Q&A: Multi-strat HF Analyst
Multi-strat HF analyst focused on public equities. All opinions are my own, any views on specific funds are purely anecdotal, will not answer anything too detailed on my background or specific funds, but happy to speak to broad industry generalizations.
Could you talk a little bit about
Your path to where you are now
How many years of experience you have
How you would describe your or your team’s investment philosophy and process
Thanks!
Pretty typical mix, most have worked at a bank before in some form or other.
Given sizing and liquidity requirements for trades there is some truth to ‘there are no new ideas’, would characterize it more as monitoring a relatively well-defined universe of hard and soft catalyst names and prioritizing a few of them. Typical hard catalyst could be a deal closing, spin off, asset sale, regulatory change, index event, dividend increase, share buyback; softer catalysts could be management change, activist activity, strategic review, broader industry consolidation.
The focus for risk arb is not so much pursuing ‘successful’ trades as much as avoiding deals that break. The most successful risk arb trades are typically when there is a bidding war, but there are other types which can provide good annualized returns, particularly when there are unusual technical elements that sometimes accompany a deal. Other than bidding wars, the big spreads are typically caused by something unexpected or unusual so it is hard to generalize too much.
For quant to work well generally you would need liquidity, low transaction costs, price transparency, ability to leverage and some kind of statistically significant relationship between securities and data sets. This should leave some markets on the public side relatively untouched, though these will almost by definition be niche. Risk management at quant funds has improved, but the leverage inherent to quant strategies means that if they are putting on similar trades and there is some degree of drawdown, this can lead to forced selling which can create more forced selling. There is an element to the current in-flows into quant which is likely cyclical and will change when these strategies face a more straining environment, though suspect the main casualties will be newer, smaller quant funds who have absorbed the more recent incremental demand vs. the more established players who are already capacity-constrained. Part of the quant trend is likely structural though in terms of more quantitative techniques being applied to risk management and portfolio construction as well as certain tasks being automated. But honestly, who knows.
Personally given the abundance of information available online I look for some investment ideas as part of interviews and how they think about them. Having some kind of investment idea and having something resembling a thought process that has gone into it seems to be a good filter in terms of motivation.
At a high level I planned this path in terms of taking steps that would make it easier to get a job in asset management, but the specifics of which firms and which roles I ended up at were not planned. Networking helped in terms of understanding the industry better, but I did not get a job directly through networking.
2+2 has clear value in signalling and networking for the purposes of HF recruiting. Anecdotally I’ve heard of several funds who have 2+2 effectively as a minimum requirement; personally recruiting for HF was a lot easier from PE than from IB. You gain a lot of experience as a sheer function of hours worked if nothing else. You are paid well given your lack of differentiated skills or experience.
The price you pay is lifestyle. Given you are paid literally multiples of the average salary for your experience level, you are unlikely to get much sympathy, but think it is fair to say that it is not a question of whether something like 2+2 will have a negative impact on your physical and mental health, but how much.
I would say the actual experience of PE is secondary to the signalling and branding aspects of it, so it is not so much that you need PE to prepare for HF, but that being hired by a PE firm that is considered competitive to get into can make your profile more interesting. In general if you have done PE you have got some more experience in general, will likely be slightly more mature (just as a function of time...), will have had a chance to put a ‘buyside’ hat on while still being considered ‘moldable’ in a public market context - while this is all true there is a risk of overstating how important PE is to HF as there are plenty of people in HF who do just fine without ever having gone near it. But as the HF industry matures and the competition for ‘good’ seats increases, PE does seem to be being used as a differentiator by some funds.
With all that in mind, the best PE experience is probably the one with the best brand / signalling attributes. I was at a generalist fund, but an industry-focused fund can be an interesting way to differentiate yourself, particularly if you know you want to focus on something relatively niche. Given a lot of generalist funds seem to essentially focus on tech, consumer and industrials anyway, joining a fund focused on those can be a way to differentiate yourself with some degree of industry expertise without making your profile too niche, if that makes sense.
Yes, though in an industry with so much personal career volatility and one that is facing some material structural challenges, who knows what the industry will look like in 10 years. I still think investing is fun and interesting and the HF space seems about as meritocratic as it gets in financial services.
The most obvious difference to PE is the day starts earlier and ends earlier. PE at the larger AUM end is more process-orientated (and similar to IB in reality). The main difference would highlight is not so much the work itself, but that PE can be boring, but there is downtime, whereas being marked to market every day in a HF context there is more daily stress.