Q&A: Former Long/Short Research Analyst at Top HF -> VP of Growth Equities at BB

The culture is definitely different, as is the type of analysis you're doing. Hedge funds are about idea velocity -- can you ramp up coverage of a relatively small set of companies and model in a way that helps you predict quarterly earnings. At a long only it's more about finding a handful of good ideas that will work over several years so there's not as much pressure to crank out pitches but it's a bigger deal to get something really wrong. I personally like my new role better -- I like being able to take the time to think about the long term shape an industry will take so I can focus on getting the big things right vs. just understanding what G&A will be in a given quarter.

The short answer is a DCF. For any business, I think about what the total addressable market is, what the current share is, and what a DCF is implying at the current valuation. Same thing goes for margins. If a SAAS company (I'm making this up) DCF implied 20% terminal market share and 30% EBIT margins I'd be a lot more comfortable with the valuation than if the DCF implied 60% market share with the market growing 25% and 80% EBIT margins. You'll find a lot of growth company valuations are closer to the latter, and then the question is what other areas could they expand into to expand the TAM or is there a reason the structural margins should be higher, etc. If you had looked at AMZN 10 years ago the DCF wouldn't have worked, but AWS represented a new TAM that has been a big value unlock for them.

I covered a sector at both places. I wanted to get a sense of what longer term investing would be like -- I was always interested in "investing" vs. trading. When I went to the hedge fund out of banking I didn't really appreciate the different types of funds (I honestly was just thrilled to even have a buyside offer) and I learned a lot but candidly I also just couldn't see myself in the constant grind that comes with being at a long/short for the rest of my life. I'm still young enough I thought it was valuable to get a different type of experience to make me a better investor and if I hate it after a few years there are always HF seats open.

Seconded.

Just to add to the prior responses, the biggest difference day to day is that I spend a lot more time learning about the business vs. cranking through models and thinking about quarters. That might be doing expert calls, meeting with management, or traveling to learn about the industry. I find it's a lot easier to get high conviction when you do that much leg work to really understand what drives a business. My hours are way better (10-12 hour days instead of 12-14 + weekends, although I probably still work more than a lot of my peers) and I guess my stress level is a little lower although it's hard to be completely un-stressed when you pick stocks for a living. I have a lot more autonomy as well. Pay wise a normal year at a long only is never going to be as good as a good year at a hedge fund but you also don't have the years where you're getting zeroed as a senior analyst when you're down. Overall, I'll probably make slightly less over the long run than if I was a really good HF-er (and way less than if I was the top PM at a HF) but I still make more than my friends that are my age and in PE, for example. Career track wise, it really just depends on the firm -- I think in general it's faster to PM at a hedge fund but it really depends on which fund, the book size, etc. but it's also much easier to blow out. There are a lot more really senior analysts that have been doing the job for 20+ years (and like being analysts). That said, a lot of the big long onlys have well defined paths for people to make PM and make room for people who are good to manage capital.

Honestly, it was pretty challenging. LOs tend to think HFs are too short-term oriented and HFs think that LOs don't do real work. There is also a difference between a single manager and a MM as I'm sure you know -- a lot of single managers don't want to hire outside of PE. LOs don't use headhunters as much so it's a lot more about networking and even cold applying online. While I didn't end up going to a job from an online application I actually got a lot of LO interviews that way. After you get to the first meeting, it's more about pitching in a way that is long term focused... showing you can do more than just call a quarter. That said, I think you'd find the process at a single manager is not that different from an LO so you're probably better positioned than someone from a MM.

Equity research for sure -- for a junior analyst at a MM, they want people who know the basics of financial modeling (which you'll definitely learn in research), how to read financial statements, etc. On the sellside you'll also work with a lot of buyside clients and get an idea of what the job is. I know a lot of people from research who end up at MMs, it's probably an even split of research/banking going into the junior positions. It's not impossible to break in from the others but keep in mind most of these places initially screen with a basic 3 statement modeling test so you need to at least know how to do that quickly.

Right, the timeline for HFs is hairier then say PE where everyone recruits at the same time. Generally, they are looking for immediate hires so you want to look ~6 months before you're ready to leave, imo. This is where peer pressure can be painful because all your friends will be doing PE interviews 6 months in and I'm suggesting you wait basically 18 months before you recruit and "miss out" on the action. You can leave sooner (honestly the HFs don't really care how long you spend in banking as long as you can model) but I personally would opt to finish the 2 years to avoid pissing off your whole banking group. You never know when you'll blow out and it's good to not burn bridges. The other route of course is to do PE first out of banking and then go to a HF - that gives you a much better chance of ending up at a single manager if that's something you're interested in.

If I had it to do all over again I'd probably go to business school and recruit for a LO from there - it's very tempting when you're young to just take whatever you get (and of course for most people that's just reality... we all know these roles are super competitive) but I wish I had had some time to recruit at a broad group of places and really understand what was out there. That said, I do value my HF time -- I think understanding how the "other side" thinks provides a unique view and is helpful, especially in the last year when the market has been choppy.

First off, that's awesome -- congrats. I think the same advice applies as does for most finance internships: 1) just show up and be ready to work hard/eager to learn (i.e., pass the not annoying/not an over confident 20 year old test) and 2) ask thoughtful questions/show continuous improvement through the summer. Nobody is expecting you to be a stock picking genius, they just want to see if you are someone they could teach to do the job. This means being a fast learner (it's a hard job) and being able to think the right way. It also means showing you're really passionate about investing... you'll learn over time most of us are huge nerds and can spend way longer talking about CAPEX or sales trends in a two week period than most people could imagine. So I'd say 1) work hard, don't make the same mistakes twice, ask a lot of questions and 2) really try to think like someone who is allocating capital (Is this a good business? Is there a competitive advantage? Why does this business deserve to exist?) If you do that you can learn the rest.

I'll chime in on Billions. Its laughably fake. Its entertaining for sure and I like the show but I kinda get annoyed b/c the average joe probably thinks its real when it couldn't be further from the truth (mostly). I'm sure US Attorneys would feel the same.

I could write an essay about all of this too.

1. That's what's so ironic about the industry -- anyone who evaluates businesses for a living can easily identify asset management as a structural short. That said, that doesn't mean there isn't room for the best people to perform over time or that it still can't be a lucrative business with scale. I think bigger picture most of us would be better served being outside of finance and doing real jobs (if AM is threatened, so is sales and trading, research, WM, etc.). However, when you consider how much responsibility you can get (I realize this is true of most things in finance) and how much access you get to senior level execs at companies at a young age I find it a great place to learn. I hope someday to be successful and then have a second career doing something useful.

2. I wish I had spent more time exploring different career paths. I'm from a very middle class family and there are so many careers available from a "target school" that most people I know have never even heard of. It's so easy to get swept up in what others are doing and I wish I had just been slower to pass judgement and learning what was out there. That said, I also wish I had a really good mentor who could have explained to me how the career progression works because I could have had a much easier time getting to here than I did if I had positioned myself better. Ultimately, you end up learning 90% of what you need to know on the job (besides a work ethic and knowing how to fail, which are important things to get in college) so I think it's more important to make sure you end up in the right place and have fun before you're stuck working forever.

Sorry got cut off: 3. There is a ton of this happening. Most HFs now have big data science teams and analysts are expected to incorporate it into their process. On the LO side people have been slower to adopt it but it's slowly happening. People will argue about the helpfulness of data but it has definitely changed the game -- there are several sectors where you can't do your job without it.

4. Basic financial modeling (ie., how to get from revenue to EPS, basic cash flow math, etc.) and the basics of reading financial statements. That's really it. The rest I learned on the job, and you'll find a lot of places want someone who doesn't know how to invest yet so they can teach the junior person their investment process. It can be hard to join a new team with a different investing style when you've been doing the job for a long time actually.

5. Ha. Hedge funds are OBSESSED with compliance these days post SAC. Yes, there are a lot of bros. There are also a lot of bros elsewhere in finance. I don't think we ever ordered a boatload of baked goods in an activist campaign though unfortunately.

I think the idea is to have more deep analysis experience vs. knowing how to trade stocks. I also think a lot of it to be honest is everyone else there did PE and they just trust their own backgrounds more than anything else. A lot of people out of business school pursue both long onlys and single managers (less so MMs) so there is a decent amount of overlap background wise.

There are a few reasons -- one is candidly that my wife is in NYC and there aren't a lot of non-BB LOs in the city. The fidelity/trowe/wellingtons of the world like single managers are very picky about background - it's very hard to get hired as an analyst unless you do their b-school internship. For me, going to b-school for the shot at doing an internship at a wider range of places didn't make a lot of sense since I essentially had a post-mba job already. Ultimately, all of things you flagged (comp, advancement, team) are very group specific at any of these places -- going to a team at any of these types of firms is fairly dependent on the performance/visibility of that particular product. I felt like I really clicked with my current team during the interview process and felt like i had a long runway to add value which was important to me at this stage in my career.

1. I don't have one but a lot of people do -- think it's more relevant if you are on the sellside trying to move to the buyside. There are a handful of places I have spoken to over the years that strongly prefer a CFA but they are definitely in the minority.

2. Yes we think about it a lot. We've done a lot of work on why the traditional definition of value might be antiquated (i.e., tech disrupting many sectors and creating more dying industries vs. temporarily challenged businesses.) All I can really say is you have to pick your names carefully and try to find a few paletable lower-multiple ideas to protect you when there's a rotaion.

3. I was talking way way in the future -- I would love to work for a company or even go into politics some day. Going to corporate is probably the most common "exit op" if there is one, but for most people once you're at a long only that's the final stop. (Of course people want to get promoted, make PM etc., just mean it's kind of like being a VP at a big PE shop... not necessarily looking to get to the next thing other than making partner.)

A bit of both - a lot of roles are posted on the websites but I also got a lot of looks based on my networks. As I've mentioned, a lot of the bigger places 90% only hire out of specific programs but that doesn't mean there won't be the occasional lateral if there is someone on their radar just through the regular course of business. The issue broadly is that the turnover in these places is pretty low so it's more just about there not being that many seats available regardless of your background.

I do consumer but it's a pretty liberal interpretation. Yes bottoms up primarily -- of course you have to pay attention to macro. I would say it plays the biggest impact in modeling downside cases -- what does a recession look like for any given subsector and how does that impact the downside case multiple vs. something else (and is that multiple different vs. last recession for structural reasons). Of course it can impact an upside case as well but typically I'm looking for stocks that have idiosyncratic growth so I don't usually need too much padding to get to a solid upside PT, haha.
Credit - there's obviously been a lot of discussion on this lately, I guess I'm a bit surprised. While I do know that a lot of the companies I follow have taken leverage up over the last few years I think a lot of it has been due to shifting to "better" business models that can take more leverage, and on the whole I still feel like more companies are conservative on leverage vs. not. All that gets exacerbated now by the lease accounting changes that will push official leverage ratios higher (without actually increasing obligations) but could decrease the incentives for companies to take on more debt if the views of the rating agencies has changed as a result. Maybe that is just based on my focus and a more cyclical industry would be different. Shrinking pubic companies - Just makes it harder to find alpha. We are a lean enough team though that there's always enough things to look at... definitely felt it more on the HF side when I could look at smaller caps. ESG - We have ESG incorporation into our process although it is nascent. So far I feel it's more a way to make me aware of things I might not have taken the time to look at before (like entrenched boards, weird voting structures) than really a decision making tool. I think some of the ESG tools still have a long way to go to be incremental vs. another box to check (almost like how some of the data tools were at the beginning). Tech - I guess all I can say is we've been in one of the strongest tech spending environments ever in the last few years and that + scale driving high incremental margins has boded well for the sector. Cloud / AWS have helped as well. So yes multiples have expanded... but I also think a lot of the businesses have evolved in a way that justifies the higher multiples.

If you are planning on going to bschool I don't think it matters that much-- if you're not I would probably say long-only first because I think it's easier to go LO -> HF than the other way. Bigger picture though, the most important thing early on is finding people who will teach you and really mentor you -- no amount of big name or impressive role can make up for a position where you were just a spreadsheet monkey and not actually learning the business. I think you can usually get a feel for these things as you interview.

I agree -- it is scary. It's hard to analyze businesses all day and not see asset management as a structural short. I do think we are closer to equilibrium now in active vs. passive, a lot of the underperformers are out, and that in a more volatile market environment a few extra percentage points of performance matters. All you can do is know there will always be a market for good stock pickers regardless of the type of platform you end up at... there is always a market for alpha. So yes the industry will continue to change but I think we are closer to the end vs. the beginning of the change on this particular topic and there is still hope if you are good at your job. Of course there's not much hope if you can't consistently outperform which is a separate question.