LO investment process
Listening to podcasts/interviews with LO PMs (even at the top places), a lot of them sound absolutely braindead. Basically "this company is growing 20%, so the stock will go up 20% too!") or crazy levels of first order thinking (e.g. 2021, people are staying at home, so long Peloton). These are $100 billion to multi trillion dollar firms.
Is the investment process that shallow at LOs and the time is spent doing marketing and ESG rankings? the top firms hire "smart" people (top MBA, 2+2 IB/PE), but the way they talk about stocks is the same as my dentist or grandpa
of course, the other explanation is the research is very in-depth/smart, but they are marketing to a retail investor base so need to dumb things down
Id think they are not going to reveal genuine alpha generating ideologies on public podcasts
At least the alpha does show in their results. Oh, wait.
Why do you think 95% underperform the benchmark?
they dont get paid (much) on outperformance relative to just sucking up AUM and clipping management fees, so why do they need to care about outperforming?
Because underperforming would lead to outflows?
But it doesn't. Esp if it's very mild. Very easy to land plus or minus a bit around your benchmark index forever
I think it's mostly your last point (dumbing things down to appeal to retail investor base), but there are a surprising # of funds out there who don't do very good research and somehow still exist.
I think there is a prevailing belief in LO land that time arbitrage / low turnover gives them an advantage and allows them to form less cogent views on what might move a stock over the next 12-18 months. That belief results in a less rigorous investment process IMO and partially explains why a lot of LOs don't generate attractive returns.
Varies wildly from fund to fund. They all dumb it down publicly because of whose dollars they are trying to attract. Some LOs really are the sleepy orgs that people assume of the industry. Others very much operate where you sweat quarters, stock v biz, grind for differentiation on key drivers, have to be thoughtful of ST even if your thesis is market will wake up to new view on key driver in a couple years time, etc etc. Same job as many HFs, just can have some longer term bets sprinkled in. These tend to (but definitely not always) be the best performing funds. Not a one size fits all answer in reality
Can you name some of the latter ones?
Honestly the “first order” thinking stuff is typically what has made so much money over the years when you think about how home run trades. Long FAANG 2010-2020, long AI the last 1-2 years, long GLP1, long covid winners during covid.
It sounds really dumb but they’ve all been multibaggers compared to churning bps of alpha daily. Not saying one is right versus the other. Just saying those first order type of trades can work fascinatingly too.
Absolutely wrong. This is called availability heuristic and cherrypicking winning time intervals to determine winners. It is easy to name winners and then assign them to the subset of "first order winners". Did you forget about the tech drawdown in 2022?
I’m not sure your point. OP says first order trades are stupid. I’m saying first order trades have worked and have been huge for some. Obviously some trades don’t work. Loads of people rode the wave and came out of the tech meltdown just fine.
That’s not the point. The point is first-order trades can and do make money.
First order thinking and in depth financial analysis are equally irrelevant when both strategies are outperformed by the market regardless.
I’ve been both a pod and T1 LO and I would say the level is pretty similar in terms of idea generation. A big part of the investment teams actually comes from pods.
My LO is also very active on L/S books though, so maybe I’m biased.
Have you seen a lot of ppl from pods going to LO? What about vv? Haven’t heard of many such cases
Yes a lot. Especially between 0/3 YoE. This is the kind of profile that the T1LO are targeting these days.
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