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: How long did the interview process take?

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.