Q&A: Non-Target School to Portfolio Manager at a Top Hedge Fund – 6 Years Out of Undergrad

1) How were you able to make the move straight into a buy-side idea generating position straight out of UG? I'm a few years out of UG and am finding it incredibly tough to even find these kind of positions to apply to (granted I am in London where the industry seems to be much more concentrated).

• First and foremost, I'll flat out admit I found this job on an on-campus recruiting site for a target school that my friend was a student at. Yes, I even did that back in undergrad. I had friends who went to target schools and I literally would use their logins to browse for jobs. Most employers leave an application link or an email address and that was my way in. Goes without saying that some never responded while others flat out said no because I didn't go the university they were advertising the job to. I'll refrain from officially recommending this approach, but will say it definitely helped me get in front of better opportunities for companies who were willing to give me a shot. In this case, it worked out for me.
• I technically wasn't in an idea generating role straight out of undergrad. We had dedicated research analysts, traders, and portfolio managers. I was none of those things. I was hired as a "desk analyst" which ended up being whatever they needed me to do. Responsibilities included research (here and there), financial analysis, handling margin calls, collecting market color from dealer desks, writing market commentaries to the floor (overnight, intraday, end of day), etc. I did generate my own ideas from time to time, but that really wasn't my core function coming out of school (nor would I have expected it to be). I wore multiple hats which, looking back, was critical for my development. 
• To give you something further to chew on, I think giving you a broader lay of the land could be helpful. Bulge bracket banks and mega funds (Citadel/Bridgewater/DE Shaw/Point72/Blackstone/etc) are very well staffed. Given the fact, they're able to architect highly standardized analyst programs that not only ensure a structured curriculum of learning for new hires, but also an impressively sustainable recruitment pipeline for new undergraduate hires as the years pass and as attrition materializes. Make no mistake, this is rare in the grand scheme of things within Corporate America. In reality, there are thousands of boutique banks and small-end hedge funds / private equity funds that none of us have heard about. They are less staffed and are less equipped to advertise their hiring needs.
• This can be used to your advantage if you network. Sometimes a trading desk or a deal team simply needs someone to do the grunt work. It can be that simple. Every working group in America has that need. That's where fresh or recent college grads who are smart, informed, and technically capable enough to be dangerous come in. If you can show a busy trading desk or deal team that you can hit the ground running for them to free up their bandwidth, that really goes a long way. Looking back, I really do think that was the silver lining for that structured products hedge fund to actually hire me. I was cheap, had the technical skills, and was ready to do anything they asked me to do.
• Browse the internet and just compile a list of all the companies/funds that look semi-interesting. Like when you applied to colleges, have safety/target/reach categories. Reach out and/or apply to all of them. It's a numbers game, maximize your hit ratio where you can.

How did you make each successive jump?

• Combination of skill and luck.
• Starting with skill. Work hard, keep learning, put out good work, and make sure the higher-ups see all of this. Unless you are actually printing your own PnL, perception is pretty much reality in terms of what you do for your manager(s). They're not going to remember every single pitch deck or model you put in front of them. Come comp / promotion season, all they're going to operate with is a broad-based opinion of you. Do your best to help them form a positive one.
• Moving onto luck, Finance operates with a similar "next man up" mentality that you see in sports. In all honestly, my biggest breakthroughs (desk analyst to trader; trader to portfolio manager) were catalyzed by senior personnel departures. Every company is faced with the decision to either replace a departure internally or externally. Internally is always cheaper and quicker since the employee already knows the desk/procedures/systems/etc. External hires are only really made because internal candidates lack the necessary skills to fill the void. Be preemptive and model yourself after the people you admire most on your team/desk. Should they leave, you can step in quickly. 
• Coming full circle, you can't control when or if you'll get lucky. All you can control is the refinement of your craft / skillset. When I was desk analyst, I automated trading reports, collected dealer runs on less liquid products we traded for pricing purposes, I put out morning commentaries on what happened overnight in Asia and Europe, I sent around trading ideas for any PM who would give me the time of day, etc. So when a trading spot opened up, I was actually a relevant internal candidate. I prepared myself to get lucky. If you're not prepared, you're not every maximizing your luck.
• Same thing when I became a trader at my current fund. I was very outspoken with my market thoughts and partnered up with Portfolio Managers who liked my ideas. I always knew where the flows were, which dealers were axed and why, what the relative value trades were, what positioning looked like (what the crowded/pain trades were), etc. By the time the Portfolio Manager promotion conversation was being had, I already had trades on in multiple PM's portfolios. So when the funded needed to allocate capital to another risk taker, I was there prepared to take that opportunity by the horns. Once again, I prepared myself to get lucky in order to maximize any luck that came my way.

Sure, happy to help. Thanks for the thorough set of questions.

1. What do you see as "standard" career progression for buyside macro analysts (knowing obviously that there isn't a cookie cutter path)? Specifically, in comparison to something like equities/credit which might might be more clear-cut/linear (2-3 years Jr. Analyst --> 2-3 years Sr. Analyst with some ability to run risk and PnL tie --> PM), is there something comparable for macro?

• You're definitely right that the equities/credit side of the business typically has a more defined career path. Macro tends to have a much more varied set of backgrounds and therefore a much less linear progression path (for better or worse depending on how you look at it). I attribute this to two factors:
  • First, macro involves a much more inclusive asset class mix (rates, FX, commodities, volatility, inflation, etc). Most people are specialists in just one or two. Therefore the structural need for a comprehensive set of specialists to cover all major markets is much more conducive for work experience diversity.
  • Second, as you already very well know, macro is a top-down investment framework vs the bottom-up approach required in single-name security selection (debt or equity). I think this once again invites a much broader set of backgrounds and experiences vs the standard long/short equity or credit analyst who did a 2-3yr investment banking stint at a bulge bracket in order to learn M&A/LBO modeling, three statement modeling, spreading comps, etc.
• That said, regardless of asset class, I think a lot of it really comes down to the firm and, arguably more importantly, the PM you work for.
  • Starting with the firm, is it a single or multi-manager org structure? If it's multi-manager, it's definitely all about the PM you work for.
  • Whether it's the firm's c-suite (single manager) or the PM (multi-manager), predispositions will govern how risk and people are managed. Does the PM or firm have a research, economics, trading, structuring, and/or quant background? The answer to this question will be the nucleus of the firm's investment style which drives everything else.
  • For you, as a macro analyst, you need to find a PM or firm that falls under the research-oriented category. Macro funds like Bridgewater are an excellent example of this. They have an army of execution traders to manage the execution and implementation shortfall of their positions. All the ideation and portfolio management is done through their research department. Research analysts are promoted to Portfolio Managers at Bridgewater, rarely traders. That's their investment style and that type of organizational structure will set you up best for success.

2. Is there a difference between the career progression of "research analysts" and "traders," or are they more or less the same and a macro "trader" is just a more senior role with direct tie to PnL (i.e. a PM or junior-PM type role)?

• This is a great follow-up question to #1. 
• Every firm is different as seen in my Bridgewater example above. The DNA of the fund (research, trading, quant, etc) will dictate the progression towards your desired role of managing your own PnL.
• For example, the fund I work for is DOMINATED by traders. So coming from a trading background definitely boded well for me. Most PMs on my desk are ex sell-side guys who ran market making desks at big banks (GS/MS/JPM/BAML). They were the senior risk taker for their franchise across various FICC products and simply transitioned their expertise over to the buy-side as a starting point. The transition isn't always easy. Sell-side trading and buy-side trading are extremely different. Being a good market maker requires a solid understanding of game theory and has a positive drift for returns (you collect bid/offer spread). Being a good portfolio manager requires a solid understanding of outcome distributions (managing and taking risk) and has a negative drift for returns (you pay bid/offer).
• I've seen great market makers blow-up as portfolio managers and simply go back to the sell-side because they're just simply better at being a dealer. On the flip side, there are definitely Portfolio Managers who don't directly come from a trading background who wouldn't be the best market maker either and would struggle to work in and out of risk they DON'T want to be in (IE when a client lifts you out of 500mm of 10yr treasuries, making the decision to hedge by lifting 10yr swap spreads, buying a yard of 5yr treasuries and have steepener risk on, etc until you're able to recycle the risk).
• There really isn't a standard because in macro there is an abundance of ways to make money (discretionary, systematic, trend following, high frequency, low frequency, etc). It just comes down to what you're best at to harvest alpha consistently. One of the PM's I work with has a great saying: "I don't care if you flip a spoon every day to generate returns. Alpha is alpha, it doesn't matter how you generate it if its sustainable". Ipso facto, it doesn't matter what your background is or how simple or exotic your investment approach is. Positive returns trumps all.   

3. What advice would you give to someone who went straight into global macro out of undergrad and is gunning for a PM role 5-7 years down the line? 

• I'd recommend reading my response to other posts for some added color on this in terms of how I managed to secure a PM seat this early in my career.
• Without repeating what I've already stated, I'd keep the following in mind:
  • Forget the title of Portfolio Manager for a second. In essence, the job is to understand the world around you and utilize that understanding as the backbone for your speculation on future events. Before you even think about how to become a Portfolio Manager, you need to start thinking like one. Have views.
  • Once you formulate views, put on "paper trades". Fine, you're an analyst without a book to run risk with. Who cares, think of trades that you would put on if you did manage capital and record your entry and exit levels. It could be as simple as a spreadsheet where you track your own PnL and book of trades.
  • DON'T FORGET the importance of leverage and VaR. Sizing your trades correctly is almost just as important as the idea itself. Everyone has winners and losers. It's all about sizing trades correctly and in accordance with your conviction level. The best portfolio managers know how to consistently make money. You'll die quickly if you're swinging too hard or too softly for that matter (IE have your capital pulled because you're running too little vol on your AUM). Set target levels for your trades and set stop losses. Have a set of bylaws and rules of engagement. ACTUALLY follow them. Having a framework will keep you in the business for the long haul.
  • There's no better way to understand the markets and refine your portfolio management abilities than simply doing it yourself. Learning by experience, that's how life works.
  • Before you know it, a year has passed by and you now have a collection of paper trades in a paper portfolio to speak to. I'd be shocked if the PM you work for isn't interested in your trades / thought process, especially if you made money or even outperformed his book :)

4. Do you think sell-side/market-making experience is necessary/helpful to move into a risk-taking role (i.e. PM or trader) on the buyside? Why did you decide to lateral into trading? 

• See my answer to question #2.
• Moving to trading definitely helped me. But that's because of how my fund is structured (we're not alone either, a number of other blue chip hedge funds also hire traders that trade their own risk as PMs). But, as I mentioned, it's still case dependent. There's no one size fits all in macro or fixed income for that matter.

5. Aside from credit and rates, did you ever trade other asset classes (e.g. commodities, FX, etc.)? Why did you decide to specialize in relative value?

• Yes. I traded mortgages before moving to rates. Knowledge compounds itself, so the more product exposure you have the better. In macro, if you understand Rates, FX, commodities, and Inflation, I think you're pretty set. If you want to get really fancy, learn how to trade mortgages and volatility (non-linear instruments). 
• Most PMs start in relative value (RV). Couple reasons why:
  • RV trades have a much higher hit ratio. They are much more mean reverting and often times are available to trade because an end-user has or had to do something. These dislocations are usually short-lived and you can profit from the normalization process.
    • For example, CTAs have begun to flip short duration amidst the recent global selloff we've seen in rates. CTAs almost exclusively trade exchange traded products. So I know they'll be underweight duration in the most liquid treasury contracts which are TY and US. So, without taking any outright duration risk, I could sell TY/OIS spreads to capitalize on the underperformance of TY futures vs the corresponding OIS swap which trades with a short rates beta. I'd argue this is actually why TY/OIS spreads have tightened over the last 1-2 weeks.
  • Second, most Portfolio Managers are initially seeded with a reasonably small amount of capital ($50-$300mm in AUM). The smaller you are, the more nimble you can be. You're charged less when taking liquidity and you don't run the risk of moving the whole market on a given trade. Once a PM starts managing a couple billion, they're usually too big to trade just RV in the hopes of hitting their return targets. They have take more directional risk and therefore need to have much more acute macro views.
  • So, if size wasn't an issue, a PM will always go with the higher hit ratio trades. That's why most PMs who start out in RV. RV also forces you to understand market microstructure and the nature of flows (what makes hedge funds trade, asset managers trade, LDI/Insurance trade, etc). 
• That established, the Fed has definitely taken a lot of the RV out of the market via QE. So, much of the RV trading I do has macro beta to it anyways. So, especially during times of easing, macro is still the primary driver of risk transfer so you still need views. 

6. Lastly, what do you think of the move in rates recently (last couple weeks). Seems like economic data is rolling over the wrong way and it also seems unlikely that the economy is going to recover from COVID (employment-population ratio, labor force participation, etc.), not to mention supply chain issues and potential risk-off sentiment driven by China's RE issues - so I would expect further downside in long end UST yields from a fundamentals perspective.

However, I was hearing some rumors that some of the more violent bear steepener moves were driven by rate vol ticking higher combined with elevated payer ratios triggering dealer hedging flows (+ mortgage convexity kicking in).

What is your intermediate-term outlook on rates (3-9 months from now)?

• Short convexity always gets thrown around when there are big rate moves. We haven't seen any on our end and neither have the major banks we trade with. So, in short, I don't think thats been a big driver (yet). Keep an eye on swap spreads, that's your best proxy. They've been pretty stable over the last 1-2 weeks. If you do already watch them, don't count today given that it was month-end (better cash buying) and especially in the front-end given that was just an optical widening given since another set in the spot starting swap structures have fallen into the post-fallback period. Therefore, given the complications that come with LIBOR fallback, also keep an eye on SOFR swap spreads as well (SOFR swap trading market share is rising materially following the "SOFR First" initiative back in July). If rates do continue to selloff, I do think we will hit a convexity bubble in the market given where the MBS basis is trading and the amount of gamma supply there is in the market given the low realized moves seen over the summer that hedge funds and systematics sold into. 
• This bear steepening isn't US driven. Look at the overnight price action, it's ALL Europe. Gilts and Bunds are leading the way and this is due to the extraordinary energy crisis they're currently experiencing. EUR Winter Spreads blew out like 27 standard deviations (or something crazy like that). Russia has shutoff their oil pipelines, turbine-generated energy is minimal given the moderate weather in Europe over the summer, and Europe has shut down a good number of their nuclear power plants already given their green energy movement. So all they have left is Nat Gas and their reserves are TINY. The UK literally has like 3 days of excess LNG reserves on-hand. Nat Gas prices has rallied 400% since beginning of 2020. There's now a HUGE inflation scare in Europe with risk of spillover. GBP 1y1y is trading at ~70bps vs a terminal rate of 100bps, the market is pricing in the BoE to fully front-load hikes. The only reason we aren't bear flattening is because fRM is selling whatever collateral they own now to get ahead of the inflation and their holdings are typically farther out the curve. The rest of the G10 rate markets are just selling off given their beta. I think it's overblown and there's definitely a trade there which I unfortunately can't go into more detail than that on.
• Keep an eye on commodities, that will be your guidepost for when this price action may eventually turn. Also, foreign buyers are mostly active in the primary markets instead of the secondary. So with 10s near 1.50% and 30s over 2.00%, the 10y and 30y auctions in ~2 weeks will be the pivot point for how rates trade next in my opinion. I argue that these auctions will be, on the margin, more important than Oct NFP or CPI assuming they don't print too out of consensus given what transpired last week via the Sep FOMC meeting.
• Going forward, these are some high-level views I'm able to divulge:
  • 10yr treasury will end the year somewhere between 1.50-1.70%. I think we hit 1.70% before we return to 1.30%.
  • Economic data really hasn't been that bad and COVID cases have come down, especially the second derivative (rate of new cases). If you actually plot the two together, that marked the lows in treasury yields (when rate of cases peaked). The rate rally we saw in July and Aug definitely reflected some Delta variant risk premium, the FX market corroborated this too. 
  • We'll see how this winter goes, but I don't think COVID has enough stopping power to completely derail the recovery and/or path of monetary and fiscal tightening. If anything, this new energy crisis in Europe and the potential for contagion is the bigger tail risk in my opinion. Did you see the news out of China today? They are looking to secure new supplies "at all costs" ahead of this winter (see here). If inflation isn't transitory, it's going to come down to energy prices, forget just looking at Core CPI.
  • Powell literally gave us the playbook last week. Rather than squashing the hawkish dot plot, he pretty much implied a Nov taper announcement (contemporaneously alongside treasury coupon issuance cuts), a completed taper by mid-summer, and likely a hike by Dec 2022. The market has already priced this in. So, at this stage, I think the belly of the curve (say 5s) are pretty fairly priced. If anything, 5s seem like an asymmetrical buy to me especially if you're paying/short 2y1y or 3s against it.
  • I think the best way to express this is via the fwd curves. If you look some of the fwd curves, they're already inverted which makes no sense. These curves typically only invert during peak market stress (which isn't the case since we're still easing) and during a peak hiking cycle (we haven't even tapered yet). Fwd curve steepeners, by virtue of fwd swap mechanics, will put you long the belly.
  • Especially if you have a 1y1y or 2y1y hedge against this position, I think you're in a good position. Because either you're right and COVID is still a risk in which case hikes will come off the table and steepen the curve, or the hikes will materialize and the terminal rate needs to be higher. With 1 hike in 2022, 3 hikes in 2023, and 3 hikes in 2024, 5y5y OIS at 1.70% is still too low. Either way, these curves need to be steeper. So I do disagree with your view on long-term yields. I think they're too rich and I think its been a function of a lot of P buying from pensions who are now better funded given how equities have performed. When we actually begin tapering, I think there will be more term premium injected into the fwd curves. To be clear, the fwd curves can steepen while the spot curves flatten which, all else equal, will probably continue especially as we near rate liftoff.
  • I could talk about this all day, but I'll stop there for now. Hope this helps.

I can always appreciate a candid post. You're definitely not alone. There are definitely plenty of people out there with similar thoughts so hopefully the following helps. For the sake of readability, I'll decompose your post into its primary parts.

Do you think I'd be a fit?

• Creativity, freedom of expression, and structural feedback loops. These are the core elements of any risk taking role.
• Having the ability to form your own thoughts, be creative in the implementation of those thoughts, and having an immediate feedback loop to quantify the efficacy of your decision making is a rare combination for one's intellectual environment. There are few things in life, let alone jobs out there, that can afford you such a refined way of thinking and bettering oneself. 
• I bring this up because I believe these core elements are the primary intellectual draws of trading markets. The market is a global snapshot of the human psychology at a single point of time. Even if you remove the money component, you're still left with playing one of the most extreme games available to man by speculating on or against the state of our world. Trading is as challenging as it is rewarding. No one can ever master the markets, all you can attempt to do is master your way of thinking. Every day is different and so are the set of decisions you make. Your PnL is absolute. Your skill, or lack thereof, is of pure merit void of debate. It doesn't matter how much of a smooth talker or introverted you are. Your PnL, and your individual net worth for that matter, is merely a sum of your decision making. 
• If this sounds appealing to you, then I think a career in public markets could be a better fit vs the more transactional nature that comes with investment banking and private equity. 
• BUT, you need to address yourself first. To be brutally honest, I don't even think you should look for a career on the HF side if you don't even have any interest in personally investing in the stock market. Public markets are so efficient and they will bury you if you aren't committed to understanding them. How can you expect to generate returns for investors if you have no interest or commitment to generating them for yourself first?
• Losses will always hurt more than wins. That's just the science behind human behavior so you're not unique in this respect. It all comes down how you manage your risk and how you handle adverse risk. We all experience losses. We all find ourselves on our back foot at times. Anyone can win. It's easy to be successful. What separates us is being able to identify asymmetric payouts and how we bounce back from failure. This doesn't just apply to trading or a career in Finance, it's prevalent throughout all our lives.
• Based upon what you've divulged in your post, you've clearly had to battle adversity to break into the industry. You should be proud of everything you've accomplished and where you are today. Carry that with you in trying something new. What's the point of living without taking some risks? Especially since you look to "milk every penny you're paid for", you owe it to yourself to take a shot at trying new things even at the risk of loss. This is especially the case in our younger years. At the end of the day, it's just money. You don't want to be the guy who's in his 60s regretting he never gave new things a shot at the risk of failure. Unless of course that does sound appealing and you are just fine "collecting the coupon" on a safer more stable Wall Street salary (which isn't necessarily a bad thing). Then I think you already have your answer. 

Is there literature you recommend reading?

• I love reading and, if anything, I wish I had more time to do it these days. 
• As a start, here are 5 books I'd recommend checking out. They're a mix of finance/trading, intercommunicative psychology, and the science behind evolution and what motivates us.
• I think reading these will give you a better understanding of what it means to understand oneself and how one should approach being a student of the markets.
  • The Intelligent Investor (Benjamin Graham)
  • Security Analysis (Benjamin Graham)
  • Market Wizards (Jack Schwager)
  • Compelling People: The Hidden Qualities That Make Us Influential (John Neffinger)
  • The Selfish Gene (Richard Dawkins)

Would you be able to make a list of questions to help me understand more about what the job is like and if I would enjoy it? 

Sure, here's a start:

• Do you prefer knowing the answer outright or investigating how one arrives to the answer?
• Do you prefer autonomy or a more structured set of tasks in your workday?
• Would you prefer a higher salary and lower performance bonus? Or a lower salary and higher performance bonus?
• Is failure your motivation or demotivation?
• Does the idea of other people seeing your performance make you uncomfortable?
• Do you prefer being told you're wrong or would you prefer no one said anything?
• Would you rather be the best at something simple or run the risk at being average at something complex?
• Do global events interest you? If it wasn't for your job, would you care about what goes on in the world?
• Do you prefer a lower frequency or high frequency day? IE would you prefer to be completely in the zone on building a financial model or moving in and out of trading positions with live PnL impacts? They require different parts of the brain and one is higher frequency than the other.
• Do you enjoy debating your thoughts against others? Or would you prefer to keep your thoughts to yourself? 

It’s like you were writing it straight from my mouth. You more than likely have Adhd, or at least I do and it causes all of the above prescribed. You may also be an enneagram 3 ha

Thanks man. See below.

What have your returns been?

• I was promoted to Portfolio Manager this year and got my own sleeve/pod in May 2021. So I am still a very new Portfolio Manager who's still very much a student of the market.
• I was up ~4% coming into September. September was a tough month for me. I am closer to ~2.5% up on the year now as we kickoff October. I'm pretty well positioned for the recent bear steepening we've been seeing across global rates. So, to the extent that this trend continues, I should be able to pad the PnL a bit more this month and reclaim some of the September losses.
• You're only as good as your last trade, so for the next 3 months I'm just looking to take advantage of the macro and RV opportunities that make sense to me. Not looking to be a hero as we near year-end, definitely need to end the year in positive PnL territory especially in my first year. 
• Running about ~500bps of vol on a max deployment 1000bps (so I've deployed about half of my risk budget on the portfolio).
• Would say I'm currently printing a ~1.5 sharpe on my risk. Goal is to get into the +2.0s if I can. This of course becomes more difficult as the AUM grows, so I really hope to get into the +2.0 sharpe category while I'm trading on the smaller end of the AUM range (call it =<$500mm).

Do you think we are in a bubble ?

• This is a loaded question that we're all currently deliberating. The answer to this question can take many forms. So I'll just extend a specific thought that may provide the answer you're seeking.
• QE is a very addictive drug. It's highly difficult for markets to wean themselves off of it. The more QE a central bank engages in, the more entrenched that liquidity becomes in its markets. The more entrenched that liquidity becomes, the more the economy and its consumers become reliant upon it. This, in turn, perpetuates the need for more QE to address future problems hence the economic paradox that has now been introduced to the system. Just take a look at Europe and ask yourself why they're now running negative interest rate policy and why they're unable to get out of it.
• The Fed did the right thing cutting rates back to 0 to address the pandemic-induced economic shock. That said, even though we were addressing a healthcare crisis, we essentially just kicked the can down the road. We started hiking in late 2015/early 2016 with Fed Funds peaking at 2.50% (upper-band) right before the pandemic hit. All things considered, we were in a relatively good place as it relates to equity market conditions, prevailing treasury yields, and having a healthy dose of term premium in the yield curve despite the Fed being well into its hiking cycle.
• That was all erased with COVID and what we're now left with is historically low treasury yields, all-time highs in equity markets, and all-time tights in pretty much every spread product (credit, mortgages, munis, structured products, etc). We're in a pretty delicate place right now from a valuations standpoint.
• That said, the Fed is aware of prevailing valuations and is attempting to thread the needle. They're gradually withdrawing liquidity by the removal of temporary facilities, tapering their bond purchase program (most likely starting this Nov), and eventually raising rates (TBD but first hike is priced for Dec 2022 at the moment). They've been pretty outspoken about decoupling their tools in the form of balance sheet management and raising the key rate. However, what remains variable in all of this is another powerful force at play: inflation.
• For the first time in decades, there's a material chance we get meaningful inflation. However, the current inflationary pressures we're dealing with are supply-driven, not demand-driven. Prices aren't going up because purchasing power is high due to low rates in the hands of a healthy consumer. Prices are going up due to supply chain constraints and inventory scarcity most prevalently seen in commodity markets (especially energy). Raising rates doesn't help address supply-driven inflation. If anything, it makes it worse if you crush the consumer.
• A bubble is only really seen as a bubble once it's popped. Then it's obvious what caused the bubble and why it popped when it did. Market participants are always quick to point to a policy mistake from the Fed as the reason for why the economy will be derailed and this time is no different. As I mentioned in a prior post, look at the fwd curves. Some of them have already inverted. If you look at the front-end forwards (OIS, Fed Funds, or Eurodollars stripped for FRA/OIS), we're not even fully pricing in the Sept FOMC dots either as the presumption is that they won't actually be able to enact such hawkish policy. The market has a history of always preemptively pricing in hikes (market thought we were going to hike in 2014 following the May 2013 taper tantrum - we ended up hiking end of 2015/early 2016). This is just the nature of the market's reaction function to policy tightening.
• So are we in a bubble? Well it depends how you look at it.
  • Firstly, the macro playbook can be broken down into 5 stages: Recovery, Mid-Cycle, Late-Cycle, Contraction, Recession (repeat). Per Keynesian Economics, there are peaks and valleys of economic growth. That's healthy, so I think the idea of a "bubble" gets thrown around too much especially once you understand the natural ebbs and flows of a developed economy. We're currently in the Late-Cycle stage which comes with fair-to-rich valuations with low risk premiums. This is a good environment for RV and tactical trading.
  • Secondly, QE / accommodative policy is temporary. Therefore, the marginal increase of asset prices as a function of this liquidity handicap should also be temporary. So it's natural for risk assets to give back some gains once this liquidity is withdrawn, especially if interest rates do go up. But the manner and magnitude in which we experience this repricing will define in many people's eyes a soft or hand landing. If it's the former, it's a normalization of market conditions. If it's the latter, then we were in a bubble. I think trying to classify which one will happen is a useless exercise. Market prices will have to recalibrate to their new state of homeostasis. It's not a matter of if, it's when. The Fed will do its best to achieve a soft landing but, since market timing is pretty much an impossibly difficult endeavor, just position your portfolio accordingly to manage the eventuality of us entering the Contraction stage of the macroeconomic cycle. You will want to lean shorter risk assets, hold off on any risk premium harvesting, and be long convexity/volatility. 
• In closing, I think for the first time in a very long time, monetary policy isn't going to be the singular driver of the economic condition. The world has changed and we're dealing with a new sit of inputs that will ultimately fall into the calculus of where r-star should be. I'll touch on this a bit in the section below.

What is the next data metric that would make the markets correct? 

• The obvious data metrics you'll want to keep an eye on are jobs (NFP), inflation (CPI, PCE), and ISM & PMIs (Manufacturing and Services). Full employment and the steady state of inflation will define the Fed's path of hikes both in context of the terminal rate and the speed in which they hike.
• If the substantial pickup in inflation ends up being supply-driven, we run the risk of stagflation (low growth, high unemployment, high inflation) if we hike too quickly or too late. The Fed will do its best to avoid this outcome and will hurting the consumer. They will be patient on hikes by partitioning their tightening (taper first, then see how things fall before hiking - the market doesn't believe this though) and will only aggressively hike if inflation truly gets out of control (the breakeven curve is still inverted so the market isn't saying this yet).
• Therefore, I think it's important to keep track of the consumer and the headline drivers of inflation (again forget Core CPI, the headline numbers driven by energy and food is what matters at this stage). 
• Stay on top of the fiscal policies coming out of Washington DC. Stay on top of commodity prices specifically petrol, electricity costs, etc globally. Keep your eye on freight costs, shipping activity, and other key components of the global supply chain. This is the closest we've seen to a commodities supercycle so I think this asset class will be just as important as watching the Rates market itself.
• The outcome-based solutions from central banks for the current set of challenges will be more interconnected than I think many realize. It's not just about rates, there's a huge fiscal and supply-side component that we need to take into consideration.

Thanks! Glad you have found some of these posts useful. Also I very much appreciate you sharing your views. Trading markets is a team sport and we can't be successful without having our views challenged or refined.

Could you provide a bit of color, about how your firm deals with costs be it seat cost or if any costs in your control?

• Like most funds, we have both a management and performance fee structure.
• The management fee covers standard overhead (Bloomberg terminals, trading/pricing software, salaries, etc). What you'd typically imagine. However, the fee isn't fixed. We manage our strategies across 6 different vehicles with different turns of leverage. The management fee will be higher for the more levered vehicles as we'll pass on some of the added financing costs to lever up positions with our balance sheet. We have a very large balance sheet so we're naturally a pretty big player in the repo market. The ability to hit competitive bids to fund our positions is definitely a value proposition we extend to investors.
• Our mandated target gross return is 10% and we have return tiers within that (3.5%, 5%, 7.5%, etc). These tiers govern carried interest provisions. The investor of course always comes first, so the above is null if we lose money or fall short of a given performance tier.
• We, like many other funds, are aware of who our competitors are (Element, Brevan Howard, Tudor, etc) so relative performance is a very informative variable for our investors. This is because relative performance is what typically what drives inflows and outflows in the HF space. If macro hedge funds, on average, lost 10% but you only underperformed 5%, the CalPERS of the world probably won't pull their capital despite it being a losing year unless they want to reduce their overall exposure to Global Macro. On the flip side, there's really nothing worse than when your peers AND the market outperforms you. Investors will always be more dissatisfied with MAKING them less money than the market or competitors vs LOSING them less money than the market or competitors. Just the way it is. Call it it the negative convexity of portfolio management (if you outperform the market = great, thats your job; if you underperform the market = what the hell are you doing and why am I paying you fees).
• All in all, we're a blend of the pod shops (Millennium, Citadel) and the single manager (Element). Here PMs have full discretion over managing their pod/sleeve, but there's a lot of cross-collaboration. There are core themes expressed at the fund level and we're all aware of them. The cross-collaboration is most beneficial when we're dealing cross-market (rates trades overlayed with EMFX or CDX for carry, etc).
• I enjoy having the benefits of both worlds. I couldn't imagine doing this job alone (I'd go crazy). And I couldn't imagine having to pre-clear every single trade with the master PM who is just going to say yes or no based upon bias (I'd also go crazy and their bias may also eventually blow us all up).
• As a PM for this fund, I really don't have much say on how these costs are structured. That's up to the more senior PMs and our investor relations team. I think the below will help clarify this a bit more as well.

Do you have an analyst or shared resources? I often think people never discuss on here the actual costs/hurdles that come with the position. 

• Bit of both.
• We have analysts to help with macro research, backtests, and whatever else we need them to do.
• We also have a group of quants at the fund level that are more of a shared resource. They build all of our models, curves, derivatives pricers, etc. They report to a "Chief Analytics Officer" (CAO).
• The analysts are on our direct payroll so that definitely comes out of our management fee and our bonus pool. The quants not as much, granted the senior PMs who rely on the quants the most work with the CAO to determine comp. Obviously more vanilla products will require less quantitative work vs the PMs that traffic in more exotic / bespoke products which come with more quantitive rigor.

Addressing your views on Energy

• Thanks for sharing your thoughts. 
• I actually don't necessarily disagree with you. If anything, I think the market is still unprepared for a more permanent move higher inflation and, in turn, an expedited tapering and rate liftoff timeline.
• That said, within the GBP rates market, I still see asymmetry. Every PM has their own styles, and mine isn't unique in this sense, but I seek out asymmetric payouts. The fundamentals and the technical drivers (flows play a big role in pushing markets out of fair value) have to be addressed, but I think a good risk taker always looks to isolate asymmetry whenever possible. 
• I'll give you an example/exercise on how I think below. For the sake of breaching any compliance rules here, I will refrain from detailing any explicit trade structures. Rather, I will present you objective market evidence instead.
  • 1y1y SONIA is trading at around ~70bps vs a terminal rate of 100bps as established by the BoE. 1y1y has sold off materially as the market repriced to a more hawkish liftoff path as energy inflation pressures became more real. This has significantly flattened both the macro curves and the front-end fwds. 1y1y vs spot 5y SONIA curve is trading at 5bps... the flattest it's ever been. This is is no coincidence. The terminal rate of 100bps has anchored everything out the curve (2y1y, 3y1y, 4y1y, 5y, 10y, etc).
  • At this stage, one of four things can happen:
    • The BoE actually hikes and the forwards realize.
    • The BoE doesn't actually hike as much as initially anticipated with inflation turning out to be a bit more transitory.
    • The BoE needs to hike further and the forwards realize at the terminal rate of 100bps and they're done hiking.
    • The BoE needs to hike so badly given runaway inflation and they have to raise the terminal rate to accommodate more hikes .
  • Now, lets assign probabilities to the 4 outcomes above in order.
    • 50% probability (let's assume the market is efficient given UK Rates are a liquid market and therefore the market gets things right half the time)
    • 10% probability (let's assume that this is the smallest likelihood given your views)
    • 20% probability (let's assume an even split on the remaining outcome percentages since I'm not going to pretend I have an edge in knowing whether inflation will be unhinged to the point where the BoE will have to bump the terminal rate higher)
    • 20% probability (as I stated above in point #3. That said, I'm probably overestimating these odds since you don' think higher energy prices will crack the consumer. This scenario is our tail risk which implies a hurt consumer. No less, for conservatism, let's assume 20%).
  • Now, let's assign market reactions to the these outcomes:
    • 1y1y stays where it is and sets at ~70bps. Hikes priced in currently are fair.
    • 1y1y rallies given transitory inflation. Hikes either come off the table entirely or they get pushed out the curve. Let's just assume it takes one hike off the table (moving 1y1y back down to say 50bps).
    • 1y1y sells off to 100bps. Either longer-dated rates (like 3y1y, 2y3y, 5y5y, etc) also reprice to the terminal rate or they invert vs 1y1y which would be the market viewing the move as a policy mistake. The inversion can ONLY be significant if the market thinks the BoE will have to cut down the road given their over-tightening OR if they completely stomp out inflation (1 more hike seems unlikely to tip the balance on this though). 
    • 1y1y sells off to over 100bps, let's say 2 more hikes to 150bps, as the terminal rate gets bumped higher by the BoE. Longer-dated rates and fwds either have to reprice even higher than 1y1y given the amount of hikes being priced in (which is what is happening to the EONIA curve already in EUR) or term premium is destroyed and the curve inverts if the market views these hikes as a policy mistake where the BoE is willing to temporarily contract the economy in an effort to completely eradicate inflation.
  • When you weigh these outcomes via their assigned probabilities, you're able to size now size your risk accordingly. So, for example you could theoretically assume the fair value of per your modal outcomes for 1y1y is = 70*(0.5) + 50*(0.1) + 100*(0.2) + 150*(0.2) = 90bps. You can then run an OLS regression or a monte carlo simulation to determine the beta of 1y1y vs a longer-dated fwd or rate to determine how it should be priced vs your assumed 90bps 1y1y fair value. This will be the basis of your trade with of course a given confidence interval.
  • Once you've determined your probability-weighted sizing, you can choose between a linear or non-linear expression.
  • Assuming the skew and the conditionality present in the vol surface make sense, I'd prob prefer the non-linear expression via swaptions / midcurves (receiver or payer conditional curve trades). If engineered correctly, non-linear trades can define your downside without overly truncating your upside. This is very helpful when trading levered fwds that can easily reprice in the linear space.
• Per the above thought process, I see asymmetry before we even discuss the macro view. Whether you have a conflicting or inline view with the market, I believe a good risk taker should always have the ability to identify asymmetry in the outcome distribution and look to capture it. If it goes against your view completely, then it's sized accordingly and will likely act as a hedge to the rest of your book. If it is inline with your view, then it's sized accordingly and will likely be risk additive to your book. That's the final step, introducing what was initially idiosyncratic risk to now a book of risk in the right way.
• In conclusion, I hope this helps shed light on my original statement on seeing opportunity in the UK rates markets and nature of the opportunities (the above isn't the only place I'm looking). Of course, I apologize if I ended up being too abstract in the above exercise (and not actionable enough via an explicit trade) but figured you may have wanted more detail in terms of how I think. For the rates traders out there, or anyone else who followed along, hopefully this aids you in how you approach these markets.

Well, outside what I've posted above, I'd say the following quick tips should bode you well:

• Walk the walk. Plenty of people think or say they want to work at a hedge fund. But if you have no real market views, minimal to no personal trading/investing experience, and/or any real understanding of market history, then you're probably just kidding yourself. Stop putting the Hedge Fund Portfolio Manager job on a pedestal. It's not a job. It's a craft underpinned by a mindset and framework. You DON'T NEED to work at a hedge fund to develop such a way of thinking. You can literally wake up tomorrow and become a portfolio manager for yourself. Start with the basics and learn how to manage risk for yourself. As I mentioned above, if you haven't managed capital and generated returns for yourself (either in your personal account or a paper account), then why should any institutional investor trust you to do the same for them.
• Intercept the job description. Make no mistake, you will definitely learn a lot on the job. But, to maximize your odds of even getting it, pick up as many skills required on the job as possible. Excel, VBA, Python, baseline understanding of statistics, sold market IQ and knowledge of the relevant asset class(es), etc. Learn something new every day and focus on hard skills you know you will need to be competitive.
• Be an intellectual. At the core, a Portfolio Manager's existence is defined by his/her understanding of the world around him/her. The better their understanding of reality, the better s/he can speculate on the future. This is impossible without having a genuine intellectual curiosity and a thirst for information. Read everything you can. It doesn't even need to be about finance specifically, just train your brain to expect and retain new information regularly. Especially if you're in college with more free time, I expect this of you. Don't waste the incredible amount of time you have to be productive.
• Network aggressively. As I've detailed above, you need to be aggressive. A hedge fund career is still one of the most sought after professions in the world. No one will ever just give you a job at a hedge fund with idea-generating or risk-taking responsibility. You have to work for it every step of the way. The first step is getting in the door. See above what I did networking-wise for details.
• Embrace failure. If you can't, you're in the wrong business. You're going to fail. A lot. Learn to embrace it or forever be imprisoned by your cognitive dissonance.
• Be a good person. When all is said and done, there's so much more to life than a career in Finance. Yes, a successful career in Finance can open many doors. But nothing is free and in return it demands of you a tremendous amount of time, energy, and commitment. Just remember, despite all the "success" you may end up having, just remember that if it all blows up in your face only your friends and family will remain. This will always be the case, don't forget to make time for them.

Hey there. Yes, the move is definitely possible. However, in your shoes, I think it any potential jump is likely to boil down to 3 scenarios. I have ordered the below in descending order of importance.

1. Lateral into Trading
2. Establish rapport with your fellow traders and strategists (which it sounds like you're already doing)
3. Take a shot with a client that already trusts you for trade ideas.

I'll elaborate a bit further below:

1. Sell-Side traders definitely have a better shot at making the jump. You get direct trading experience, you see all the flows, and you will ultimately have some PnL you can speak to (most market making desks still have some sort of back book to trade directionally separate from their franchise flows). I'd aim to lateral to a sell-side trading seat at your current firm or another bank if you can. That way you can be categorically more competitive during the recruitment process and, arguably more important, you can better determine for yourself whether actually you want to be, or are even good at being, a risk taker.
2. If #1 seems like slim pickings, then continue being the best salesperson you can be both internally and externally. I know a couple Portfolio Managers who used to be in Sales on the sell-side (both at my firm and other funds). They were held in excellent regard both with their clients AND their sell-side traders. They always had views on the markets, an intricate understanding of the products they covered (arguably as well as the trader), and portrayed an image of "always having the answers" (which I'll elaborate more on in #3). They didn't necessarily want to be Portfolio Managers initially, they were just first and foremost fantastic market observers. This unquestionably catches the attention of clients who may look to recruit you down the road and/or the traders and researchers on your desk. If/when your desk's primary senior risk taker or researcher leaves for the buy-side, there's a higher chance s/he may take you with him/her if they have a strong opinion of you. Like I've alluded to above, people will always have the inclination to work with who they already know (IE hiring internally vs externally). It's just human nature to remain in our comfort zones if it doesn't compromise other factors. If your trader or researcher hops to a hedge fund and has the option to bring a team on with him/her, guess where s/he is going to look first? Be a person they think of.
3. Obviously the biggest risk you take here is them saying no and it potentially getting back to your boss. Or worse, it getting around the Street you're just the salesperson who's looking to get a new job with any client who will take you. I think to avoid this you need be strategic and it begins with your brand. Going back to what I mentioned above, your first aim needs to becoming the salesperson with "all the answers". As I'm sure you're already aware of, not all salespeople on the Street are the same. There are some I just shoot the shit with and never talk markets with because I don't trust a single thing they say (I just think they're funny/a good time). There are a select few who I go to for everything that matters including thoughts on the markets, random answers to random questions, how to think through a problem, understanding how a key end-user in my market behaves, etc. The former gets you nowhere, you might as well just be in sales forever and hope your franchise sees enough flows to get you paid. The latter puts you in the best position to accomplish everything I've already outlined above (lateraling into trading, being in good graces with your colleagues who are in a better shot make the jump to a HF, and/or having a client think of you for an open seat). The less you have ask for the job, the better. If your colleagues and your clients see you as someone smart with good trading ideas, then the more chances you'll end up getting to eventually put on that risk for them.

Lastly, quick note on building your technical skills, see my previous posts. Regardless of whether you stay in Sales or make the jump to the buy-side, these skills will only help you in the long run. College is over, so no one is left in life to teach you these skills except yourself. So definitely take the initiative to begin building those skills now. You'll thank yourself later. 

Hi, thanks for the post. See my quick thoughts below.

• You're in the right seat. So congratulations. Trading FX or rates vol on the sell-side is a great gig for two reasons:
  • 1) Volatility trading still has some of the highest bid/offer out there across liquid products which is great for desk revenue. Still mostly voice trading in this product too, so less risk of automation/electrification in the coming years
  • 2) You're required to understand both the linear (underlying) and non-linear (the option itself) components of the market. So from an educational perspective, I think this is a great start.
• Every macro HF is different, but there's plenty out there that you've heard of that will hire sell-side traders as PMs. So think you're in a good spot here assuming you have a good track record as a market maker to point to.
• As far as how to be a good sell-side trader in this product, here's my 2cents:
  • Be a relative value trader first. You can have macro views, but your more senior traders are expected to have those. If you're just starting out, you need to be the eyes and ears for your desk with the micro first. Know all the good RV trades across the vol surface in both Gamma and Vega (IE calendar spreads, vol switches, conditional trades, where skew is rich or cheap, etc). This will be your angle when you speak to clients as well. Most clients you speak will be more inclined to hear about the micro to help supplement their macro view (IE I know I want to accomplish "xyz", what's the best way to express this in the fx or rate vol market with "abc" parameters). This will be your edge as a young trader and, down the road, act as a solid foundation for when you eventually begin to trade macro. 
  • This will also help you to make good markets. This is extremely important. Obviously your bank's balance sheet will drive a lot of this but, on the HF side of things, I only really care to speak to my top liquidity providers. For me, being a top liquidity provider means you have smart things to say, you have good trade ideas that I may end up putting on myself, and you have competitive pricing. GS/MS/JPM/etc all have similar balance sheets for the most part.  What separates them are the traders themselves. If you know what RV you want to be in, if you learn how to work in and out of risk you're being put in or lifted out of, etc, then you're in a better position to provide more competitve pricing to your clients. If you can make money for your desk and be someone the buy side can rely upon, you'll be in a good place in a couple years.
  • Put out content. As a market maker, you're in a very unique seat. You are literally setting the market price and see ALL flows. This puts you at an immense informational advantage. Publish market color regularly with your thoughts, trades you like, and offer to answer any questions. Your clients will appreciate it greatly.
  • Get to know your fellow dealers and don't make enemies (front-running a client, running another dealer over on a large trade you know they have to work out of since you didn't win the risk, etc). In fact, front-running is probably the dumbest thing you can do at this point in trading. Build positive relationships with traders on the Street both on the sell-side and buy-side. Information is everything in our business and it begins with where you get it. Plus, you never know when a relationship will come in handy.

Hey there, glad you have found this thread helpful. Apologies for the delayed response, this past week was brutally busy for markets.

Could you explain how you chose which strategy you wanted to invest within? 

• I honestly kinda just fell into it. My approach was rather inadvertent and simply driven by my thirst for information. However, when looking back, my approach may have been accidental but no less effective than anything I'd recommend now. I got lucky in this respect. It simply begins with understanding your own intellect.
• Your first step should be focusing on learning the product itself. I really feel that many people overlook this and incorrectly pursue the investment style first. It is of paramount importance to actually understand what it means to invest in an equity, a bond, a structured product, a commodity, etc. Understand the product's design, how it derives its value, its conduit for trade, its end-users, etc to see which product or set of products peaks your interest. The internet is your best friend for this. If the internet falls short of giving the information you need, then use the internet to find the books you need to read. This is a journey of self-discovery, so I encourage you to embark on it vs having someone just recommend you a bunch of books.
• From there, transcend this interest to the various markets in which you can trade that product. For bonds, explore the sovereign bond, corporate bond, municipal bond, mortgage bond, etc markets. Or for commodities, explore the ags, softs, metals, energy, etc. On a more peripheral basis, explore how these products may differ in developed vs emerging markets.
• Finally, once you derive an understanding of the product and the market in which its value its exchanged in, you should have a good idea of the type of analysis required to forecast its future performance. This should inherently fall into an investment category you're familiar with and help you decide what type of investing is right for you.

Could you also share what type of people/personality/skillset is more relevant for HF or the different strategies?

• The HF world is filled with an abundance of diversity. Diversity in intelligence, approach, cultural background, personality, etc. Everything. This is actually a crucial part of the business as it avoids group think. There's no quicker way to get blown up in markets than for you to surround yourself with people who think just like you and, therefore, share your blindspots. 
• I say this because I really don't think there's one type of individual you find at a hedge fund especially in this day and age. 
• That said, I will admit if you possess some of the below qualities you'll probably fare better at a HF than an individual who lacks them. This isn't a comprehensive list, just what comes to mind at this moment:
  • Intellectual Curiosity - many of my peers are inherently curious about how the world works
  • Calculated - not just being quantitative or comfortable with numbers, but also having a highly intentional and logical way of thinking that is un-compromised by emotion or impulse
  • Competitive - trading is an immediate and structural feedback loop. Competing against yourself and your peers in the form of investment performance should make you want to be your best.
  • Thick Skin - you will make mistakes and you will take losses. Neither will be experienced privately. People will scold you on the floor for a mistake and everyone will see if you're down on the year. Have grit or you won't last.
  • Grasp of Game Theory - markets operate on their own laws of physics which act as their binding constraints. Market participants are still, for the most, human beings driven by greed and fear. Understanding the nature of the game, market participant needs, and the rules in which they have to play the game by goes a long way.
  • Self-Starter - there are plenty of jobs out there where there will always be "work" to do. Tasks will be endless and your ability to accomplish each task will define your career. Being a Portfolio Manager is not like this at all. At the end of the year, you won't have 50-100 tasks you've accomplished and can point to warranting why you deserve a raise. It's either you made or lost money. That's it. No ambiguity to it and singular in purpose. Being a portfolio manager is like being a business owner, you own your framework, your approach, and your performance. If your business sucks, no one cares and you're shut down.

Also, have never done a stock pitch and don't know where to begin on that either.

• People get bored easily. So brevity is key when making an investment pitch. If people are interested, they'll follow up with questions.
• So first rule of thumb when pitching an idea: don't bore your audience to death.
• Get straight the point with the following approach:

1. Investment Recommendation ("I want to go long/short this")
2. Catalysts ("here's why; 1-3 short points")
3. Target Return ("here's what I think I can make on this trade and over xyz period of time")
4. Sizing ("given the realized volatility of this security I'd likely put abc amount of risk on")
5. Risks and Stop Loss ("If I'm wrong, abc is probably why. If this were to occur, I'd stop out of 50% of my risk at this price and the rest at that price")

• Ideally the pitch ends up becoming a dialogue where you can elaborate further on your idea. Otherwise, the above roadmap should help you keep things concise while still communicating your investment idea effectively.