Q&A: SM L/S Equity Analyst
Hey Everyone,
I hope that all is well.
I am a L/S equity analyst at a $1bn+ AUM HF. My immediate prior experience was in large cap PE. Unfortunately, I can't offer much beyond that without sacrificing anonymity.
I wanted to carve out a few hours to respond to any questions on the typical HF interview process, what my job is like, what my work / life balance is like, etc.
I have derived an enormous amount of value from this forum over time, and it only felt right to give back to younger folks in the small ways that I can. I am starting this discussion in the PE forum consequently but everyone obviously is welcome.
Ask away.
Thanks for doing this. Coming in from PE, were your interviews more focused on your prior deals and coverage or stock pitches and public market dynamics? In other words, how polished/experienced did they expect you to be in public markets before going in?
Couple more questions if you have time, feel free to ignore:
-How long did the interview process take?
-Roughly how many funds did you interview with, and how did you determine the right fit on your end?
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.
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.
Thanks! Really appreciate the color.
Thanks for doing this.
Could you walk us through your research process at the HF and how that compares with the process at the PE fund?
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?
At $1bn AUM, do you have access to sell side research. If so, how often do you incorporate them into your thesis?
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?
Thanks a lot for taking the time again!
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.
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.
Amazing response, thanks a lot
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.
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.
Would love to hear your thoughts on career earnings trajectory as referenced in another response
^ bumping "hf careers earnings trajectory"
Of course. I am a total nerd, so please forgive me for the below as it is long and pretentious and – like a 201 college philosophy course – doesn’t answer the question as much as “teach you how to think about it.”
This is an optimization problem of several variables subject to certain conditional considerations and incomplete information. There also is an inalienable behavioral component as not everyone weights the same outcome equally and success in your career is a large but not total contribution to a life well lived. I approach this problem from both the SM and MM analyst’s perspective as I think it will help people think through what the right path for them is:
On first pass, it’s easy to think that you’re maximizing average career earnings (μ) against the risk of getting fired in any given year (σ). It immediately becomes clear that this game has conditional considerations, namely what happens to you if (after) you get fired (e.g., get a new job of same tier, get a new job of lower tier, death, etc.). Here is how I think about these conditional considerations for both the SM and MM analyst. You should place lower weight on how I think about the MM role as that hasn’t been my experience to date, but I have a number of close friends in those seats so I’m not totally ignorant:
SM Analyst – Say you’re at a large blue-chip fund, like the ones that are frequently discussed on this forum. All of these funds have different durations, processes, and “special sauces” so they’re a lot less fungible than people tend to think. If you get fired from your job at one of these funds, I think it’s actually a lot harder to join a “similar” SM fund relative to what most people think and you can check LinkedIn to get a sense of the actual likelihood. You’re not “not employable” but you’ll likely have to sit out of the game for a few months to re-recruit (which is why you should try to build as good of a network as you can regardless of how good your seat is) and you’re probably moving down market to a lower AUM fund (read: comp compression very likely). The gamble you’re taking is which fund has an interest in you, but you should have a lot of information to make that decision as you’re really in the driver’s seat. I think it’s hard to move again if you blow up at fund #2.
So keeping these conditionals in mind, we start to think about the earnings trajectory in a vacuum:
SM Analyst – You usually have perfect first year visibility into total comp because the fund gives you a guarantee. As I noted in another response, you should think about this number as a high probability base case rather than a floor with a ton of update. People new to public markets generally take 6-18 months to ramp, so the logic is that the fund de-risks your ramp / makes a fixed investment in you upfront then harvests on the backend. Experienced hires sometimes get guarantees too but I haven’t been in this position so can’t speak to it with confidence. After Y1, there is a very wide range of outcomes – not only in how the fund itself will perform – but also how you get paid in each of those different states of the world. This is the imperfect information that I spoke to at the start of this (what has now become an) essay. Comp structures range from 100% discretionary – where you have no visibility into your comp, aside from a “vibe” on good year = good bonus, bad year = bad bonus – to 100% algorithmic where the variables could be individual PnL, team PnL, fund PnL, etc. Most of my SM friends have some hybrid model where part of their pay comes from a discretionary component and an algorithmic component. The discretionary component helps the analyst because (i) funds, generally speaking, want to build their bench of talent over time so you can “overearn” your contribution to PnL as a junior analyst who is still learning the ropes and (ii) there generally is more insulation in down / bad years where you can “overearn” a purely algorithmic model. The discretionary component hurts the analyst because (i) it’s discretionary and you’re subject to the whims of a PM / CIO who might not be perfectly objective, (ii) you could “underearn” what you would make in a “purely algorithmic model” in great years or years where your performance drove an outsized contribution to fund returns, and (iii) on a related front, your strong performance in a good personal year could get “netted” against the fund’s overall bad performance, which means your shit out of luck despite crushing it. Having said all of this, you’re probably going to be putting up M-HSD six figures to LSD millions in most years, but you’re generally not going to be putting up MSD-LDD+ millions as a result of the model.
So keeping all this in mind, we can now think about variance or the risk of getting fired, broadly understood.
The Podification of the Hedge Fund Industry – A friend of mine is a biologist and sent me an article the other day about this concept called “carcinization,” which is basically the tendency for otherwise unrelated species of animals to develop similar physical traits because they face similar environmental pressures. The most cited example is non-crab crustaceans that independently evolve a crab-like body over time. There is clear evolutionary pressure in markets caused by the proliferation of new techniques (e.g., trading around high frequency data) and increasing LP sophistication over time that produces a virtuous cycle where the winners accumulate more capital, increasingly are the marginal buyer / seller which shifts which trading strategies, and so on and so on. I would submit that there is basically “podification” of the industry. The mechanism seems to be that (i) the shift from active to passive and greater share of HFT / MM flows as a % of total flows has increased short-term volatility especially around typical MM catalysts (e.g., earnings, alt data release dates, etc.), (ii) SMs and MMs are judged on the same rubrics which heavily consider monthly / quarterly return variance and the extent to which total return is beta / factor / alpha driven, and (iii) legacy SM PMs who grew up before this regime change were forced to adapt to the new paradigm and many either refused to do so or lacked the true duration required to “see through” the higher short-term vol. Most of the SM PMs who have survived have changed the way they manage risk and shortened their duration. This is hard to see from the outside, but I promise you it has happened.
SM Seat, True Duration – It’s so hard to know which firms actually have any duration anymore and there is MASSIVE negative reflexivity from an LP standpoint (i.e., everyone appears stable until they drawdown and LPs start to run for the door). To stay in the seat, analysts need to (i) consistently pick the medium-term winners given their fund (in theory) can weather longer-than-expected cycles, short-term retarded moves, etc. and (ii) overall fund performance is solid. If both are true, then congrats you have an awesome seat with among the best job security in the industry! You get great but not exceptional comp and much higher than average expected tenure. There is alpha in these seats. The people who work at these funds also get to do “real investing” and not have to sweat the quarters as much, though you’d be silly to think that they’re not focused on positioning and skew into earnings.
SM Seat, New Regime – These are funds that are basically a hybrid of the old SM model and the current MM model. This is the clear future of the SM industry in my view, and I think that these seats are the best in the industry as a result unless you’re working at the top few pods at the tier 1 platforms. Hard to know for sure but I think that these guys are making more comp than the SM seats with true duration but probably have higher risk of getting fired each year – as a consequence of having to be right more often on harder to project things like quarterly earnings – but less so than the MM seats. There is alpha in these seats as well.
SM Seat, Everyone Else – These are some of the worst seats in the industry, full stop, and these analysts should try to work at any of the other seats that I list. These funds are a dying breed as a first point. Analysts who work at these funds don’t get to monetize the right tail (which matters a LOT for expected value analysis) and face MUCH higher getting fired risk because they’re invariably going to get blown up on a name at some point. There is negative alpha in these seats.
If I was to rank, it would be: MM seat at top pod, top platform > SM Seat, New Regime > SM Seat, True Duration > MM, Everyone Else > SM Seat, Everyone Else.
As you are now at an SM do you get points in the fund?
I was offered points in a 1B SM out of undergrad and ended up going to one of the large multistrats and won’t get points for a very long time. Regret my decision a bit in hindsight.
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.
Didn’t go to a pod, went to one of the large event driven Multi Strats. To caveat points would be after Year 1. Will stay anon but made decision on brand name.
Thanks for doing this. Couple of questions:
Cheers
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.
How is job security compared to a MM fund?
I just replied to an earlier question with some considerations but let me know if anything else
I'm in MFPE, but the last time I recruited was 3 years ago for the internship. What type of interview Qs should one expect to enter HF processes outside the basic "why HFs, pitch a stock, what is the S&P doing, view on Fed etc."? How would you prepare for the non-basic Qs?
How much gross P&L have you generated in what length of time?
Somewhere between $0 and the current cap of $CME
Thanks for doing this!
I want to know how receptive are HF for post-MBA IB associates? I know undergrad ->IB->PE->HF is the norm, but is there an alternative way? It's also tough for post-MBA IB associate to break into even PE, so is there even a slight chance for anyone? Does HF have a preference in B school?
I have a relevant experience (MBB+MFPE) but it's different geography so discounted it
ima stupid college senior monkey that scrolls this for fun with NO IB offer but this thread is actually so informative about what’s it’s like
thanks for doing this
Good luck in your future endeavors, whatever they may be
I come from the controversial viewpoint that you cannot be L/S generalist bc finding upsides on long's require specialist type of understanding that is quite unobtainable for those who are entry-level analysts. Curious if you have a view on this.
Do you have a view on the SM vs MM distinction for merger arb / event-driven? Would the same dynamics you described in your previous answers (i.e., the pros and cons of SM vs MM, expected earnings, focus on risk vs expected value investing, etc) apply?
What are your thoughts on pivoting from credit to an equity L/S platform? I'd imagine pretty tough, but for someone that's very passionate and targets more of a value investing fund, I was thinking there could be a decent angle.
Then generally, what do you of picking credit hedge funds (if you have an opinion)? I think private credit / private hybrid solutions will be more sustainable given the flood of capital into liquid credit has really compressed the risk return profile, especially with higher octane distressed strategies, but curious to get your thoughts.
Thanks for taking the time — reading through this was really informative.
1. Any advice on breaking into the game straight out of UG without a traditional background, but have a genuine Interest over markets? Besides going down the Twitter rabbit hole, what would you recommend?
2. I’ve always enjoyed being a generalist, but I’m also easily distracted by whatever shiny/intersting thing is happening in the market. I’ve had some really good luck and, at times, what I’d call decent market intuition - essentially being the “vibe guy.”
How does a fund typically perceive that? If it’s not necessarily ideal, how would you recommend translating that “feel” into something more concrete that can persuade people/strangers to trust my judgment/give me their opinions/attention?
3. Is it sensible to offer to work for free for people I don’t know, primarily as a way to learn, build relationships, and get more exposure to how good investors think and trade?
Thanks again
Not interested at all in PE. Do I have to lateral from my amazing (good WLB/ lean teams / learning a lot in specific sector) to a top firm just to recruit for MF PE to have a shot at HF?
2+2 sounds miserable.
Amazing advice, thank you for sharing your deep knowledge!
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