Q&A: 3rd Year Hedge Fund Analyst

If anything, I used my banking experience to highlight why I didn't want to be a banker. In addition to being interested in investing, I discussed how things like alignment, critical analysis/reasoning, and the desire to keep digging until you really have a deep understanding of a subject are all very important to me, and how most work in banking is kind of the opposite.

That being said, having it on my resume helped get an interview and the experience itself helped me better explain basic finance concepts and derive implications when discussing more technical topics in the interview.

If you don't understand something, ask, ask, and ask again until you understand (even if you're the most junior person). Chances are there are several other people in the room who don't understand either, and there's a good chance the person talking intended it that way.

LMAO...I mean comp doesn't really matter to anyone does it? Pretty sure most of us here are just trying to make the world a better place. Let's just say it puts me comfortably in the 1%

It's a little bit of both. We spend a lot of time building detailed models, but this is primarily to understand the true profitability of the company and analyze management's past actions. Accounting figures and Adjusted non-GAAP EPS/EBITDA can tell a very misleading story, especially once you start digging in to "one time costs", restructuring, "other adjustments", working capital, capex, etc. Add to that a slightly rosy version of the truth being told by management...This can be particularly important when they have made lots of acquisitions (have they created value of have they just spent shareholders' money and to get bigger).

Once you've become comfortable with all of that, it really gets more high level. Later on, running some different scenarios through the model can help with the discussion on when to sell.

really rough estimate 20%-30% of analysts get one in. we're not very big, so statistically it's really not that relevant. I'd say it's a similar path, the process just becomes more rigorous. First you have to get your boss to agree it's worthwhile to spend any time on whatsoever. Then determine, and later prove, that it really has the potential to be a good idea. If you think it's actionable, then pitch to whole team and have your thoughts and assumptions torn apart by the team, if consensus agrees with you , then you really dig in and do even deeper research. Then present to team again. There are often several iterations of this until everyone is comfortable enough to make a move.

1. pretty similar to banking maybe a little heavier weighted to bonus
2. I'd run a relative value based strategy similar to what we do here. I never would have gotten the position if I didn't believe it was the right approach (it's easy to tell if someone is BSing this in an interview). Not entirely sure what you mean by philosophy but I believe that in order to succeed, you have to have conviction, but never dig your heels in if evidence points to you being wrong. And you have to be willing to take some short term pain in favor of long term gains.

It's a bit of a mix between straight out of undergrad, former bankers, and former consultants. However, it doesn't matter whether you have 3 years of banking experience or join right out of undergrad, you start in the same position. You won't get credit for past positions. The only credit you get is for how you perform here.

It's all mental...It takes a certain type of person to deal with the pressure...I used to play competitive sports and that helped me be able to deal with stress and pressure.

I believe that due to a flurry of factors (human psychology being a large one) most securities are mispriced at any given time. relative value lets you exploit that without engaging in the superhuman task of trying to forecast macro events.

everyone is aligned with fund performance so everyone is pulling on the same rope. Doesn't mean that everyone wants to go out and party together, but everyone wants everyone else to succeed. Also any thesis, assumption, or recommendation is fair game for criticism, even if its an intern criticizing a partner (as long as you can back up your criticism).

I tried to improve my model skills as much as possible before my internship, so I felt well prepared. However, with a little practice, modeling is easy and is not high up there on the list when we look at hiring someone. It's a nice to have, but can be taught pretty quickly.

I'm going to be very blunt and honest. You will have to do a lot more than just sending you CV to one HF "a few times". Given your background, you will be fighting an uphill battle. If no one at the fund has spoken with you and likes you, it is highly unlikely someone with your resume would be considered. Just consider how many investment bankers and high performing new grads are applying to the same funds. Without knowing someone at the fund, you need a very strong GPA from a well known university, coupled with investment banking, private equity, consulting, or other investment fund experience in order to receive any consideration whatsoever.

Here's what you need to do: read a lot about investing and finance, and develop your own investing philosophy. Think about it and come up with what you think is the best way to deploy capital. next, start reaching out to as many people as you can who work in the industry. Try to meet up with them and have face to face conversations. Ask their advice, talk about investing and how you think about things compared to them, etc. etc... careful: don't be arrogant and think that just because you spent time thinking about your approach and because your method would have achieved good results over the past few months or couple of years that it is the best approach (or even a good approach). use the opportunity to learn about other ways, get feedback on your thinking and continue refining your thoughts. As you go through this process, your conversations will improve and someone may be impressed and like you as a potential candidate. Apply to firms once you've had at least one interaction with someone there (if you're from out of town, try to set up a trip to meet several people over a couple of days). Thoughtfulness and adaptability are a lot more important for this type of role than it is for investment banking roles, where the main requirements are often work ethic and fit. If you've been out of school for more than a year and have only passed CFA level 1, then that will be held against you. So if that is the case, don't highlight it. If you're a fresh grad then it's ok to show.

Well I think that AI will be an aid to analysts, but by default this means that it is a threat to human jobs, since you will need less people to do the same work.

The idea that hedge fund underperform is in and itself a fallacy. What do they underperform against? articles love to tout that an index fund would have beaten most hedge funds over the past 10 years. the problem with this is that the index is not a benchmark for most hedge funds. most hedge fund mandates are not to generate a better return than the index, they are to limit downside risk. Also, the last 10 years have been a very unusual time with extremely low volatility, so it's a bad time frame to use when evaluating. Despite this, I do think you will see the HF market shrink and the fees compress overall, as there are many bad fund managers charging 2/20. However, there are also many mangers who will continue to raise more money and will continue charging 2/20 (or more). Just like in any other industry where supply has increased substantially, there will be a consolidation period where some exit the market, others start competing on price, and the few with a real product advantage make all the profits.

The thing that appeals to me about HF vs. PE is that you have more flexibility in what you invest in, and you get presented with mispriced opportunities far more often. In PE you're generally buying from and selling to well informed sophisticated parties. If you're looking at public markets, the chance that an asset becomes mispriced is a lot more likely.

Right now I'm just focused on doing the best job I can and learn as much as I can. I don't see myself moving to a different fund, but whether I stay at my current fund for my career or open my own fund depends on a myriad of factors that are impossible to predict at this point in time.

it depends on the thesis/rational for the specific investment. If we find the right company we will at times take a very long term approach. In that scenario we will use a dcf. but if the thesis is expected to play out within the next couple of quarters or even year, then a dcf is somewhat pointless (can be used to support a multiples approach).

we don't think about it in terms of how much loss we're willing to wait out. We'll maintain (or increase) a position until something changes that indicates we were wrong.

In terms of networking, I think it's important to have read a lot about investing and have a well thought out investment approach that you believe in. That way you can have a productive discussion. Just don't get caught thinking that simply because you've spent a lot of time thinking about it that there's nothing that can be improved about your approach. Be open and use your networking discussions to improve your philosophy and with that improve future discussions and interviews. You'd be surprised how many people I sit down with and they say that they're really interested in the industry but haven't really thought about what how they'd approach investing...either you're lying about your interest or you're really damn lazy. either way, it's a big ding.

Why you gotta hurt me like that? jk failures really are the best learning opportunities...

can't be specific, but a smaller company that had a very valuable software product for a core group of about 30 large companies. The CEO was a large shareholder himself, and was very passionate. The CEO wasn't that strong financially, but the CFO seemed quite strong. they were just getting starting with a lot of room to increase penetration with their core customers and possibly adapt the software to be valuable to smaller companies or companies in other industries.

Growth was good and margins were strong for quite some time. One day, the CFO left "for personal reasons" and an internal guy was promoted on an interim basis. We reached out and he confirmed that he left for personal reasons. Of course this doesn't really mean much, since termination contracts often involve clauses around saying anything that may be considered as negative towards the former employer. For the next couple of quarters, growth actually accelerated slightly, but margins and cash flow were weaker than expected. This was attributed to inefficiencies due to higher demand resulting in more implementations (overtime, additional contract workers, etc.). The street actually loved this and the stock went up a lot. We still liked their growth prospects, but the weak cash flow and apparent execution weakness made us uneasy, so we sold about half of our position here.

However, then growth decelerated and margins did not improve like they should have with lower growth. As a result, the stock started to weaken rapidly. Shortly after, they made an acquisition that did not appear very savvy. They paid a high revenue multiple and because of their weak cash flow, they had to issue both debt and equity to do the deal (remember, their their stock had been weak). At this point we bailed. It appeared that the interim CFO was too weak to stand up to the CEO.

We later found out that the their customers had started asking for discounts so they could increase the speed of roll-outs and make up the lower price with higher volumes. CFO thought that was a bad idea (CFO was right). CEO loved the idea of accelerating growth and pushed the CFO out. Their customers started smelling blood when they were willing to discount and then when their cash flow weakened, their customers got even more negotiating power over them, so the discounting increased (they couldn't afford for their customers to not make an order in any given quarter). The CEO panicked and bought another company with valuable technology to those same customers. He hoped to combine the two products and get away from discounting again. This may have worked out if they had more time (I doubt he would have been able to execute on this but who knows), but shareholders and debt holders were had lost faith in them and they were eventually forced to sell themselves for about 30% less than we had put our original position on for. Thanks to trimming our position early on it wasn't quite a painful as it could have been, but it was pretty bad non the less. The board in this case was full guys from their VC funding days who valued growth over anything and either agreed with the CEO or didn't want to stand up to him.

1. certainly not out of question for us, but we won't actively recruit from there. The reason is simply that recruiting takes a lot of time and we'd rather spend that time making money for out investors. We want to target as few schools as possible that are conveniently located and offer high quality candidates. We are not in a situation where we have to hire someone each year, so if we don't find a good candidate for a year or two, that is ok.
2. Someone with that profile would have to make an effort to demonstrate that they are a good candidate. If I simply got a resume from someone with that background it would land in the waste basket. Again...this is in the interest of time. you have to understand that we get hundreds of resumes and simply don't have the time to talk to each candidate and find out if their a good candidate or not. About 30% of applicants have an obvious background (PE, HF, banking) and that is still too many to interview, so if you're background is not an obvious fit, you have to reach out, talk to someone and make a good impression to be considered. No one can determine you knowledge from books/clubs/personal accounts (everyone claims great success in their PA) without talking to you about investing and finance and seeing how you can think on your feet.
3. No
4. If you decide that investing is for you, learn as much as you can by reading and talking to people. That way when you network, your enthusiasm will come through and you'll be able to have an intelligent discussion. Being an academic is not very helpful in this industry but you can tell if the person you're talking to has spent a lot of time thinking about investing or has just done a bit of last minute prep. Good grades are a must, but excellent grades are far less relevant than being interesting and having some life experiences to talk about and learn from. We love hearing about times you completely messed up but were able to pick your self up and learn from it...

1. I mean read about different investors and how they think about investing, talk to people about investing and then start thinking about how you would invest $100MM. What asset classes would you invest in AND WHY? how would you think about what percent you'd allocate to the various asset classes AND WHY? Within each asset class, how would you determine which specific asset to purchase (or short) AND WHY? When would you decide to sell an asset or even an entire asset class AND WHY? High level, that will be your philosophy/process. How you'd go about researching or finding the actual investments is secondary. First you have to know what you're looking for and have a well thought out reason why you're looking for it.

2. Not impossible but very tough. I'm going to over generalize here (and maybe be a little blunt?) just so that you can get a sense for some of the preconceptions you'd be up against. In general, Traders tend to have very different priorities and thought processes and attention spans than investors/analysts. They often lack the intense need to dig and dig and dig until they fully understand everything about a specific investment. They often overvalue small but instant gratification of a successful trade quickly executed over a longer term thought out thesis that has been painstakingly researched over months. coding skills are not necessary most places but comments such as a "love for the markets" would act as a confirmation that you're a trader at heart who sees tickers and charts and not real companies, strategic decisions, value creation, and profit dollars. If you want to move into an analyst role, you will have to take an active role in combating these preconceptions.

• don't use Bloomberg data as it is unreliable and you it prevents you from understanding what the numbers actually are (what do they include/exclude, what adjustments have or have not been made, etc...) Also, that would take away a lot of the fun work for interns ;)
• all 10Ks and letters to shareholders that you can find (up to say maybe a max of 30yrs). 10Qs, industry reports, analyst reports, relevant article, credit agreements, presentations conference call and presentation transcripts and such probably for latest 5-8 years.
• too interconnected to separate. Can't really do one without the other
• depends how I come across the stock. could be that management appears smart, could be that their financial show strong returns, could be another investor said something interesting about them, etc..
• nothing massive up until now (knock on wood) would say maybe getting too carried away with minute details and losing track of the big picture
• getting a name in that made us lots on money

1a) Probably consulting or AM

1b) For an internship I'd focus more on knowing at least 3 stocks that you can speak about intelligently. make sure the names you know are at least somewhat relevant to the fund (i.e. no micro caps if they invest in mid-large caps, no international if they focus on US, etc.). Don't have to be a buy, but you should have a recommendation on each (buy, hold, sell) and be able to speak about them in quite a bit of detail (management, returns, margins, history, main driver, etc.) You should understand how models work for the interviews, but you can focus on improving your actual modeling skills after you've secured the position. It's very rare to be tested on modeling during internship interviews but you should be pretty good once your internship starts so you can make a good impression.

2) Unlikely. We get a ton of cold emails with exactly what you described. Reach out to more junior employees and try to meet with them. Your preparation for these meetings should be similar to the interview prep above. Send them your CV and pitches after speaking with them so they can look over your work after already hearing you speak. This path shows more initiative and is more likely to get a response, but don't forget or be scared to follow up. emails from kids wanting to meet up frequently just get buried or forgotten if they come while i'm busy or traveling.

Lastly) depends how hard/quickly/efficiently you work and learn. If you can't get it done in two years, you'd likely have a rough time convincing me that you deserve a shot at a HF though ;)

• imo if you do value properly, it includes both growth and cyclical components. growth prospects can be factored into value (not speaking graham style cigar butts). and the same is true for cyclicals if you do a decent job at estimating what point in the cycle we're at.
• depends. on average, yes. the market is generally good at acknowledging that a company is in an attractive industry and as such they are often fully valued. A diamond in the rough on the other hand can often be priced attractively. Also, a lack of capital discipline by a company in an attractive industry can easily destroy value or only create minimal value over time.
• could be any of those except for the last one, although we'd look at them all in the same way, as being relatively overvalued. ex. If a broken business is trading at the same valuation as a good one, it's relatively overvalued since their earnings will grow slower or decline.
• more analytical. a lot of investment decisions tend to be influenced by emotion (fomo, herd mentality, etc.) and being able to identify that and just stay away from emotional decisions is a surprisingly significant advantage.
• generally we're expected to come prepared with our recommended execution strategy, but if it's time sensitive it's better to bring it forward and get the team to help than wait too long.

first of all, congrats and I hope you absolutely kill it!

• I'm at a single manager and I like it that way. Get to focus on and get aligned with one strategy that I believe in. I think it also simplifies performance evaluation and internal politics.
• Hasn't changed that much...I spend a lot less time building models myself and spend more time traveling and meeting with management teams. I have more of a voice in meetings and investment decisions and have more freedom in determining what I spend my time on and what I push to the side.
• None whatsoever!
• I'm a big believer of staying long term. If you identify and join a good fund, then the only reason that I can see to jump to another fund would be if you're not performing, and as such not getting paid well and not getting the promotions and respect you want. You can generally get a promotion, signing bonus, and /or salary bump out of a lateral, but if you're performing at your current fund, performance comp would more than make up for it, since it really increases as a result of trust earned over time. At this point in time, I think I'd only leave to start my own fund.

very entrepreneurial feel....everyone who's been here for more than a year or so thinks very much like a principal..It's a gradual shift, so I couldn't really say it took x number of years because it's continuous. I think that within a year I had a reasonable amount of credibility, but it really depends on the quality of your work and how insightful your meeting/discussion contributions are. Given that we're relatively lean, you can position yourself to be someone who adds value quite quickly. The flip side is, if you speak up too much too early, before actually being capable of adding value, you'll be marked as not trustworthy for a long time.