I have 3 years of tech IB and 2 years of MM Software PE under my belt. I've always been interested in investing but decided to ultimately go the PE route given it was natural from banking. However, as many former PE Ass. know, the role is really less than 50% investing and mostly doing other process / portco work.
I've decided to give a shot to try to break into hedge funds as I think I will enjoy the "pure investing" more. I have a few questions for those who made the switch or are trying to:
I’m most familiar with software and ideally would like to only do tech public equities. Is that feasible or should I cast my net wider?
I know to have ~2 long and 1 short idea handy in all interviews. Where do you begin to source these ideas? Basically reading a lot? setting up market signals? (i.e. PE drops below 5x)
Do you recommend any prep course? Or if you recommend any study materials or case studies?
I just rolled off as a PE Associate. Would it look bad to have a gap in my resume for a month? I'm sure I can spin this as took a bit of time off to re-evaluate what I want to do, etc. and now back at it
Don’t use a signal. Pick a group of stocks, learn what’s driving them each quarter, form a view.
If you think about stocks like “PE drops below 5x” you’re going to need to materially shift how you view them. Move towards thinking about them from an incremental change POV (I.e what’s changing vs consensus) and risk/rewaes (interesting long at XYZ given consensus is already at top end of guidance, interesting short at ABC given limited earnings upside and data points suggesting good odds of volumes missing etc)
Thanks. Do you know if there are software / tech focused hedge funds? Know the top ones like coatue which are SM but was wondering if there are actual software pods in MM?
Bro lol yes there are actual software only pods at MMs. There are pods for every strategy and sector you can imagine, since that is the point
Stock Selection: Best stocks at least for purposes of interviewing are most likely going to be ones you know - so would stick to technology (or other adjacent interest areas that you've come across in verticalized software). Can even pick a stock that straddles the lines for purposes of having optionality - for instance if you wanted to interview for an industrials seat, can pick a industrial tech company if you have some familiarity with the space
View vs. consensus: Versus a PE like role where it's simply about someone willing to pay higher than another person (multiple accretion), buying down your multiple (M&A), with a sprinkle of operational improvements - should be more focused on viewing where unit economics, underlying data is going to drive the stock to go. Are the factors (volume, price) building up to revenues or costs likely to change - and if so, how is it different than consensus / where street thinks these will go? Why are these likely to change? Then modeling take rate / margin profile - and seeing how this flows into an implied TEV / Market Cap than where street predicts stock will go today. As such, would understand the consensus view - read the 10-K, last 2 years of earnings transcripts, and understand why street thinks a particular stock will go in a certain direction and why. Ideally you can find a stock through this type of work wherein you can build a view that has a greater degree of variance to where they think quarterly estimates will go for the next few quarters because of something they're misreading or in a case where you think the chips might fall differently, and would have quantifiable rationale to back it up.
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