Is there a difference in the structure of the pitch for a MM HF vs SM? To use software sector as example:
MMHF: Co A may be fundamentally shaky company (with questionable market tailwinds) that has consistently underformed street consensus. However, I formed a view that they will beat consensus next quarter because I have conviction their new logo growth will outperform expectations due to x,y,z reasons. Even though it’s a shitty company, I see an investable opty to capitalize on.
SM: would only invest in fundamentally strong companies with strong tailwinds. Given duration is longer than ~6-12 months, I don’t really care too much about next 1-3 quarter print. As long as it’s solid 25% IRR in next 2-3 years, it’s a good investment.
Is my characterization of the 2 styles accurate? If so, does MMHF style open aperture of investable companies? I assume that’s a fundamentally different pitch vs SM style.
I understand SM can take many flavors but I just generalized into SM= longer duration.
There's more convergence than you think, ideas number 1 can be done by SMHF and idea number 2 will often be done by MMHFs, particularly good teams that have a scaled book (on the long side anyway).
Its also a tough sell to pitch a short that you think will upgrade this quarter, based on a 12m forecast. Why risk the squeeze? Why not enter later? Why not be long for the quarter and then cut back into a short?
For 6m+ trades you might not be obsessed with the next stock move next quarter, but you do care about where the numbers end up because that will inform your odds of the trade you want to put on after working out.
A common mistake I see people make is just betting on the next quarter for MMHF pitches; you can be right on the numbers and then wrong on the stock, especially given sentiment, positioning etc. There's still a need to understand what the underlying business momentum is. Doess a slight beat this quarter meaningfully shift perceptions after they've constantly underperformed? It might do...what's the source of the beat? Is it something the market will likely view as structural? Ultimately what's the R/R on this? Are we differentiated on our FY+2 numbers and expect the street to rollover onto our EPS numbers? Or are we catching a weird quarterly accel because of Fx translations? Again buyside perceptions on what's impacting the stock, terminal risk perceptions, and positioning will be determinants on whether you play the quarter or not.
In reality, if I thought the R/R was there, I might ask PM to throw $$$ into the trade and call it "tactical", so long as it's not already a crowded long. But yes, investing is intrinsically about valuation, so at an MM you're not restricted to buying quality compounders and will long stocks opportunistically. If there's a chance that mega crap company will be perceived as slightly crap company on earnings, and I have conviction its not priced and my downside is capped I'd take that bet.
Thank you - this is a super helpful way of thinking. A couple things would love to get thoughts on:
For context, I'm prepping 2 long pitches for HF interviews (former PE associate & currently corp dev)
Excuse my ignorance but is R/R essentially the delta v/w Base & Bear case with weighted % how each case would transpire? ($100 base / $80 bear with current price at $90 -> 0.9x R/R?)
Yes to R/R.
As for the rest of it --> this is where you show your ability, intuition and creativity. Good luck
SM or Tiger Cub style is focused on capturing some latent factor, e.g. owning the next big thing. On the short side, it’s typically comprised of structural losers, or weaker positioned companies. Pitches I’ve seen from quality SM tend to focus around conviction across a 2-5 year cycle, where there is less emphasis on the next six months and more emphasis on what will happen over the next 18-24 months.
E.g. SaaS co has acquired a startup that is growing rapidly in a new TAM that is where the industry/vertical is moving towards. You think the acquisition “changes the game” and believe it’ll enable SaaS co to win market share as they ramp up and roll out app synergies and cross-sells. Near-term, earnings might be a bit weak because legacy vertical end market is being hit by tariff concerns. But you think the set up into 2h looks good, with upside risk to next year estimates.
MMHF will be tracking this thesis too but the trades are more around the path of the stock in the near-term. E.g. hey, SaaS co is trading narrow vs peer on a 5d basis, spread should normalize from revisions due out in a week. Or, SaaS co recent decel in growth has the street worried, and positioning has been very light 2 weeks into earnings, with market implied pricing a miss to nfq of -5%. We think the number is in-line and tracks to the long term thesis.
In MMHF you’re trying to optimize your position for every curve and turn, while in SMHF you’re more focused on the end goal and are willing to eat some vol. Structurally this works because the product is different — SMHF is a higher vol, lower sharpe, higher return vehicle while MMHF is a lower vol, higher sharpe, lower return one.
In other words: at a SM you’re looking for juicy returns (40%+ absolute returns) and don’t care about every 1bp because your tc is too high. MMHF is sweating for every 1bp because you can take home $1-5mn for every 5-8% on your GMV.
Useful write-up, but I would caution students and prospects against thinking there is a standardised or universal approach towards MMHF idea generation.
Very important caveat.
Agreed. It's best for students and prospective analysts to focus on the 1-3 year story / expectations gap. If you can do that and run a tight research process, then your PM can work with you to build out the path of monetization in the near-term.
Thanks, this is helpful. If I'm interviewing for an entry level seat at a MMHF (from PE & Corp Dev experience), would I be expected to understand the trading & positioning dynamics you pointed out in the interview (pair trades, etc.)
From your comment below, it sounds like to always initially approach a stock's return profile from 1-3 year horizon, which should essentially be the "timeline" for my catalysts to transpire. Any profitable trade that can be realized within 3-12 months should be the next level thinking (with my PM as you said) or if I have super high conviction my thesis will materialize in next few Q's?
I guess that's good to hear as the long pitches I'm preparing have 1-3 Yr horizon of catalysts, so I can use them for both SM or MMHF interviews.
No on the trading bit, but they could ask you if they wanted to test your knowledge of the risk model and how you think about exposures.
Really, they want to test whether you understand the basics of investing, raw insight/intelligence, and if you can think in scenarios/bets rather than in binaries.
At least this is what I would test, what a different team wants can and will be different. And most of the time, they're really just testing if you can be a proficient model monkey.
What do you mean by "market implied pricing a miss to nfq of -5%" ? How can one reliably think about what is implied by the market price, and how can that be used to decipher just the very next qrtr? Thanks
I’ve explained my approach in a few other posts on this site.
I acknowledge that you’re really focused on picking a good stock idea, but for an interview it’s far more important to just know the business cold. To be honest, I would spend your entire time learning about the company’s drivers for revenue and profit growth, and understanding how the company’s revenues and profits grew and shrunk in the past. Then you can model the future, slap a multiple on it, and decide if risk / reward is good or bad. AKA just follow the revisions and don’t overthink it for an entry level hedge fund interview
^ This
Prob you impress / standout on understanding realistic path or reaction function = close to 0
But you can def stand out (relative to peers) by understanding business better
At the end of the day no one expects you to show up knowing former. The latter is what you should be getting evaluated on. If not then tbh prob means PM is a clown and you don’t want the seat anyways
agreed
Wouldn't overthink what a "MM bet" is supposed to be. For a case study it's about first principles anyway. They're more likely to test your investment acumen, not style fit to SM vs MM (people just want to hire the best).
At MM platforms style varies wildly PM-to-PM. You'll find teams turning over their book 15x sitting next to others who hold positions for years and just size up/down as views evolve.
Case in point: In my book, I have "aged" positions that absorb risk for other bets - these rarely surprise in either direction - they're "gathering dust" so I can put on other names with more variability. On the flipside, I also have short-term longs in businesses that are structural share donors (and valued as such), but SI is sky-high, 3P data and read-across from private peers skewing to upside surprise. The thinking here being positive revisions + sector rotation + SI unwind = take profit on unwind and cover on the fade, not betting on terminal value. So you'll even see different bets in the same book.
Structural (LT) vs cyclical (ST) views are table stakes for MM and SM alike imo - rarely a defined differentiator. But bet expression might differ. For a MM case study you could maybe allow for more thinking around a probability-weighted path and the actual nr's you're continuously tracking that leads to thesis fruition and the market converging to your view. Thinking here being that time horizon in isolation is irrelevant - it need to be be mixed with price - as so does your take profit levels. More importantly, maybe articulate how you'd size differently depending on variable outcomes and time horizon of your thesis.
Key is just to show clarity of thought + intellectual honesty of what you know / don't know. That said, I think most SMs would think along those lines as well. Bottom line: Better to nail the path of business fundamentals cold than try to sound like you've got the perfect trading strategy. The former is what ultimately gets you the job.
Thank you - that's helpful. Quick q on short profile pitches. There's a stock that I believe is a good short candidate but major risk is a PE firm with history of take-privates own ~10% of the shares. From my view, this is an uncontrollable that is too hard to calibrate the downside - essentially my short position looks capped.
Would this be a deal breaker for public investors? Especially if PE firm is a known for take-privates in software.
Depends… The PE stake is a potential catalyst that's outside your control and a bit tricky to analyze. While not an absolute dealbreaker, it alters your risk/reward. Not the best one to bring to as a pitch imo, unless you have extreme conviction in the short thesis with an immediate catalyst & take profit strategy.
In reality, a short like this would need position sizing to account for this binary outcome risk. You're essentially shorting with a built-in stop-loss that you don't control or know what it is - So it could never be a scaled position.
Hypothetically, if this was put on my desk as an idea to discuss I’d wanna see deal probability calculations, what's their historical follow-through rate on similar positions (some large alt’s just have PIPE exposure, not always take out candidates), is the stake “stale” or built recently over time, or is it a stub from a listing that they’re looking to offload (then arguably shorting tailwind). If not, is the M&A premium partially baked in? If it’s stale what's the price levels to deal IRR relationship (where is it a no brainer for take out / where not?), is financing environment tightness constraining PE's ability to execute incrementally vs. when position was built? Where's the sponsor in the fund lifecycle, how has that fund performed? Do they have appetite for a deal of this size given supply chain vol for the foreseeable future?
I’ve shorted PE owned biz in the past with but only on stale stubs post listing (i.e. sponsor is seller, not buyer). The problem with shorting take-out stocks is in general is that the more your short has momentum the more the risk of takeout increases. Even if I’ve had conviction around PE’s perceived inability to take out the biz, all that’s required is a moron on Betaville posting a headline and the event algo’s vaporizes your position PNL in seconds. Also, some stocks are anticipated M&A targets so the register might be full of event funds, which might have driven price to reflect a prob weighted takeout value as opposed to what the marginal fundamental price setter is willing to pay - just something to think about.
For a pitch; I’d recommend something cleaner.
Interesting
Having just done a few first round interviews from a similar private markets background, this thread is pure gold. I was very honest about not being great / still learning catalyst paths but they seemed to appreciate my sector knowledge.
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