Is there merit in doing PE before HF?
2+2+2 is a well trodden path, and those that end up in the third bucket of those 2s have proven they are intellectually competent and can handle tough environments. However, would they have been better off spending the prior 4 years in a HF?
I’m currently An2 hoping to end up in event driven/ L/S, some fundamentalist Strat, and I’m really thinking does going to a PE firm really benefit me if the end goal is the aforementioned.
So I ask you,
- What merits are there in doing 2 years in PE?
- Do those that enter the HF space post PE have skills that drastically set them apart from those who either started in the industry or went straight from banking whom are also a similar number of years out of college/uni.
- Any other points, please add them.
Speaking on the L/S side, everyone I’ve interviewed from PE in the LTM have been unimpressive.
If you want to do L/S just join a fund asap
completely different types of styles, PE is very diligence focused/looking under each rock before a decision, in HF you're rewarded for quick action with imperfect information
no advantage/might even need to unlearn what you learned in PE to be more comfortable with uncertainty (unless you're some sort of activist HF)
How does this shape up with activists….
If you look at PS, they’re almost all ex PE, and spend months gaining conviction on a singular trade.
Is this approach is a true outlier, or are there some other HF strats based on fundamentalist/value driven approaches that require deep diligence on each trade.
PS is an absolute anomaly. They are just riding on the legacy relationship between the LPs and Bill. They dont even do activism anymore its literally just large cap LO. This style of a superstar PM making big concentrated bets with minimum hedging is a dying breed.
Matt Levine had a line about this. He said there are two ways to consistently generate market beating returns as a large scale manager: Make a ton of bets and consistently bat above 50% (pods) or you pursue some manual process in the investment (PE/Activist/DD). However there is a third way where you buy 10 stocks and just watch them go up, but many are skeptical of whether this is even real.
I understand that each HF has its own strategy, but I think the distinction is simpler than that. Here's an example of a classic fundamental/event-driven HF play: a pharma company announces a failed drug test. Even though the business has multiple revenue streams which kept growing 4-6% YoY, the market is pricing only a 0.0% growth going forward over the next years. You think this is nuts and you hit "Buy". Congrats, you just made an event-driven profitable play*.
I’m not in HFs, so this is based on my limited flirting with this space, but once you hit the desk, you'll probably get some 30-50 stocks, model them in and out to understand their revenue drivers, and past that point your entire work will be keeping yourself up to date with news/trends/market aspects to jump on misvaluations like the one from above. Your entire PE skills in terms of diligence/digging into QoE/managing stakeholders or putting together an LBO are useless.
You’re better off sitting two years at that desk, knowing an industry cold inside and out, and thinking about creative ways to make a buck for your fund’s PnL. I know it's not L/S/fundamental, but think about the recent ARKK trade covered in FT and ask yourself who’s more likely to have pulled that move, a 2+2 ex-PE HF guy or someone w 4 four years in a HF who lives and breathes public markets?
Besides, when I talk about doing "PE level diligence in public markets" I talk about the sort of deep dive that for example Elliott did w PepsiCo 2 days ago - it's public on their website. Your fundamental analysis outside activist seats is more basic than that, undergrad level I might say, so PE is a loss of time for HF seats
*real trade done by Marathon btw
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I'm old school, but still think yes. You just come in more ready / prepared.
I've had a much easier time with 2+2 juniors and seen enough people move over too early and flame out.
That’s interesting. Forgive me, but would you say there’s any relative bias? - As the 2+2s arriving on your desk are 4+ years post college, even 6+ if post MBA. Is it just that they can cope with the work/attrition in a more mature manner (managing internally/externally)?
If you were to directly compare a 2 & straight into HF with 2-4 years of public investing against someone with a 2+2 who had just stepped into the HF industry.
On:
- PE candidate day 1, IB->HF Yr2
- PE candidate Yr2, IB->HF Yr4
- PE candidate Yr4, IB->HF Yr6
Are you still choosing the 2+2->HF?
Of course it’s their innate ability, and arguably a tiny bit of luck that’s the dividing factor which we can’t control, but still interested to hear your thoughts.
I'm a student fwiw, but wouldn't it make sense that someone who has done smth like Stanford CS -> GS TMT/Qatalyst TMT/EVR TMT/MS TMT -> Silver Lake/KKR/Apollo/TPG in TMT be much more understanding of the industry?
Sure in PE, you're doing more due diligence and grunt work, whereas at HF you're making quick decisions based on imperfect information, but if you're smart enough and did IB + PE at top groups, isn't it just better (since you can make quick decisions + deep expertise in the industry)?
It’s a completely different mindset depending on the type of HF that you go to. If you’re at any of the PE firms you mention and go to a PS or any firm where you’re constructing a best ideas portfolio and investing with longer duration (which is a rapidly shrinking universe), the work / research is similar. If you go to Citadel, Point72, Millenium, Candlestick, Jain, etc, where you’re market neutral, you’re still looking to pick winners and short losers, and although you’re well aware of business fundamentals, you’re really looking to capitalize on incremental change that will move the stock one way or the other based on the markets perceived reaction to said change in the shorter term.
As someone that did PE and then made the move to one of these firms, it’s a fundamentally different way of thinking, which is why some struggle. PE helped to solidify my business acumen, so I can easily look at a PnL and think good business-bad business and for x, y, z reasons but that alone doesn’t make you money.
helpful
Debating the theoretical merits of 2+2 is pointless.
Just look at the empirical data of who’s hiring esp. for the new high profile launches
anecdotal observation based on another post on WSO. guy from top PE/PC firm and he got placed in operations at a HF. wild
maybe barely... i think the micro focus in PE on actual business operations / pnl focus of a company is definitely an invaluable skillset to understanding the mechanics of how these things work. but by and large there's a billion more factors day to day that move your portfolio PNL that aren't necessarily related to the depth of business acumen/knowledge necessary in a PE seat + in PE as we all know returns aren't dictated by anything more than duration/extend&pretend/liquidity/low rates & high valuations... not to put a damper on PE but it just creates a completely different incentivization structure within the actual investment role that the focus of the job and how you make $ is completely different
would also just add that the HF primarily wanting to hire guys w/ PE experience are also the same funds that blew up in 2022. maybe there's something there, maybe there isn't - but my takeaway from that is that those funds are levered long beta the same way PE practically is. in publics there's less and less information edge (everyone knows who the good companies are) so unless you're able to identify inflection points, changes in mkt share, structural thematic moves across mkts/geographies.. buying the fastest growing tech stocks isn't REALLY a strategy. risk mgmt in HF world is paramount to success whereas risk mgmt in PE is less important/top-of-mind given the duration differences/liquidity profiles.. having control in a PE investment is a way different mindset than owning 100k shares of ORCL. all that to say i don't buy that the PE background is all that valuable or any more valuable than jumping straight into publics and going trial by fire
Hedge fund -> PE works, and in fact hedge fund analysts generally are better industry analysts, better at digging up intel upstream downstream and adjacent and making fundamental bets based on that. Credit/CB capital structure understanding is also helpful in PE.
PE -> HF doesn’t really work, the private mindset isn’t that compatible with public markets.
PE work is much more trying to DD a specific company looking for landmines, implementing a value creation strategy, etc
What? In reality, which do you you think you see more often?
I’m not making an argument that someone that does PE will be more or less prepared in a HF seat, but your point is just disconnected with the real world.
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