Hey guys, haven't been on here for a while, but I'm currently waiting a few weeks to start my next gig and I'm bored. I figured I'd try to give back a little, especially because I know there are people from London on here, and the amount of info available on London HFs hasn't been great historically. Quick background: School: Very 'target', did an IBD summer internship IBD: Call it a lower Tier 1 BB (i.e. not GS/MS/JPM), did M&A for 3 years in London HF 1: Classic concentrated fundamental equity L/S, multi-billion AUM - strategy/style-wise, think Tiger Cubs, Greenlight, etc. Worked for 3 years as a generalist analyst covering US + Europe. Managed a small sub-book in my last year in a kind-of junior PM / senior analyst-type role. HF2: Moving to an event-driven fund where I will remain a sector generalist; interviewed at a lot of places incl. single-manager L/S, multi-manager L/S, event-driven and macro. Happy to answer questions on most topics: recruiting from sellside, recruiting from buyside, day-to-day, career, stock analysis, portfolio construction, my research process, HF strategies, etc. Won't go into lots of detail about things like comp, just because there are so many funds out there and I really don't have that many data points.
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Cool, bear in mind I am going to be biased since I do equity-hedge, but here goes:
1) I think it's indisputably much harder to generate alpha in equity L/S vs. 20-30 years ago. But vs. 5 years ago? IMO not clear. So perhaps we are in a new steady state within actively-managed equities. The new challenge is the continued rise of passive, so the most replicable strategies will be the first to fall. IMO, that will be strategies like diversified L/S, particularly heavily long-biased funds - if you have many positions and many trades, that means you have many datapoints, and computers are better at crunching large amounts of data.
Longer-term, I think passive/active mix will fluctuate and be cyclical, but nonetheless, the average share of active will be lower than it is today, so the future isn't amazing (there should be fewer HF analysts overall). That said, there are plenty of bad equity HF analysts out there today, so if you are good, you should be able to hold down a seat.
2) This is kinda similar to (1) - the least replicable strategies IMO are things like activist L/S (don't think boards will take letters written by a computer seriously); distressed debt (driven by legal system to some extent, and humans still have some advantage over computers in terms of NLP); and event-driven (more 'bespoke' situations i.e. fewer consistent datapoints, ergo harder to create pattern-recognition).
3) Preface: I feel like in the US it's common to bounce after 2 years, whereas in London you usually need 3 years unless it's a distressed fund (for some reason they're usually fine with 2 years).
I think you need to come from a modelling-heavy IB team, to the extent that any excel modelling should be easy for you. Read plenty of investing books: Einhorn, Howard Marks, Joel Greenblatt, Value Investing by Greenwald, Capital Returns by Marathon are a few of my picks. There are some good threads on WSO about books. Be very proactive in terms of reaching out to both recruiters and firms.
4) Most straightforward way to move across HFs is through personal network: prime brokers, sell-side sales / research, and other buyside contacts. Because you have someone who knows you, your work, and can vouch for you. Unless you're at a pod shop or you're a fully-fledged PM, you won't have a track record that you can shop around. Otherwise, you have go via recruiters or cold-email firms - neither is an enviable prospect.
5) In my short experience, I don't think analysts generally 'burn out' in HF the way they do in IB. It's more common to be found out that you simply don't have what it takes, e.g. not comfortable taking risk and responsibility; unable to think independently from consensus; can't handle pace of public markets; caught up in behavioural biases; insufficiently competitive.
Following your hypothetical, I would say 2 out of 5 get found out in the first 3 years. But once you know you're in the right long-term career, it's far more rare to burn out. As an analyst, you're constantly building your knowledge and refining your processes - so the job should become easier (or at least more efficient) as you go along.
The exception is multi-managers - plenty of PMs who come from directional L/S, L-O and SS do not last. But again, I guess it's not really 'burning out' because you just get fired.
6) Common to go to L-O, ER, SS equity strategist. Possibly PE if you've only been doing HF for a couple of years. Sometimes you see guys who go back to IBD (shudder).
Appreciate your time.
By way of background, I'm currently in a PE gig and am looking to attend a European MBA (LBS, Oxford, Cambridge, etc) for a 2018 intake and then hoping to secure a role at a distressed fund thereafter. Hoping to get some insight on European/London hedge fund recruiting in general/things to keep in mind.
My expectation is that it'll be a lot of networking to secure a role, but anything I can do in addition to that (do euro HFs want pitches as part of hiring?), expectation of technical skills/starting knowledge would be helpful to know.
I have limited knowledge of European distressed but I'll try and answer the best I can. Also did you do IBD before your current gig?
I feel like networking to break into HFs in London / Europe isn't as easy vs. US because of cultural differences, but obviously do as much as you can. Would definitely try reaching out to firms directly - and it can be helpful to send pitches with cold emails as well (but they need to contain some original thinking / research). Also use job boards (mainly eFinancial), and reach out to recruiters (but they seem to have become less relevant in the last couple of years in London). Also based on anecdotal experience, I feel like many distressed funds want to hire people with an European language.
Definitely worth working on pitches - you'll need to have ideas to talk about in interviews anyway. Ideally some variation in terms of sector and style. Could develop 1-2 of them into full investment memos so you have something to show the funds you apply to in terms of your writing ability.
With technicals, at the interview stage, it's typically things like what makes a good / bad company, and what makes a good / bad investment. Then it's down to having an appreciation of risk / reward across the cap structure, and an appreciation for markets, i.e. why different instruments can be mispriced relative to each other - try and find some case studies to look at. I assume you will have read Moyer and the other distressed textbooks, which will cover off most of the process-based technical knowledge (albeit it is US-focused and I have no idea if there's a more European-centric equivalent out there).
Well firstly, I wouldn't say there is 'a lot of room' to generate alpha in any conventional strategy going forward. Secondly, it's important whether you define alpha as being before or after fees.
From a human vs. passive / quant / AI perspective, I would say distressed debt is still attractive as an asset class, as I don't think computers are welcome on bondholder committees (yet). But from a human vs. human perspective, you could argue that the space is getting a little crowded i.e. too many managers, so it's really not that clear-cut for me.
But If you're talking about vanilla fixed income funds, then alpha (esp. net of fees) will get harder to come by as there is a lot of room for passive / quant to increase share. It's such a data and maths intensive field that I have to imagine that quant-type strategies will outperform long term.
Similar story with equities where the less replicable strategies have better short-term prospects for alpha. But everyone is trying to pile into them, which will reduce that alpha opportunity.
So long story short, my take is that when you look at asset classes as a whole, alpha will be cyclical. Unless you can truly do things that no one else can, e.g. RenTec / Madoff until he got busted.
Then I decide if it's worth pursuing further. This is usually based on whether I think I could have a variant view to the market that is (a) valid; (b) significant to the share price; and (c) will not be overwhelmed by other factors.
I'll go through a few sell-side models to see how other people model the company. I'll adapt one of the models for myself, or build my own if I hate them all. Then I'll spend most of my time on the few key factors that drive the stock - maybe it's an upcoming product launch, or a poorly-understood accounting issue, or a change in the industry dynamics - it could be anything. That entails lots of reading, and sometimes calls with management, competitors, suppliers, customers, or industry experts. If my thesis is still standing, I'll model out a few scenarios and calculate a target price. Then I'll go through a checklist of mainly behavioural factors to try and minimise my biases.
Then I'll write-up the investment case, typically with a focus on measurability - what specific things need to happen for my thesis to be proven right; and thesis-breakers - what things would compel me to admit my thesis is wrong and exit the position.
If you take an index like the S&P to be a benchmark, it's going to be 100% long, and you're comparing that to funds that might be running 30-50% net long. That's arguably a fundamentally different product from a risk/return perspective. Sophisticated investors understand that, which is why HF AUM has not collapsed completely.
That said there are plenty of crap funds out there who have no business managing money. But I don't think HF underperformance is quite as bad as the media make it out to be.
Here's a good place to start: http://www.psyfitec.com/p/the-big-list-of-behavioral-biases.html
I initially went through a list similar to that one and narrowed down to the biases I felt I was most susceptible to. I run through my personalised shortlist on each position to think about how I could have slipped up. I also refine the list over time based on my own mistakes as well as learnings from other people I know.
I also have a list of what I call 'bad investment theses' which are based on common ways that investors slip up. A few examples: long positions that are overly reliant on NOLs (everyone can calculate these); SOTP valuation (ditto); ex-cash valuation (ditto); paid to wait (this is just an excuse for "share price didn't go up"). Short positions that are overly reliant on a single metric e.g. ROIC (some other people care about earnings) or EPS (some other people have longer time horizons or care about other metrics). It's really just about eliminating false heuristics.
I find stuff by Kahneman, Mauboussin and Montier to be helpful too.
No problem.
Other times, we might have an edge on a name just because it's a competitor or supplier to one of our portfolio positions, and it might only take 2-3 days of incremental work to put on a position.
Answered this a couple of posts above. Will be a mix of merger-arb and other events e.g. corporate reorgs, cap structure arb, regulatory, and the occasional distressed opportunity.
Good question, as it's not a natural switch. I used to think risk-arb was a terrible strategy (pennies / train tracks) in my early L/S days when I had a very purist value investing mindset. But then I learned more about the product, met more risk-arb people and actually thought it was pretty compelling (I have a preference for low vol / low drawdown / high diversification).
I had the advantage of having done a lot of public M&A when I did IBD, so I have a pretty good foundation in terms of process / regulatory / antitrust. So event-driven was attractive in the sense that I could combine those skills with the fundamental analysis stuff I developed whilst doing L/S.
Thanks for doing this!
I also come from a similar background - SS ER 2 years and will be starting at an event-driven fund as a generalist. Some questions if I may:
1) Job security - As a junior in a HF do you come under the line of fire when fund is under-performing or is the PM more at risk?
2) Tips - Any advice for acing the job in a junior role? Would love to listen and learn from your experience.
3) Fundamental Work - Any books or websites to recommend to pick up the basics of merger-arb, cap structure, corp restructuring? Would imagine it's not just simple valuation.
4) Quantitative Skills - Are funds increasingly adopting a 'quantimental' style of investing? How would to be part of and capture that trend?
Thanks so much again for doing this. Really appreciate it.
1) The PM / CIO is the ultimate risk-taker, not the analyst. So overall fund performance is their responsibility. At a fund where PM and analyst work together in close-knit pods, your job security can depend entirely on the PM being employed. At other funds, analysts have more protection (i.e. a PM could get fired but their analyst could still have a job).
Obviously if you screw up really badly on a position, then the outlook for job security won't be great. But the reality is that HF job security primarily depends on factors you have little control over - fund performance and AUM flows.
2) Read a lot, especially when you're out of the office, to build informational edge. Develop your own methodical research processes over time, which will help you earn more responsibility and freedom once people realise you can be left alone to do analysis. Also very useful to build network with corporates, investment bankers, and other buysiders.
3) Risk Arbitrage by Wyser-Pratte; Merger Arbitrage by Kirchner; Merger Arbitrage by Melka / Shabi. Moyer is somewhat useful on the restructuring side.
4) Short answer: yes. For now it's more on the risk management side (a lot of factor exposure analysis), and idea screening (again, factoring). I think it's more within L/S rather than event-driven. In event-driven, ideas come to us, and we usually have fewer factors to analyse b/c typical event-driven portfolio should have less cross-correlation vs. a typical L/S portfolio.
At this stage probably most useful to just get educated on application of quant methods, perhaps via your prime brokers. I suppose you could learn Python if you really wanted to get hands on with manipulating large data sets.
NLP would be really interesting in terms of analysing regulatory stuff, so that could be an interesting tool for the future.
I'm pretty skeptical on quant applications on the idea generation side for traditional fundamental strategies.