts shared above (including VIC forum), read books (Intelligent Investor, Margin of Safety, Thinking Fast and Slow, Berkshire memos, etc.), read about macro, understand business cycles, etc. Khan Academy has some short videos about common HF strategies so you can go through them. On Coursera, there is also a specialization in Investment Management which you can binge-watch. Also, pick an industry and read 15-20 10Ks, after that you should be able to differentiate between good companies and bad ones.

2) Throw some thousands into a brokerage account and practice what you read. Try to be extremely pragmatic with what you read by analyzing your investments retrospectively and by adjusting your investment strategy as you become more knowledgeable. If you read some controversial strategies, test them and see how it goes.

Once you have an extremely good foundation in finance, dig into other topics such as philosophy, psychology, sociology, etc. Public markets and business cycles are led by people, so the better your understanding of the world, the higher your chances of building a great thesis.

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Flâneur, what's your opinion? Comment below:

- Follow @fundamentedge on twitter and read all of his pinned threads.

- Read Best Practices for Equity Research Analysts and check out James Valentines website for more in depth resources on equity research

-check out the Institute of Trading and Portfolio Management and their YouTube channel. Anton's PTM course is an awesome primer on idea gen, portfolio management and risk management. Next step would be to open a trading account and start putting your ideas to work.

- The HF training Module on the street of walls site was also a great breakdown of what a HF research process looks like.

The issue with learning the L/S equity HF "skill set" is that for a long time there wasn't any definitive resource which gave the A to Z formula. You've got to hunt out industry pros and lurk twitter to find the 'tricks of the trade' which so few get access to directly. The resources I listed above were what I found to be the best place to start. 

One more thing, throw The Intelligent Investor in the trash. Absolute waste of time IMO.

Remember, the grass is always greener on the otherside because it's fertilized with bullshit.
  • 4
packmate, what's your opinion? Comment below:

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