SM to Running Capital?
I'm at a crossroads here and was wondering if the more tenured individuals could help out with some objective/raw guidance. Using a throwaway account to not be doxxed.
Right now, I'm an Analyst at an east coast ~$1B AUM single manager (L/S net long with a decent emphasis on the short book). Pedigree of the shop is a tier 2 tiger grandcub with solid returns. Been here for 7-9 years and I've been relatively successful in the seat. I gained access to carry early on due to some decent trades and research quality, ending up with somewhere of a net worth of mid to high single digit millions. In my mid 30's, so not a spring chicken.
While I think that the seat overall is highly desirable (there's a reason why I've stayed so long), I'm starting to yearn to have autonomy and manage my own risk/pnl. Due to the structure of the fund, I have no track record (typical) and there is no chance of opening up a sleeve here.
I've come to the conclusion that there are 3 different options:
1) Go to another hybrid/multi manager that isn't one of the big 4 pods and allows me to run net long. There are supposedly shops out there that have multi-strats and aren't as stringent of risk/net requirements. Wouldn't have to be running money from the getgo, but I'd be willing to swap to these types of seats if a future PM seat was up for grabs. The benefit here is clear: I can keep doing what I'm doing and raising capital would have less friction as the ops/marketing side would be mature/stable/scalable. Am I dreaming here or are there a few places that have this type of model? Any standout shops?
2) Run my own money in a bootstrapped launch. Raise a small ($10-15M) amount of outside capital (friends/network/family, not institutional) to start, build a 1-2 year track record then market it to institutional clients. Would be "opex light" in the sense that I wouldn't go all out on legal//CFO/ops/marketing but rather would outsource this for what I think is somewhere around $75-100k/yr, with initial startup costs of roughly $60-70k. I've asked peers about this and these numbers seem about right. While running the majority of my own capital, a modest year (10%-20% return) would still yield an increase of my net worth by nearly seven figures and I could perhaps have the carry/fees from the outside capital to pay for salary/expenses. My thought is that if I can't raise more or break into institutional size, or I have a mediocre track record, I could always go back to another fund (pod/SM?) My partner makes plenty of money, so a year or two living off of their salary would be fine. How crazy does this sound?
3) Go the pod route. While I'm a generalist, I could refine my coverage to 30-40 stocks in related fields that I've covered for years (consumer/tmt). I think that I would want to work under a tenured PM at first as an Analyst (don't care what the title is) and ideally/hopefully generate enough PnL to become a PM myself. It seems as though the SM>pod PM swap has higher risk of failure compared to the more progressive approach. My main fear here is clearly failure. It would suck to have to hop around every 2 years at a few shops, then end up like roadkill that's been ground down, despite pulling in a few more bucks. I think that the process is not that different than what I do today (I trade a fair amount with duration of 3-6 months for a lot of my names, with core longs/shorts staying in the book longer), but there is less leash for sure.
Can anyone point me out to what might be ridiculous/realistic ideas, or what they've witnessed?
This is a horrible fundraising environment and you have the type of seat most (including myself) would kill for. You should stay.
-Do you think that fundraising will remain horrible in 2-3 years? Because that's when I'd gun for the scale up. Lots of funds shuttering now and as others regain back to their high water mark, could lose assets back to emerging managers. PE might see some rough years ahead as they will need to exit losing positions, marking down their books and creating more liquidity for public strats (I might be delusional here).
-While you're trying to level back into a role like mine, I'm also looking to level up. You're saying don't level up, but sit tight. The problem with that is, if I sit tight for too long, moving to another manager/fund becomes increasingly more challenging. My value decays/is in a sweet spot so in another 5 years or so, certain doors that are open now would then be closed (someone could correct me if I'm wrong). I might have enough to semi-retire, but I might not as well.
I do think that the fundraising environment will be better in 2028-2030. PE falling out of favor is going to be great for fundraising in other asset classes sure, but the rise of quant strategies & low cost ETFs/index funds make vanilla equity L/S less attractive, especially if you're an "emerging manager" just doing that. Any new allocator capital even remotely interested in that is going to allocate more to established equity l/s funds, especially one that's a tiger cub grand child. I don't understand why you'd want to move to a new fund.
Have to throw in that despite not being in Structured Credit, that's the asset class I'd be trying to start a small fund in across PE, VC, equity l/s, credit l/s, distressed, real estate, etc. It's in an interesting sweet spot.
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You’re right, the litany of analysts from SM that have moved over to MM over the last decade all suck and none of them were in good seats making 7 figures lmao
OP - the only thing I will say is 1) talk to people IRL 2) take comments from this forum with a grain of salt - majority of the people have less experience than you and work at worse funds than you and simply are not who you should be taking advice from
You know you’re soft when you post under an anonymous name yet still have to go back and delete your post
Honestly if you want more, you're going to have to switch at some point, but you already know that. A few thoughts below.
Drawdown limits can always be managed with position sizing, but stylistic changes are slightly harder to implement and will take time to adjust. Find the platforms that won't force you to take more gross than you're comfortable with (e.g., Citadel and BAM are known for this, MLP a bit more flexible, P72 not sure). If you do choose (3), you'll likely get a decent guarantee that will de-risk the move somewhat for you.
At the end of the day, you need to make this choice for yourself. Both staying and leaving (to various exits) are valid options. Plenty of people stay on the course that you're on, and most of WSO is biased that way as well. However, if you don't scratch that itch at some point, you may regret not giving it a shot later.
What's your thought on going to (2) first then (3)? Would the guarantee be worse because I'd arguably have less leverage? I'm wondering what your thoughts are on doing this, rather than the reverse, which I'd agree is more conventional.
Regarding over grossing - how does that look? Does it mean that modest success is then met with immediate access/push to capital/leverage, increasing vol and less agility, ultimately increasing risk of failure? That would be helpful context.
What do you think of holocene/freestone/hudson/non-big4 pods?
I think realistically, if you go (2) first it's highly unlikely that (3) will still be open to you if you fail (e.g., unable to raise > $100mm). And if you do (2) and succeed, you won't need to unless you get tired of fundraising or something. The headlines you see of PMs closing up shop to go back to the mothership are already guys I would consider to be moderately successful (i.e., AUM > $250mm), and I'm pretty sure even those guys are getting screwed on terms coming back.
Right now, you're in the position of maximum leverage and the way to capitalize on that is to extract a large guarantee from a platform. If you do (2) first, you're basically giving away all your bargaining power.
It's not just modest success leading to more gross than you can handle at the moment, although that is a problem. I'm more speaking to the fact that some of the platforms have realized it just doesn't make any sense to allocate to a PM with less than $X capital or $Y annualized volatility because having a bunch of small mediocre PMs who just net each other off dilutes returns in the pass-through model and no one is really big enough to move the needle even in a big year. The thought is basically 'Can this guy scale to $1bn gross / $50mm vol? Higher than that? If not, it's not really worth our time.' So, you basically need to have clear line of sight on how you intelligently grow your book over time, or work under a larger PM who does have that plan, and you play a small part in that growth.
Seems like 3 is the clear choice to the PM path. 1 as well but seems unlikely.
I know somebody who did path #2 and it seems fulfilling, albeit challenging from a business perspective. Generally, institutions need you to be at least $100M in order to allocate to you, and going from $20M AUM to $100M AUM is no joke and will take serious commitment and a strategy that is conducive to AUM growth. Ultimately, if you think it would make you happy and you’re confident in your abilities, it could be worth pursuing.
(3) makes no sense. Why would you go be a pod analyst? You could be a pod pm likely. Don't take some intermediate step towards managing risk if you want to manage risk, you're just introducing uncontrollable risk to your career in having new PMs. If you have a very strong idea of the strategy you want to run you should probably just try to raise more money and strike out on your own. Likely can always go back to (1) and (3) options if it doesn't work.
You will be in a much weaker bargaining position coming from a failed startup vs established SM for any kind of established platform - more common to see raising ones own $100m fund as the last resort. But agree OP can probably get a starter PM seat vs analyst at a pod
I understand your sentiment, but I can also see the merit in trying out a senior analyst w/ carve out type of role before going straight to a sub-PM or PM deal (assuming all these options are on the table). Gives you some time to adjust to the model before putting a target on your back when you get a payout. Most people don't do very well with the fairly dramatic stylistic shift that will be necessary in moving from OP's current fund to a platform, even one with more a more generous risk/drawdown framework. Learning for 1-2 years from PM who grew up in the model, or who already has several years of experience, can help OP navigate common pitfalls.
What are you clipping per yr on avg right now? And how stable is the core comp? Are you in position to grow your % of pts etc.
without knowing your comp trajectory , I’d personally be hesitant to leave for a pod unless you got a really good y1-2 guarantee as a startup PM. There are a ton of pod analysts who probably would love to trade seats with you
As for starting a fund, you’d have to be comfortable it being a -ev decision dollar wise, but could be really fulfilling if you want to take on more entrepreneurial path.
What sort of freedom do you have trading your PA? Could use that to scratch your itch, while you clip your SM coupon until you hit your FU number to just run your own money without worrying about fundraising
I'm in a similar position as you so totally understand the risks/tradeoffs.
If you haven't seen this check out Yale's new program to help launch emerging managers. Will obviously be quite competitive, but great to see them doing this.
https://investments.yale.edu/prospect/
Forget about institutional standalone launch as you don’t have a track to begin with. Terrible environment for launches anyway.
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