One topic ive mused on, and spoken with many friends in the industry on, is how to best optimize your career trajectory in the HF space. This is mostly for more mid/senior people, but I think it will enlighten prospective HF joiners and mid level as well.
First caveat, my background is a mix of macro / quant, so my knowledge on 10+ headcount pods or anything L/S is limited.
Second caveat, and id think at least a fair bit of people who make it to pm level would agree, it is not that difficult to hit 10-12% net returns, even with the vol/factor constraints funds have in the mandate.
The real question is how to time the marathon... Lets say you've made it to APM/Junior PM, in terms of risk tolerance, you likely have some nice savings in the bank, a fair bit of resting offers at competing funds, but your max comp scenario is constrainer by your AUM or allocated risk. I
In this stage, you mainly want to demonstrate you can hit the baseline target, or slightly higher, and need to be somewhat risk averse until youve got some track record.
After you graduate to PM, you're floor is likely a 25m per year pnl target on 250m allocated risk/capital. Now you are starting to make meaningful money, ~5m if you hit target, but you still need to be conscious of track record and keeping your seat.
In some ways this boils down to your 'retire' number, but the question still persists, at one size of book/aum/risk/targets do you step up the risk profile? If you get to 500m+ aum or allocated risk (assuming its you + analyst + maybe a dev), you are now at the level where if you fail, most funds will happily show you a nice bid (plenty of evidence of this). If you hit 15% or 20% returns at this level, you're taking home 15-20, but of course that level of outperformance means increased risk (all else equal) and higher probability of drawing down and getting the axe.
My question is, at what levels of aum + years of experience do you step up and really swing the bat, if at all. Personally, I think after 2y+ of track as a PM, paired with a 500m+ capital allocation, the EV starts to shift meaningfully towards taking more risk, while in earlier PM stages, its fine to slightly underperform your targets, but show good risk management and build up reputation + aum.
Curious to hear thoughts from others who are at different stages of running capital, from analyst to senior pm;.
Based on the most insightful WSO discussions, here's a breakdown of how to think about optimizing PnL and risk tolerance in relation to your career trajectory in the hedge fund space:
Early PM Stage (APM/Junior PM)
Mid-Level PM Stage (250M+ Allocated Risk)
Senior PM Stage (500M+ Allocated Risk)
General Insights
Ultimately, the decision to step up risk is highly personal and depends on your financial goals, confidence in your strategy, and the broader market environment.
Sources: Q&A: HF Analyst @ $5bn+ Fund - Breaking In and Transition to Risk-Taking Role, Q&A: HF Analyst @ $5bn+ Fund - Breaking In and Transition to Risk-Taking Role, LO to MM HF?, Joining Start Up Hedge Fund - What to Expect, Reflections from year 4 as an equity analyst
If you're aiming for "not difficult" 10-12% returns under your "consevative/risk averse" approach, you're simply not aware of how tight the stop losses and volatility constraints are at a MM.
Either that, or you're massively underestimating just how hard it is to deliver those returns under a market-neutral construct.
This is true for L/S, but not necessarily macro (which it seems this guy works in)
Not in the equity space, but know enough to agree firmly with what you said, in regards to that market. Hitting those returns with risk constraints in the equity space at a multi manager sounds like a nightmare, especially w so many places focused on not just mkt neutral but factor neutral. Zero interest in that biz line tbh, it’s a self (investor/managment) imposed prison.
I’d push back hard if it’s anything outside of that. If you are at PM lvl you’ve done this before, have more or less promised these returns and risk profile to whatever shop you join. There’s enough structural alphas to do this, up to some capacity constraint, unless you’re just lying to funds. This is the entire reason you get hired and paid, solving returns + risk constraints imposed.
Kelly criterion. Size between half and full kelly (preferably not near full kelly since it is more -EV to size above fully kelly than below, if you estimate your edge incorrectly).
I like aspects of Kelly, but this is more of a Kelly + career risk/reward Q. Feel free to DM me if you are also a discretionary macro pm..
You can play it safe and probably even underperform, but multiple years as PM at a proper fund not only builds internal credibility but also makes you a prime target to poach. It’s a Q of entry lvl pm running 250 or so for multiple years vs when you are running 500+ solo, or w small team, and how do you adapt your mindset (if at all). It’s more of a HF world structural flaw where if you get stopped out early on for some reason, it is slightly more difficult to land the next gig. If you are down 2-3% but run over a yard, you’ll get bids away easily…
Discretionary Macro PM thoughts (I run about 300mm so in line with the 'mid' level as described) -
Overall think the thought process is fairly correct. The general rule set for discretionary macro is that LTD and YTD PnL matters quite a bit, both within firms and across firms. And that as such implies an autocorrelation between risk sizing and PnL history. This is formulaic at a place like BlueCrest where you're given extra credit towards your drawdown for making PnL, and is true behaviorally at any place I have worked (3 platforms ranging from no name -> C,M,P). There is performance pressure ahead of your stated stops near 0 YTD and LTD PnL, and drawing from very positive HWM is perceived very differently from drawing through 0.
As an analyst, your job is to prove that you have what it takes to be given a risk allocation. As an APM/risk taking analyst your first two years matters a lot and your future career outcomes are extremely asymmetric around 0 PL. If you can print positive numbers (even below your target PL if sharpe is high), your credibility and career risk shifts dramatically. Two years of positive PL in a MM risk construct effectively guarantees (unless you've made a lot of enemies) another shot at a risktaking seat. At this point you've put up 8figs of PnL and have low-mid 7 figures in the bank + credibility within your firm.
By year 3 you will likely increased AuM and management backing to "swing the bat" more = increased VaR limits + generally being left alone at say 1/2 your stop as opposed to year one and two. At its core the macro business unit PnLs require this sort of approach. Large fractions of the unit's YTD returns are driven by few risktakers, and it becomes incumbent on you as a 'proven' risk taker to take the amount of risk required to reach fund objectives considering most discretionary macro risk takers don't achieve budget (management tends to expect 1 sharpe).
This is a bit of a simplification, as pockets of macro units have very different PL profiles (e.g. vol RV, bond basis pms, systematic rates RV), but for 'discretionary macro' sleeves management tends to view the strategy as a slugging percentage strategy as opposed to a consistent carry business (like EQ L/S for example). The desire to scale/maximize risk budget are skills that are directly hired for by CIOs (watch any of Edwin's interviews).
Hi could I DM you to ask some questions about early career analyst stuff? Curious to talk to a macro PM, macro analyst junior here
Great response, for anyone earlier or up and coming stage, very good summary, especially w.r.t. strategy types. Any good shop will decompose your PnL distribution, plenty of PMs who fall into the short convexity profile, definitely big demand for people who can demonstrate any degree of long or at least not overly short convexiry distributions at meaningful capacity.
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