Q&A: HF out of undergrad, ~5 years later

Hi all,

Think I did one of these a few years ago but I've been in the seat now for a few years as an analyst & partner at a < $1bn L/S equity hedge fund. Interned in IB. Am a generalist but cover a lot of consumer, TMT, financials/REITs, industrials. Everything ex-biotech.

Happy to answer questions on career path in both IB vs. HF, LT career questions in HF, as well as general market questions, thoughts on industry, strategy, etc. Can also discuss my day-to-day as well.

Thanks everyone.

 

Hi, first off, thanks for doing this. I just wanted to ask about what was it exactly that differentiated you, as going into HF right out of undergrad is minuscule? Also, how can networking for HF be different from that of IB or something else, is there a difference in the approach?

Thanks.

 

I had interned with two hedge funds during undergrad that at least demonstrated I had a vested interest in the L/S & public markets space. That at least "proved" I was devoted to wanting to do public equities investing, but I think having relevant internship experience is important. Hedge funds largely don't have the infrastructure required to train junior investment professionals, with the exception of Citadel/P72. Even Millennium has outsourced that training responsibility to UBS equity research... ideally training students out of u/g with the idea that they move to Millennium after 2-3 yrs in a formal sell-side program.

The networking is different in that you have to show you can add value for a fund, versus IB I found it more meticulous... e.g. grabbing coffee and trying to demonstrate interest like you would tour a college campus. Hedge funds simply want to know 1) how you think / your thought process and 2) can you model effectively? What separated me in my networking was that I had developed 3 written pitches and models I was sending to most funds, so they at least had a taste for some level of work product and thought process. You wouldn't send a giant CIP to a bank in hopes that you show your ability to pitch deals to that point.

 

Would you recommend starting at one of the pod shops (Citadel, Point72) out of college?

 

If you're dead set on doing public equities I think the more experience you can get earlier is always better. I think some on the site may disagree and suggest that going through a structured, formal training program in sell-side banking or research is inherently more valuable but I think that only applies to junior professionals who are uncertain of where they want to be in that next role.

A part of my entire edge as a young investor is that I've spent > 4 years already in a buy-side public equities seat, where most peers my age have spent < 2 years. A lot has occurred in public markets since then and developing a "rapport" with how stocks trade, how companies operate, and just identifying inflection points across markets takes time. I think if you were fully certain public equities was the path you wanted to go down, I think the best setup for anyone is to get there as soon as you can. You're thrown into the fire quickly and forced to learn and adapt. Citadel / P72 likely have the steepest learning curves out of any FT U/G job you can get so I'd say go for it.

 

Whats your long term goal?  Can u move up higher at your current fund or do u essentially have to stay on as an analyst here forever?

 

Hahahaha scary accurate. LT goal would be to run my own fund one day, been a dream to do this for a very long time and since I ever discovered what a L/S fund was, as cliche as it sounds. 

"Moving up" at a SM (single manager) essentially entails I continue to get more responsibility and discretion in the portfolio, but am never fully managing or executing trades. I already do this to some extent, make investment decisions and help position sizing; but I don't have full autonomy over the book and don't have final say. I'm by definition a partner in the fund so I share in performance upside as well, suggesting that it's in my best interest that I contribute ideas to the fund and they have a direct correlation to comp. 

But yes @deathtouch is sort of right I basically am stuck here in analyst form until I'm either given full autonomy (my PM retires) or I leave to manage a MM book/launch my own fund.

 

Hi, first let me thank you for your help, I think I really need some guidance

I am a intern in ECM and I only joined because I really like financial markets and my main goal is to change to the buy side - either long onlys like family offices / HF or even Asset managers

My doubts are:

1) what are the skills you need to work on a HF ?

2) where you think you can learn the most to prosper in your work ?

3) Looking 5 years back, how do you feel regarding your work ? Happy ? And why ?

Regarding work/ life balance

1) do you feel much pressure because of dealing with the results you have to accomplish even though sometimes the markets are irrational and out of control ?

2) in terms of work hours, how many hours do you usually work and what is the expected annual salary when you work on HF

3)what do you think about ECM ? Shall I continue here for more 2 years and then try to change to a investor or should I leave right at the end of internship ? Main problem is that I spend to much hours on the office and do not have time to really learn how to invest. ECM consist mainly marketing/ selling a company not learning to invest. Any advice is welcome

Thank you

 
Most Helpful

ECM isn't a bad place to be by any stretch so don't be discouraged by anyone discounting it on the site, congrats for landing that gig.

I think while it can be relevant and you could tell a rational story to get over to the public markets side, it's a bit tricky. I've seen more dedicated ECM buyside roles as of late (pre-2022) that were wholly focused on teams doing primary issuances, IPOs, SPACs, etc. If that's an area that interests you then you likely have a leg up being in ECM and trying to make a move to the buyside in a similar capacity. Not sure how these teams are doing YTD and can't imagine they're doing too hot to be frank, but an option if you find that style / type of investing interesting. 

1) Ability to process information quickly and make critical decisions is huge. I think as an analyst your entire responsibility is to be your PM's eyes and ears, his/her boots on the ground so to speak. Can't speak to skills that a PM needs as I'm not there but what makes me a strong analyst is not only attention to detail, but going the steps further to collect, analyze, and process information in a way that connects the dots. I treat the entire market like a giant puzzle and you're essentially trying to fix the pieces together in a logical way to understand what's happening beneath the surface.

2) As a generalist I can definitely start to learn more about each sector. Often times I feel my theses are too simple or narrow-minded and those with sector-specific experience have a much deeper grasp of certain subject matter level information in those names that I may not be aware of. It's important to know how other smarter investors think through security selection as much as you focus on developing your own process, candidly because your process won't always be right and it will help explain moves in price.

3) Happy. Been an insane few years to be a public markets investor and I've learned a ton and made money / outperformed since I've started. Knock on wood but blessed to be in the seat under a very smart and successful PM.

WLB

1) Ha, yes. Awesome question but yes it's an insane amount of pressure. Shared this elsewhere on the site and don't mean to play the "holier than thou" card but public markets investing in a seat where you take risk is a different kind of stress than meeting narrow deadlines. Sure my role isn't client facing but in the span of 5 minutes I could be down in the $ millions, for any reason. Especially lately, you look at a guy like Plotkin who was a storied investor for > 15 years, all to lose it in the span of basically a month... in my view that's a hair more stressful than missing a deadline for a data room. (and yes I did pick a high-profile $bn blow-up and compare it to IB analyst level work).

2) ~60 on average. During earnings closer to 80. Pretty flexible, my time is my own. I work Saturday's and Sunday's when I have free time and want to look at stuff or have an idea hit me. The harder/more I work on generating new ideas though is pretty commensurate with getting paid more. Comp at junior levels was pretty similar to junior IB salary, but scales up quicker and then bonus higher in both cash and equity in fund.

3) Alluded to this above but it moreso depends on if you actually enjoy the ECM type deals. There are buyside seats exclusively focused on working on IPOs, primary and secondary issuances, etc. If you were really dead set on wanting to do traditional L/S investing, a pivot to a coverage or M&A group probably makes more sense.

 

Have my own investments that were grandfathered in... for lack of better word. I had single stock holdings in my PA when I joined the fund that I now need approval to trade, so I don't. I can freely trade ETFs within our compliance guidelines, but also don't do a ton here. Made some seriously good derivative ETF bets in the last few months that I took profits for and rolled into the fund.

I can't really trade freely in my own PA so I don't bother, but I own a % of the fund (GP & LP) so in a way I have a "co-" track record to some degree.

 

Hi, thanks for doing this. I was curious when did you feel it was the right time to move over to and HF? What are the best years to try and move over.. i.e. 2 years out, 4 years or even around the VP level?

Context: I am an incoming analyst at one of the largest AMs but would like to understand how that switch the HF works? If you are a hard working person will a firm come find you or are you more reliant on your own ambitions / reaching out to your network?

Thanks!

 

Well I decided to move out of u/g, so frankly as early as possible. I knew I wanted to do L/S. Not much more I can really add to the answer than, if you're sure you want to be in the HF seat, as mentioned above the earlier you can get there the better. I largely think HF PM's tend to want someone with limited public markets exposure as they can mold them, particularly at the junior level. The more senior you get the more onus there is to drive PnL at meaningful levels, from both your own perspective and the PM's. You also come in with a completely different set of skills and style that may differ from the PM you're joining, so you come in at a slight disadvantage having to re-learn a new process. Not a bad thing and can be LT beneficial in becoming a well-rounded investor, but the longer you wait to get into the seat the longer you're depriving yourself of the experience. Just my 2 cents.

HH route makes sense but truly depends on the fund. Tons of recruiters are aiming to fill associate/analyst spots at large pods all the time. If you want to do go the single manager route you may need to do the pitch route, or work it via your own network.

 

So I'm going to be starting out at one of the large LOs in equities and would love to get your perspective on some things.

1. How has your process of ramping on new stocks changed over time and what inefficiencies can you avoid when doing so?

2. I won't be exposed to shorting so how would you recommend developing the skillset for alpha generating shorts given that shorting has so many added parameters that drag on returns vs longs?

3. How (aside from looking at fund returns) do you go about assessing PMs? What qualities aside from the generic ones (e.g. intellectually curiosity/honesty) do you think are characteristic of great PMs/mentors? As a new hire it seems easy to get enamored by the fact that these people are commanding massive pools of capital yet many likely do not generate alpha. 

 

1) I've definitely gotten quicker. Having joined out of undergrad w/ no FT modeling experience, I'm sure my model turnover was probably double what it is today. That one just took time to get quicker at knowing what to model for, what my PM found important, his own / my own views on which KPIs and drivers to focus on. I think a large inefficiency is trying to do too much too soon. As a generalist we need to just get a mold and feel for the company, its drivers, and how it generates & allocates cash. I can dig deeper once we have that framework modeled out and go the extra mile (we do) in getting the nitty gritty down.. i.e. getting RevPAR and ADR data for my hotel stocks, getting OTA & credit card data for BKNG/EXPE, tracking PMIs and implementing in my industrials names. Too much time can be spent on that (it's important as an analyst, but takes longer). The upfront important stuff for my PM to make an investment decision just needs to be the top 3 things that matter to that stock. So getting there faster is an efficiency.

2) Ha, you're asking that question like there's no value in shorting (you may not have intended me to take it this way). They don't drag on returns and I'd argue in this market ESPECIALLY if you look at Citadel's YTD returns that's where I'd bet all of Melvin / Tiger's redemptions will flow to. Citadel wasn't designed to outperform in massive bull markets, it was meant to drastically outperform in downturns. That all said, the skillset for shorting is tricky. My view on short selling is there's a couple ways to do it effectively: in pod/multi form you are looking for relative underperformers within a sub-vertical or sector focus. Developing a sector expertise is massively important to being a strong short seller in this case. In other short selling tactics, guys are looking to uncover potential catalyst-driven shorts. Takes a lot more time but getting close to sectors also enhances this type. And then there's just simple inverse shorting/mean reversion: i.e. you think a stock is overvalued or its estimates are too high for XYZ reason. Across all of these sub-strategies within short selling, it's essentially gaining deeper understanding of business drivers, learning sectors, finding read-throughs. Nothing that spectacular I have to share here but this is why I'm not Jim Chanos.

3) I think the best PMs have a few qualities. Outside of sheer intellectual horsepower, I'd add mentorship is huge especially at early levels. Breeding investors is not an easy task and many analysts can go astray if they only have one mindset. I think adaptability or flexibility is huge - being able to emotionally detach from single securities and trade on both the long & short side is a major positive that most don't discuss. Tons of PMs have their stocks they love and only go long but never short, and vice versa. Then lastly, more about risk management. You mention alpha generation but what about alpha protection? What happens when the market is down 20%? How does the PM respond, both in managing the book but also emotionally? All stuff to consider.

 

Lmao, definitely didn't mean to come off that way about the shorts. I just know its a very hard practice so I want to find a proper way to get started. Otherwise, thanks for the thorough responses. Any other tips for starting out in public equities out of UG?

 

Still in college so excuse my naivety. 

When you're building 3-stm models/DCFs from a company's 10K, are revenue builds really just a bottoms-up (unit x price) and tops-down (TAM x market share) approach?

I have been using bamsec quite liberally and building out models across various industries and don't know if my models are overly simplified. 

Would appreciate any input, thanks.

 

No worries. I don't do much TAM analyses because I think they're worthless but yes, bottoms up as much as possible. Unit x price at base level but then moreover peeling back geographies, product lines, product-specific PnL... and then using alternative data sources, some of which available to retail investors but then others not so much. Correlating/backing into estimates using credit card data, using RevPAR and room night assumptions for hotels, state gaming level data for GGR on casinos, chemical pricing and capacity assumptions via Platts, stuff like that.

As a college student no one is expecting you to have that level of access so wouldn't worry too much there. But think wherever you can get creative in your modeling is always a plus.

 

Are final pitches in the Pershing Square Challenge representative of the quality level of pitches required working on the job? Seems like 80%+ of the raw data in the pitches don't even come from 10Ks/Investor Presentation/Press Releases/Earnings transcripts as well so if you could provide some color on the data collection that would be appreciated.

https://www8.gsb.columbia.edu/valueinvesting/events/pershing

 

Thanks for doing this. I have a couple of questions. 

1.) Since you started straight out of undergrad I'm wondering how did your responsibilities grow and when did it start growing? Were you expected to pitch ideas the first couple of weeks?

2.)  In terms of recruiting, you mentioned you sent out pitch notes and models to prospective funds. How long did it take until you landed your spot and do you have any tips on developing the written pitches? 

3.)  In your emails containing the written pitches and models, were you straight forward with them about trying to get a position or you had to "dance around" that question?

 

1) The way we're structured was not that I was necessarily serving any of the senior analysts above me, but moreso to be directly under the PM. At first he gave me a sleeve of names, either names he was close to but hadn't refreshed the model or entirely new names. I started pitching about a year in, typically names outside of his universe and with a full-written thesis attached. Expectation was first to get modeling and get the aggregate fund's breadth a little bit wider, then second to contribute and grow in contribution. I cover > 75% of the names in portfolio today in some capacity... either my own idea generation or the PM's, w/ coverage passed to me.

2) Took... a while but bear in mind smaller funds are very unstructured in their hiring processes. The reason I am emphasizing this is because smaller funds hire on a need basis. If you reach out in the autumn of your senior year, you may be met with more "no's" because the funds aren't going to make an offer to an analyst who's planning on starting in 9 months. I think the sweet spot (as a senior in u/g) is ~March.. a few months ahead of graduation right when funds can start to see if they need to hire. 2a) Tips for pitches... be thoughtful and accurate. Don't pitch a tech stock to an energy fund. Know your audience but better yet know their strategy, read their investment filings and brochures, even just to ensure it's a fund/strategy you'd be interested in. Grade A way to be ignored is by doing tons of work to develop a well thought-out pitch, but then pitch it to the wrong group... (e.g. pitching a short to a LO fund). And then also not necessary but out of consensus pitches tend to work better. You see 10 analysts have buy ratings, none with hold/sell, figure out why it's a short and if that's a viable thesis. Ballsy but look at the 13-F of whom you're pitching and pitch one of their longs as a short, good way to get their attention.

3) I was pretty straight forward. I.e. "Hi XYZ, I've interned here here and here, and i'm very interested in X fund. I'd love to hear more about your experiences doing Y and how you got to X fund, let me know if there's a time convenient.. also, attached a resume and two stock pitches for your reference." Something along those lines.. better templates out there than that ^ lol 

 

Great thread. How many names/ideas are in the book at a given time? What does the process of getting an idea in the book look like? When did you get your first idea in the book?

Curious as to comp trajectory? Roughly how much equity do you have in the GP and more importantly, what did it take for you to get equity? What would it take for your equity stake to increase going forward? Is bonus purely a % of PnL now that you are a partner?

 

Depends. Very flexible so gross/net can move around a ton and with it do # of positions. Have run max net long (> 90%) and net short during periods of my tenure so far. On average it's > 15 longs and > 10 shorts, but no more than 40-50 on either side of the book. 

Process for idea generation to addition in the portfolio is a bit more straightforward than I've seen at other funds. PM wants to know 1) what the business is/does if he doesn't already, 2) why consensus is wrong, 3) where I could be wrong and 4) how and when you get paid. I try to narrow that down to a brief, few-paragraphs in an email with visuals and explanations where applicable - I do know other funds where it's almost PE-style; you write up an entire pitch deck diving into the weeds of a stock and explaining everything from A to Z, with risk cases and so on. The entire premise is to get it down to what's important, the company's 8th largest supplier probably isn't a needle mover for the PM's process... but should add it's something as an analyst you should know as a "just in case" it matters. Got my first idea into the book roughly 9 months after I started. It wasn't a good idea.

Won't give too much away on comp but have low-mid single digits % of the GP. Base was in-line early on with junior IB salaries and then started to ramp up more acutely in the later years. This varies widely at other SM shops. It didn't take anything for me to get equity, it was a tiny % when I started to get a taste and incentivize my work flow and grew as my responsibility/contribution grew. On a go-forward I think it's just largely a function of sheer PnL attributable to myself. I started tracking it in my 2nd year where I could highlight trades I suggested or positioning into earnings that I advised and tied what trades were made as a result, more or less backing into a rough PnL. Then there's obviously the names I have full ownership over and their performance. Bonus is % of PnL + any additional cash $ he wants to pay me.

 

currently interning at a large company with its gas/power team and really like it but currently im at a crossroads of either trying to get a job in commods which would focus more on the physical side or buyside (interested in industrials/materials/utilities/etc). im also a non target so im gonna have to network for buyside but am also in tri state area so definitely not impossible.

i was hoping if you had any guidance on how to move from here?

thx

 

Hi, seriously thanks for doing this

I would like to ask for some career advice. A bit of my background- non-target undergrad, ~1 year of IB experience in Latam (I'm non-US, non-European), and I think my only shot at getting into the HF space is after grad school. Could you give me your take on:

1. Do you think my view is correct? Or should I try to apply/network from now? (If so, any networking tips/plan that could help?)
2. Would it be better to do an MSF or MBA?
3. Any recommendations on how to prepare to break into the industry? Books, habits, materials... anything that can help. I know I have it tough, so I want to upscale my skills/knowledge as much as possible to improve my chances. 

 

1) Again, pitches. Think that's the best way to differentiate yourself and also highlight worthwhile investment thought process to a potential fund willing to hire you. 

2) This is tough. MSF tends to be more quantitative in nature, and are also typically 1 year programs. Would depend on the coursework. MBA's definitely work and can be used extensively for finance roles, but are less common in HF than say PE/IB. MBA route can definitely work, though! Just depends on the school... i.e. Columbia Value Investing program tends to place better out of all MBA's for HF.

3) DM me, have a book list can suggest. Would read all the Buffett letters, Einhorn's book, Howard Marks, etc. There's tons of good investment-process related material out there but I have a list I can share offline

 

Hi, I just finished my first year of college and will be doing the 2023 academy summer internship at point72, i chose it over some EB and BB IBD SA gigs since I want to work in public markets; I wanted to know if you thought there were any must-reads for people joining a HF out of school to help develop frameworks/add perspectives? If you had any market-neutral specific reads too I'd appreciate it alongside anything useful to go over in preparation. Going over accounting/3FS modeling is already on my list.

As a side question: how difficult do you think it would be to develop a mindset/practical thinking framework for a different strategy when being exclusively exposed to a beta-neutral strategy right out of UG? How would someone's way of thinking evolve whilst being an analyst/PM at a fund which focuses on alpha generation to wanting more factor/beta exposure?

Thank you.

 

I think Intelligent Investor albeit dry and dated is just a great read for basic fundamental value investing. A lot of those principles apply today and are especially important to recognize during the tech bubble that's popped/been popping since Dec '21. The world is more cyclical than everyone realizes or thinks.

I like the Buffett stuff, Mastering the Market Cycle by Howard Marks, Hedge Fund Market Wizards, More Money than God, I mean even Principles has some good teachings in it. 

Don't have any like... teaching material books that in my view I know of that are worth reading... if that's what you're asking for.

I will say going from SM to MM is easier than the other way around. Pods are all structured in a way that getting deep on names and then trading them in a tighter, narrower, and quicker framework is the method. SM can take a variety of different approaches, are smaller by nature, and have wider teams covering broad sectors, so therefore the thinking is different. Ultimately a beta-neutral strategy is trying to identify sentiment/positioning into earnings prints, peeling back what will be important / catalyze the print, and then managing a book accordingly. If you had a view that NFLX wasn't going to be as bad as expected you perhaps went long into their print but matched it with META short, which you expected to be worse on a relative basis. Therefore you're capturing alpha in between NFLX outperformance (we'll see today). It's a lot of pair trading. SM strategies tend to take the view of 6-24 months and say: where is consensus wrong, where are we headed, what's going to change in that time frame and then identifying the mispriced securities according to that framework. Less relative trading or print setups, more "hey I think the unit economics on this grocery store are going to dramatically change because of this new regulation on meat packaging, what does that do to KR estimates?"

Stupid example towards the end but you get my point. I don't think the MM experience PRECLUDES you from the SM framework and frankly the MM analysts are some of the sharper, deeper guys on single stocks out there. Just a different way of playing the same game.

 

I have some interest in eventually doing risk management at a fund. From what I read this was not your job however I would like to hear your perspective on risk people at your fund and on the industry in general. Feel free to tell me anything you want but I suppose some direct questions would be

  1. Are there risk people in your fund?
  2. If so, how many and how are they structured
  3. Do you consider these people to be actually useful?
  4. From your perspective, what do these people actually do and in particular which of those things do you think are actually useful
  5. Is comp reasonable?
 

We have a COO who acts as our risk management person. She handles almost all of our risk parameters and notifies our PM when we're sitting close to thresholds on gross/net exposures. I'm really not that close to this process and don't have to worry about it as an analyst so I'm probably the wrong person to ask.

She's probably very useful and a large part of why we aren't getting smoked like other funds with horrible risk management practices (see Melvin above). We stick to our process and manage risk according to our original offerings documents; it's not "sexy" but we aren't naked short selling securities that have > 25% of the float shorted. Imagine that's in part due to our COO, but maybe it's my PM just not being a Neanderthal.

I don't interact in terms of my own process all that frequently with our "risk" team so I can't contribute as much as I'm sure my PM would be able to. I think comp is quite reasonable and at some SM I know they also have % equity in the fund as well. And the work-life balance seems incredible.

 

Thanks for this!

A few Qs:

a) How in-depth would you go for a model sent out spontaneously to a PM for getting a shot at his/her fund? A short one modelling top line & margins to arrive to FCF or a full 3-statement? In the pitch, would you highlight qualitative factors (company's strategy, capital allocation, etc.) or rather focus mostly on quantitative elements (margins, valuation, etc.)?

b) I have 3 yrs of experience (LO and small HF) and I don't have a definite coverage, i.e. I have a series a names on the radar but I work on new ideas without necessarily having followed the stock for months. Would you see it as a good/neutral/negative thing if I were to move elsewhere? Should I try to build for myself a more definite coverage and know deep down a few names?

c) What time horizon you set when looking for ideas? Do you enter/exit based more on pricing alone or on catalysts to take place (e.g., a stock reaches your target range before anything in your investment case starts to play out)?

 

1) I'll answer this in the context of the modeling test I had to do to land the job. 3 statement + DCF I think is the bare minimum. Whatever you can do to show a well-thought out process to arrive at your assumptions would be great, but understood if you're limited by resources. I know some funds aren't DCF heavy but it can't hurt to plug in some more "top-down" growth assumptions over a 10-year framework, and while no MM is using a DCF to succumb to a valuation I would imagine plenty of SM, value OR growth are. I mean Tiger was probably doing 10+ year DCF's with a risk-free rate of 0.5% and LT terminal growth of > 5%. Don't use those as your assumptions lol, but definitely worth including. I prefer quantitative metrics but qualitative is important, too. I'm also of the mindset anything qualitative (market share, capital allocation) can be quantified to some degree.

2) I am neutral on people moving. There's so much more to making a jump in careers/jobs than people tend to allude to on this site. Do you have a s/o? Do you have family you care about? End all be all everyone has a different taste for making jumps and given how junior we both are, I tend to heir on the side of being in the seat you stand to learn the most from. For my own premises, and hopefully this helps how I think through my own career prospects, but I have a giant coverage list (> 80 stocks) across sectors of which ~75% I am "close to" (i.e. able to trade and make suggestions on at any given time), with the other 25% being largely model maintenance on a quarterly basis, less plugged into recent performance, etc. I haven't met any PMs at other funds, either SM or MM, that are smarter than mine. Our performance has been top notch and I have equity in the fund. I may be slightly underpaid at the base level but am very well compensated for my age group, perhaps in-line/slightly below with ~HF analysts 2-3 yrs my senior who are at shops but did the banking prior. I am quite senior in the hierarchy at our fund and have a decent amount of autonomy. I'm in a tier 1 city, but wouldn't hurt to move. Still pretty young, single. Family close. I don't know I'm just rambling there's just a ton that goes into those decisions. Do you like your PM? Do you enjoy the work? Are you paid well? Are you learning? What are your LT goals?

3) 6-24 months, typically on the low end for shorts and high end for longs. Our price targets aren't inherently indicative of anything other than what we think it's worth based on our thesis, and there are multitudes of ways that a stock or security can achieve price and returns outside of our own framework, often times we may not even be aware of. If a stock is up 20% from where we bought it in < 6 months on something OTHER than our thesis playing out, we may take our gains and re-allocate to other more attractive r/r securities in the book if that makes sense. On the contrary if our thesis is taking longer to play out than expected and the stock continues to reflect something we're missing, we may reach a point where a larger discussion on the thesis fallibility is worth having.  

 

Extremely appreciated.

A follow-up on your coverage: that's a very large one, what does it mean for you to cover 80 names (I'm referring to the 75%-share of that)? Meaning, how deeply you know them? Reading every filing + results + sell-side research, etc. or knowing the businesses, the main drivers, and stock movers?

I have a pretty sizable coverage too and I was trying to assess how you manage that. Understand it depends on the strategy, but valuable to get your approach.

Another question - if you had to evaluate the mgmt of a company you don't cover, what would be the main data points you would collect to get a quick read on how it performed and which mistakes it did? Could you provide examples of red flags you pay attention to when analyzing mgmt?

 

what do you mean when you say market structure? Can you recommend any resources for learning about this?

 

I’ve been in the HF space for a couple years. Curious to get your views on this from a generalist perspective: how much do you think your due diligence and modeling on the names actually give you any edge? Price action is driven by so many factors (which I assume you don’t hedge completely). My experience has been that everyone is doing the same channel checks, access to the same data, looking at the same companies and so much price action in the short term is driven by positioning/crowding which is tougher to get a handle of and all the modeling in the world wouldn't help 

 

I think partly contrarian thinking - it pays largely to think differently from everyone else. It's so easy to follow the noise... not suggesting sell-side consensus I'm talking crowded trades. For years we literally saw shitco tech companies at insane multiples get over-crowded not only by Tiger, but by Coatue, Whale Rock, etc. These guys all had the same trades on for years and it worked because it's levered beta. In my view that's not really an edge.

Why Citadel has an edge is because they run very neutral, very disciplined, and manage risk like animals. You aren't an LP in Citadel because you want them to be up 40% against the SPX up 30% on the year, you're invested because when the SPX is down 20% they're up 10%. Their edge is in a replicable process that uses insanely deep data analysis to trade securities in a near-term framework with extensive risk parameters. It's a really strong model from a business PoV.

 

Fair question. I think part of it is forming the right bottoms up and top down view on the 6+ month time horizon. To your point on data/channel checks, yes pods trade it religiously and so therefore intra-quarter as that data comes out it can be tricky. We also don't have extensive resources so we aren't getting all the same data to the extent that Citadel might be. But we're wary of it. It's no reason we invest or short a stock. A lot of our "edge" is either in the trenches of unit economics work and identifying inflection points in business trajectories ahead of the street, or finding mispriced securities within a larger "top-down" theme. We were long the reflation trade from May '20 thru the end of 2021 on the idea that large amounts of stimulus was going to drive substantial inflation over the near term during the midst of a reopening, so we owned tons of commodities. Unit economics work entails stuff you're likely familiar with, but digging into say an auto parts retailer and understanding product line PnL, how that may change with new capital investments in distribution centers, etc.

Crowding is tough and we try to traffic in stocks that are "less crowded." On the short side we tend not to short much stuff with > 10% SI. Just suggests we're already late to that trade if the short interest is fairly high, in my view it then skews r/r negatively as squeeze potential exists.

 

Thank you so much for doing this. Could you discuss:

  • Discuss primary resources that you have leveraged at work that you find very valuable? (eg. Tegus, Canalyst, YipitData, to name a few)
  • When you say cover, do you have to monitor these names (ie. listen to quarterly eps calls and provide the team with an update) without them being in the portfolio? 
  • How do you balance mental model conflicts of covering both cyclical (industrial, BS-heavy financials) and consumer / TMT with more secular narratives? 

Thanks again and look forward to learning. 

 

Sure.

1) I like Tegus and have used it solely on trial, as with YipIt. We've never/don't use Canalyst, and have previously used Visible Alpha. Tegus is great to get up to speed on in the ins and outs of new sectors, often times we use it on a trial basis or temporarily solely to get up to speed on a new sector. If no new sectors, we tend to limit our usage. YipIt is fine but we've found sell-side credit card data that we already pay for as a function of trading tends to be just as good directionally.

2) Yes. I go through every call/transcript and give updates on each name in my coverage. Those we haven't been involved with in say, > 2 quarters, may be smaller bulleted blurbs on 3-4 major key takeaways, whereas names we're more fully involved in get longer write-ups, thoughts, trading recommendations, etc.

3) Ahh, it's tricky. We have a pretty robust and consistent process here, we look for stocks with misunderstood earnings power in either direction that we think the market is underappreciating and mispricing. To your point, that can vary widely across sectors. My best way to describe how our process works and as mentioned briefly above: it's either a bottoms-up idiosyncratic approach, where we're looking to find names that the market has maybe oversold on fears of earnings being cut much more drastically than what the fundamentals imply. A great example of this was VVV coming out of the pandemic: this company owns and operates oil change stores, but also sells its own private label oil lubricant products. When oil went negative, they were essentially being paid to take on base oil, and then refine it to sell as lubricant. Their raw materials pricing went to $0 (for the case of this example), but miles driven actually held in and so therefore their GM % increased by ~500 bps in the interim, and EPS followed. Now it's probably a short, lol. The top-down secular example would be looking at something like chemical recycling. CPG companies largely need to pay up for higher cost materials, but as oil structurally settles higher as a result of potential implications surrounding the war, the cost parity between virgin and recycled plastic resins narrows, making it much more affordable for PG / CLX to buy recycled resin for their products. They can still go to consumers and charge the same thing, but now the relat