Has anyone ever successfully gotten a PM offer stating strong but realistic Sharpe ratios to bus dev at multi manager funds (ex: above the bar type performance that gets you more money at a MM)? Especially if for the type of strategy where the threshold for performance is lower.
Have actual good performance, but the bus dev people seem not to understand.
Is this a problem for all bus dev, or just the bad ones? Is there some alternative to just 2x-3x-ing it?
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Based on the most helpful WSO content, discussing Sharpe ratios and their impact on business development (Bus Dev) roles, especially in multi-manager hedge funds (MMHFs), is a nuanced topic. The Sharpe ratio, a measure of risk-adjusted return, is crucial in evaluating the performance of investment strategies. A strong Sharpe ratio indicates that a portfolio manager (PM) is generating higher returns relative to the risk taken, which is a key metric for funds when assessing performance.
In the context of MMHFs, where various strategies are employed by different PMs under one umbrella, showcasing a strong but realistic Sharpe ratio can indeed be a compelling part of a pitch to business development teams. These teams are tasked with attracting capital and explaining the fund's value proposition to potential investors. A high Sharpe ratio can signal that a PM is adept at generating excess returns without taking on undue risk, which is attractive to both the fund and potential investors.
However, the challenge often lies in the communication and understanding of these metrics. Business development professionals come from diverse backgrounds and may not always have a deep technical understanding of specific investment performance metrics. This doesn't necessarily reflect on their competence; rather, it highlights the importance of effective communication between PMs and business development teams.
To address this, PMs could consider the following strategies:
Simplification and Education: Break down the concept of the Sharpe ratio and its importance in layman's terms. Use analogies or visual aids to help business development teams grasp the concept and its relevance to their conversations with potential investors.
Contextualize Performance: Instead of focusing solely on the Sharpe ratio, provide a broader context of your strategy's performance. This could include comparisons to benchmarks, explanations of the risk management techniques employed, and how your strategy fits within the broader fund portfolio.
Collaborative Approach: Work closely with the business development team to craft narratives around your strategy that incorporate the Sharpe ratio as part of a larger story of success and risk management.
Feedback Loop: Seek feedback from business development on the types of questions and concerns raised by potential investors. This can help tailor your explanations and materials to address common points of confusion or interest.
The issue of understanding and leveraging Sharpe ratios in business development conversations is not unique to "bad" teams but can be a common challenge across the board. The key is finding effective ways to bridge the gap between technical performance metrics and the strategic narratives used in business development and investor relations.
In summary, while a strong Sharpe ratio is a powerful tool in a PM's arsenal, its impact in business development conversations depends significantly on clear communication, education, and collaboration between PMs and business development professionals.
Sources: The rise of business development roles in the industry, How can we do better?, Business Development Versus IB, Why don't banks just hire more people?, Banking and Business Development
How much is "strong but realistic"?
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Given the speed/breadth/capacity of the type of strategy I have in mind, 1 is the goal post (at least internally once you have the job, know from first hand experience at a multi-manager).
I was quoting to bus dev marginally above that, and they commented that it was 'low'.
It is definitely low, it might be realistic but it's definitely not strong.
If they can hire someone that will deliver 1.5-2×, why would they bother with a 1×?
Frankly even from your perspective, it implies you're going to hit their drawdown limits within the first couple of years. Doesn't sound like a strategy suited for a MM.
This is very common with smaller prop shops largely because they have limited capital and will not fully fund your trade unless you’re hitting certain risk adjusted return metrics. Why would they fund your trade hitting a 1.5 sharpe when they have other trades that are hitting 3-4?. I’ve never seen this requirement from large hedge funds.
This is usually a big red flag especially if you’re compensated on a formula, because if you don’t get the capital then you can’t make sufficient profits to earn a good compensation. Going to a new fund and experiencing a sharp drop in profits even if it’s the funding fault will put you in a challenging situation where other firms will be skeptical about the “truth” about the decline in profits (ie there’s a small chance you just suck) which could force you to take a step back to a sub PM role.
There are other reasons to be skeptical about this requirement too because you don’t even fully know what kind of infrastructure they have. Literally every firm will proclaim they have the best infrastructure with the best OPs teams, which is definitively not the case. Imagine joining a firm with far inferior tech/operational processes/setup, and you’re not able to fully hit their sharpe targets because of the tech, then you’re totally screwed contractually, and you won’t be able to change shops without having to sit out on garden leave. And finally, just because you are hitting their sharpe numbers doesn’t guarantee you to fully get funded, they can always proclaim other external factors too. So this requirement does not go well in your favor and only can be used against you.
Sharpe 1 isn't that bad actually if it's consistent over multiple years and if it is based on actual performance. If it's some attribution/backtest performance then it's quite low I think.
I've never been in your shoes but I can see majority of people claiming much higher Sharpes than reality. How are they going to check anyway? To me it sounds like you can just cook up a great yet believable chart/table and back that up some reasonable investment process. With some good bullet points in your resume you sound like a superstar future PM.
A couple of variables not mentioned yet are: actual strategy type, strategy capacity, and how diversifying it is to current shop / existing strategies. If you have a more niche FI RV or Vol-Focused strategy then the expectations are going to be for a higher Sharpe based on how those strategies perform and lower capacity if you work out well (I'm generalizing a bit here, but true in broad strokes). If you do something more like directional macro, then a Sharpe in the 1.0-1.5 range is totally reasonable and shops will be comfortable with it given how the capacity is quite large (you can get ramped materially if you turn out to be great) and you are probably pretty diversifying if they are more focused on Equity L/S or FI RV. I don't have a ton of insight on Equities side of the business so just my two cents on the more macro-oriented strategies.
Edit to add: The way Sharpe will be interpreted will also vary based on other variables like length of track record, at a shop with similar risk parameters so that new shop has increased confidence it will function, cumulative $ P+L, et al...
The reason they filter on sharpe > 2 is because when you hire people with sharpe 2s you get PMs with sharpe 1s who have been lucky. When you hire guys with sharpe 1s, you get sharpe 0.5s who have been lucky. Remember you would not even have had an interview if you were unlucky. There's no way every single PM at these MMHFs can have uncorrelated sharpe 2 strats or the main fund returns would end up being a straight 45 degree line going to infinity.
This. At every blue chip platform there are maybe 10% Sharpe 2+, 15-20% Sharpe 1 and the rest are churning around 0
TLDR everyone lies and says they are Sharpe 2 when talking to BD
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