Q&A: SM L/S Equity Analyst

There is a lot here, and I am happy to unpack the follow up Qs:   

Q: Coming in from PE, were your interviews more focused on prior deals and coverage or stock pitches and public market dynamics?

There is so much variance between interviews, so it's hard to be overly prescriptive. Short answer is I was asked about each of them. I remember questions on everything from stocks to industries to my deals to my PE experience to mental math to my relationship with my siblings. I discuss some considerations you should have in mind:

• On the pitches - You will be asked to pitch a stock in every process, and most interviews. The standard advice is to have 2-3 ideas, but I found it better to have one really solid idea that you know cold. Try to divert to this pitch as much as possible. People love when they're pitched a stock short because it's perceived as harder than a long. My advice here is to lean on your PE experience and choose assets in industries that you know well, since it lets you speak with much more conviction and nuance. This isn't going to mask over a bad idea but it will give you a relative advantage over someone learning everything cold. Or you can get an idea from a friend at a fund, that works too. 

• On public market dynamics, the bar is probably lower than you'd think. My answer is mostly just know what's happening in the world / read the cover of the WSJ everyday. I'm never going to care if a candidate doesn't know what % of income gasoline represents for the bottom quintile of US households, unless they're way off, but you're going to look like a moron if you don't know, directionally, where rates are (and why), what the fed is doing (and why), etc. 

• On coverage, I was transparent that I was a generalist in my prior role and no one seemed to care. What you do need an answer for is why you want to work in the coverage for which you're interviewing. Just using industrials as an example, this could be the diversity of business model, the ability to cover both stalwarts and cyclicals, etc. Don't lie or come across as disingenuous, people have a great nose for bs in this industry.  

Q: How long did the interview process take?

Depends entirely on the firm. I was in one process that ran over a month, one that was a few weeks, and one that tried to compress everything into a single week. I'll let you guess who that last firm was. Worth having your pitches ready before pressing go rather than in progress, because you don't control the pace once you start.

Q: Roughly how many funds did you interview with, and how did you determine the right fit on your end?

I ran with four processes, though it wouldn't be fair to say I pursued each with equal effort. There are only ever so many funds recruiting at one time, so how many you end up in is partly luck of the draw.

On fit, I think most people start off with some box-checky considerations as it relates to economics and the CIO / PM. Economics being AUM and AUM / IP, but more importantly comp evolution. Once you've made it through a process, I'd really try to focus on how exactly you get paid. CIO / PM being how they've invested through cycles, what the 2020-22 era looked like for them, that sort of thing.

The main piece of advice I'd offer here is that you're really choosing under whom you work, be that a PM or a sector head type of person, as much as you're choosing the fund itself, and probably more to be honest. So what you, as the person interviewing, are trying to figure out is your personal chemistry with your boss. You'll try to get a gauge for how they'll react in drawdowns, how much credit they're likely to give you / how much they'll pay you when your ideas work, how they're likely to treat you when you make mistakes and get things wrong, etc. It's really hard because reference checks only go so far, but then again making decisions with limited information and intuition is a large part of success in this job anyway. 

Hit a few, but got tied up. Will be back for the rest

Q: In a SM, is there a single CIO who makes the final call on all investments and the rest of the team are analysts that feed ideas to CIO?

It's always more complicated than that, but in essence, yes. At a lot of SMs, there are senior analysts / sector heads / partners who sometimes have some degree of trading authority.    

Q: At $1bn AUM, do you have access to sell side research. If so, how often do you incorporate them into your thesis?

Yes. Access isn't really a function of AUM so much as of what you pay in commissions, and any institutional fund is paying enough to get the published research, time with the analysts, the conferences and corporate access. What scales is analyst attention and where you rank for 1x1 slots at conferences, which I think also gets allocated by wallet.

On how much goes into the thesis, everyone has their own process. I generally don't use the sell side that much sparing a few analysts who I think are thoughtful / know their space cold / have great channel relationships. I probably use them too sparingly to be honest because those relationships can matter and I could get more leverage from my own process. 

I read sell side research every day but usually never for their rating / price target / thesis. What I'm looking for is the key debates in a name and unique data points / management access. Here are the considerations: 

• The Debates in a Name – For sure the fastest way to learn what the market believes and which two or three questions it thinks decide the stock. Buyside folks are generally better in quality but they're comparatively less accessible and everyone likes to talk their book anyways. You can't hold a variant view until you know what you're varying from, so this is a key use for me.

• Proprietary Analysis – Some analysts do genuine work (e.g., survey panels, store checks, supply chain mapping, pricing databases, franchisee surveys). Worth reading whatever conclusion is stapled to the front of it.

• Management Access Color – They see management far more than we do, on non-deal roadshows and at conferences, and the tone and emphasis they report back is useful even secondhand.

• Estimate Detail – For the most important KPIs / EPS, the buyside bogey matters more than consensus estimates. Sometimes, you'll realize that sell-side has mismodeled a line item that isn't a key operating driver but has an unusually large impact on EPS (e.g., pension mechanics!). In theory, the market should see through a non-core beat / miss, but in reality the headline number maters a lot, especially when the print drops, and knowing this can give you a bit of a leg up.   

• Post-Print Callbacks – Quick read on how the quarter landed with everyone else, which is a separate question from whether it was good.

• Ramping - The highest value moment is picking up a name cold, where two or three initiations get you up the curve in a day. After that you mostly stop going to them for the view and come back for the data and to see where the debate sits. 

Q: Do you think it’s possible to economically raise a fund in London/NYC with $100m AUM? Does your shop use leverage? If so how much leverage?

Can't comment on either unfortunately. 

Q: What kind of comp expectations came with your offer?

Generally, funds will guarantee your first year total comp. You should think about this more as a high probability base case, rather than a floor with a ton of upside, unless the fund has a massive year after you joined AND you were able to ramp quickly / start ideating if not outright contributing. The market for someone with 2-4yrs IB / PE is ~$750k currently for someone joining, an an example, Viking.   

I spent a good amount of timing walking through what comp evolution could be over time as I mentioned in an earlier question. I have a lot of thoughts on how to think about hedge fund career earnings which I can share as a follow up if interested.  

Q: What's the best way for someone from a large cap PE background to prep for HF interviews?  Any specific resources / courses?

Maybe not the best thing, but the first thing is really making sure that this is the right path for you, that you love markets, and that you get turned on by the idea of creatively solving problems, one after the other. A lot of people think they love it because they're interested in markets and manage their PA somewhat actively, but doing this job to any approximation of excellence requires full contribution from heart, soul, and mind. It's the hardest thing that I've ever done intellectually and emotionally from a career standpoint, and yet I can't imagine myself doing anything else with (at least the start of) my career. 

That's not the answer that you're looking for, so I'll offer some points more down the fairway. I didn't do any of the courses or use specific resources, so can't offer an opinion there. I've been passionate about stock picking for a long time, so it was really just about finding some ideas to pitch and being able to talk about my resume / story / why I want to do this job, etc. 

People who made it to PE are the people who figured out PE recruiting, and IB recruiting, and how to do well in college, and how to get into a good college...basically you're very good at identifying what you need to do and work at it enough to success. HF recruiting is different because it's hard to understand what "good" at the job looks like and therefore how you can prepare for the job, much less the interview, which tends to freak people out. I'm saying this because most people feel this way. Preparing for the interview is something that you do over years. 

As you think about building the skillset to succeed in a HF role over your time in PE more broadly, I think the best advice is: 

• Find time to annotate every memo that goes to IC with your own questions and then see where the IC members take the IC discussion. What was a major incremental area of focus? What did you think was important that the team didn't spend time on? These people aren't gods gift to earth, but they've been investing for a while and have a lot of perspective to share. You'll also get a lot of practice thinking really critically about well flushed out (but maybe not well articulated) theses and will start to develop pattern recognition / discernment of your own. 

• On your own deals, try to take on as much incremental underwriting responsibility as you can over time. You need to be good in excel / data cutting, but what matters more is building the intuition of the minimum amount of work to argue the thesis and the types of evidence you can assemble to prove / disprove the thesis. Even if you don't get the chance to step up on your deal team, you can be doing this in the background. 

• Make 2-3 relationships with folks at hedge funds as early on as you can. Target alums from school or your IB / PE network. You probably can't offer much, so just ask to take them to coffee or connect over the phone. Come across as endearing, earnest, and down to earth. I've always found that people are much more likely to pity us than we think.

Q: What were your hours like when ramping? What about now?

I was shocked by how incompetent I was during my first few months on this job. I came in with this sense that my general corporate finance knowledge and PE due diligence kit had a large overlap with the typical hedge fund process. They did not. It's a MUCH more inference heavy job where the work isn't so much laying out 100 pages of numbers, which really is a mindless exercise, but rather spending a great deal of time reading between the lines of the few numbers that you do have to infer what is coming next. It takes a lot of time to get used to that and train your brain how to look for what matters and how to shortcut to the answer as quickly as possible. My writing also sucked and it took me some time to be able to express my ideas succinctly. You also have to learn a coverage universe too. You also also have to figure out new ideas while monitoring existing ones. You also also also have to figure out how much you need to stare at the screen all day. For someone coming from PE, you're basically faced with ramping on a number of orthogonal skillsets all at once which is very demanding. 

I was working basically 24/7 for the first 6mon at least to understand how the business works and learn my coverage. Most of the analysts I know did a similar thing, some figuring it out sooner and some figuring it out later. These hours are "denser" that in PE because you can't turn your mind off when you're going through a model. You basically need to be locked in for the whole time, which for sure was exhausting. 

I'm now at a point where I'm probably 8-7 M-T and 8-5 F with maybe 5-6hrs over the weekend. You need to be up early to process / communicate any checks that came in overnight as you need to be able to react at open. That's maybe ~60hrs / wk? Flexes up with earnings and down in the summer. I like the rhythm that I've settled into and the flexibility to be social during the week / weekend. 

Q: Might sound like a silly question but what does a HF model look like? Key differences in modeling vs what you did in PE?

This isn't a silly question at all. I had a similar thought before I started haha

There is a range. You need a model that allows you to granularly forecast quarterly EPS. You can do this in either a 25 line model or a 500 line model. I honestly have seen both and all that matters is your command over the numbers at the end of the day.

The drivers of EPS are a Pareto distribution in that only the top 3-5 things accounts for 85%+ of the variance between analysts. You therefore want to spend at least 85% of your time on those 3-5 things. Generally a lot simpler than PE models but involved enough to feel very confident in the numbers. The analysis supporting the model is obviously a different story.  

U got gp out of college and took pod? Dude…

No points for me yet, but a large % of comp is personal / team's performance. The fund has to be up, so wouldn't call it algorithmic and there is a separate, purely discretionary component as well.   

Unless you were a prodigy, and therefore would be a rainmaker no matter where you went, a fund offering pts to someone out of undergrad is a bit of a red flag to me. However, it's hard to square that against the $1bn AUM figure you mentioned. Hard to offer an opinion without your full context. 

I can think of reasonable arguments to join a platform instead, but real economics on $1bn AUM is something most analysts only dream of. 

These are great Qs, appreciate your offering them and for advancing the discussion here. I'll try to be in touch at some point his week 

On (1), I was always gunning for HF and always viewed PE as a stepping stone to get there. I don't think you need to do 2+2 anymore to do HF. Depends on the shop, but you probably don't need more than a year of IB/PE anymore. 

On (2), I don't mean to sound like an asshole but if you didn't gravitate toward stocks in college or some other point, I don't think that this is the career for you. You're competing against people who live and breathe this stuff every day, and truly love it / couldn't see themselves doing anything else. Having said that, anyone can learn anything and someone will give you a shot if you work your ass off and are smart. You just really need to make sure that this is for you. 

I was always interested in stocks but got a lot of help / learned from HF analysts while I was still in PE in terms of how they think about stocks. By that I mean the language they use to describe the set-up, the two minute drill pitch, and the skew / risk vs. reward / valuation and returns framing. That is the single most important thing to get exposure to other than what you'll pick up in the normal course of your current job.   

I just replied to an earlier question with some considerations but let me know if anything else   

Good luck in your future endeavors, whatever they may be