Joining Newish Hedge Fund (<$500 million) in August
With the recent market downturn, should I be worried at all that my offer will be pulled / the fund will blow up? Believe the fund’s net exposure is in the 80%+ range.
Trending Content - Hedge Fund Forum
Career Resources
Based on the most helpful WSO content, joining a newer hedge fund with less than $500 million in AUM does come with inherent risks, especially in volatile market conditions. Here are some key considerations:
Net Exposure Risk: With a net exposure of 80%+, the fund is highly sensitive to market movements. If the market downturn continues, the fund's performance could suffer significantly, potentially leading to investor redemptions or operational challenges.
AUM Concentration: Smaller funds often have a more concentrated investor base. If a few key investors decide to pull their money due to poor performance or market conditions, it could jeopardize the fund's stability and even its ability to operate.
Track Record and Fund Resilience: Evaluate the fund's track record and the experience of its management team. A strong team with a history of navigating downturns can be a positive indicator of resilience.
Job Security: Start-up or smaller funds typically have a shorter leash for underperformance compared to established funds. If the fund struggles, it could impact your job security.
Market Conditions: As highlighted in WSO threads, the hedge fund industry has become increasingly competitive, and market downturns can exacerbate challenges for smaller or newer funds.
Actionable Advice: - Due Diligence: If possible, gather more information about the fund's investor base, redemption terms, and overall strategy to assess its stability. - Backup Plan: Consider having a contingency plan in case the fund faces difficulties. - Communication: Stay in touch with the fund's HR or hiring team to ensure your offer remains solid.
While there are risks, joining a smaller fund can also provide unique learning opportunities and exposure. Balancing these factors with your career goals is key.
Sources: Hedging Can't Fix This - A Story of Being at a Collapsed Hedge Fund, ''Don't bother joining the hedge fund industry'', Join startup HF or pursue MBA? Seeking advice.., Hedge Fund is Paradise, Ho-Hum to Hedge Fund
Depends where they got their capital from. If they’re a new fund and are likely down a lot there’s a decent probability they end up shuttering in the near future. Maybe call up your boss and try to get a feel for whats going on without being too abrasive.
By your definition, what would be a lot? Believe the fund is down 10% looking at the 13f.
They also have multi-year lock ups but not sure if LPs can still withdraw albeit with a penalty.
If they are market neutral yes that's definitely a lot. If they are 80% net long like you say, that's still a lot but probably not out of the realm of scenarios their LPs were expecting. If you have some sense of how sticky their capital base is (e.g., a new launch with $200m of founder capital + $300m of outside capital) that could help. But as a new junior hire I would expect you to just stay posted from them to relay any news to you
Make sure to ask about the fee structure - big difference between a fund with a 6% hurdle & 1.5 & 15%… functionally that’s not a ‘500m fund’ also make sure it’s NAV not GMV which has become more popular to cite. Alternatively there are $500m with great fee structures & capital bases & flexibility that I’d chose over a $2bn fund. Ppl need to stop thinking in terms of AUM or GMV and in terms of: Fee-Dollars-Per-Head.
Consider:
Substantial to juniors re: toward growing their GMV/payout and progressing to PM (fungibility of the style + credibility/veracity of junior ALPHA contribution = efficient labor market)
Alternatively:
- $500m traditional SM
- only raise locked-up capital due to large fee concessions like: 1.5% & 15% (let’s say no hurdle, but make sure 7%)
- 200m of AUM is a seed investor who has 1/3 GP stake for 10 years (or discounted fees or monthly liquidity or some other concession)
- so 1.5%*500m = 7.5m mgmt fee but probably 2m after expenses (and that will be under-resourced)
- a 15% year = 75m PnL @ 15% 11.25m perf fee (or 7.875m accounting for 30% seed stake in GP)
So together these are about equivalent fee dollars to the team
Pros here: likely a more stable seat, probably a very flexible mandate and can get paid on factor/beta bets… easier to make 15% here than 5% at the pod most years. There is a management fee & lockup so less immediate job risk. Great flexibility of universe - can make sector bets, concentrated bets, get lucky, chiller role
Cons: these PMs probably won’t pay the team a similar share fee dollars compared to a pod and instead due to lack opacity in the actual analyst contribution of performance - to LPs the PnL is all ‘alpha’ but to analysts… what you’re expecting to get paid on beta? And who really chose sizing? And who told you to look in that sector? This opacity is also why the skill set is less fungible (it’s less clear in this mandate that you really added value from the outside & is against PM incentives to tell you or anyone else that you did)
Third fund example: spinout market neutral with 2% & 20%+, risk/vol tolerance between example A & B. Direct PnL attribution & formulaic analyst payout. Access to additional capital as needed but may be size-constrained approach. Pros: flexibility in between SM/MM, fungible/credible skillset of Pod, mgmt fee cushion of SM, pay-for-performance - depends on manager
Fourth fund example: Small or mid-size SM with a sleeve model and alpha based direct PnL attribution/payout. Pros/cons: same as above
Conclusion: there are many permutations and the rules of thumb here are dead wrong. A great fund has a blowout capacity-limited strategy & a low + stable headcount. They don’t need to market (seek LPs) or grow headcount (divide the pie), which is there if wanted - awareness only risks courting competition. Conversely a lot of dick-measuring re: AUM just leads to pod folk bragging about GMV numbers or SMs bragging about AUM that often has large crossover or low-fee long-only components.
All that matters is:
- Mandate-adjusted AUM: deployable risk$/vol (or mandate/lockup if you prefer)…. I.E how much PnL you can play for
- fee structure: how much of the PnL you get paid (and how it’s defined)
- ENABLEMENT; depends on person and mandate - may be. Tools/resources, building a good skill set, management access, sector/generalist, duration/concentration, process, portability of track record, credibility of track record, ability to participate in sector/factor cycles (or ability to lever up neutralized idio), location, teammates
I don’t blame the constant prestige/branding hunt here or un-nuanced comparing of AUM or simple returns (inconsiderate of mandate/risk)… it’s really just not the way it is out there, but it’s all you have to go off of when trying to break in. But if you’re at a place where the mandate, manager & opportunity fits you in a way that you can perform - it becomes very clear to those in your circle of competence who the axes are - and no one respects the fumbling idiot analyst at ‘brand-name firm’ when Tommy from random fund has a better thesis/idea/research.
Excellent explanation. Thank you. A tangential question please. Is 5% vol budget considered “normal” for a long-short equity market neutral pod shop please? Just to get an idea on what kind of volatility are they targeting… Thank you.
whats the gross exposure though? b/c fund could be using a ton of leverage which increases risk
Odit et ut tenetur aliquid. Atque debitis voluptatem voluptatum est recusandae magni explicabo. Labore praesentium nulla voluptatem consequatur necessitatibus quidem.
Aut facere pariatur corrupti odio enim. Delectus est non commodi nihil itaque dolorem neque. Eum sint ut harum laboriosam qui. Accusantium est eligendi minima sapiente. Perspiciatis et eaque vero tempore reprehenderit.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...