Starting HF career at a New / Small Fund
Have an opportunity to join a recent (past couple years) HF launch that manages $500M+ AUM. Background is IB / and some PE. Founders come from much larger funds and seems like training will be good. Question is how hard is it to move from smaller funds / less well known names in the HF space. Is branding as important as it is in PE? What are the key diligence items I should figure out?
Starting your hedge fund career at a smaller or newer fund can be a great opportunity, but there are some key considerations to keep in mind. Here's what you need to know:
1. Moving from Smaller Funds to Larger Funds
2. Key Diligence Items to Investigate
Before joining, you should thoroughly evaluate the fund and its potential for your career growth: - Founders' Background: Since the founders come from larger funds, assess their track record, reputation, and ability to attract capital. Their experience and network can significantly impact the fund's success and your learning opportunities. - Investment Strategy: Understand the fund's strategy and whether it aligns with your interests and skills. Is it a single-manager fund or a multi-manager platform? What’s the focus—long/short equity, macro, credit, etc.? - Training and Mentorship: Confirm that the training will be robust. Smaller funds can sometimes lack structured training programs, so ensure the founders are committed to developing junior talent. - AUM Stability: $500M+ AUM is a solid start, but investigate the stability of the capital. Is it primarily from long-term investors (e.g., pensions, endowments) or more volatile sources like HNWIs or family offices? - Compensation Structure: Smaller funds often have more volatile pay structures. Understand how bonuses are determined and whether they are tied to fund performance or individual contributions. - Exit Opportunities: Assess whether the fund’s strategy and your role will allow you to build a transferable skill set and track record. This is crucial if you plan to move to another fund or start your own in the future.
3. Additional Considerations
Final Thoughts
Joining a smaller fund can be a fantastic stepping stone, especially if you’re given meaningful responsibilities and the chance to develop an investment identity. Focus on building a strong track record and sourcing ideas, as these will be your most valuable assets in the hedge fund world.
Sources: The Hedge Fund Experience - Good, Bad, Ugly, https://www.wallstreetoasis.com/forum/hedge-fund/the-hedge-fund-experience-good-bad-ugly?customgpt=1, Q&A: HF Analyst @ $5bn+ Fund - Breaking In and Transition to Risk-Taking Role
Besides fund performance, it's important to have a sense of investor concentration (do they have 100 LPs each $5m, or does 1 single LP hold $400m which is a big risk if they bolt).
Might also want to know average fees paid to figure out fund economics. Is every investor paying 2+20, or is there major discounting going on.
Thanks for the reply! I know they have 2-3 larger seed LPs who I think make up at least 50% of capital. I figured that was normal if they were going to leave their old finds?
If you have a good 2+2 background, do not do it. Start with a big fund first...then take your risk.
Thanks for the reply. Have a 2+2 background but my current options are really a tier 2 pod (Walleye/Jain/XP) or this. I’m more risk inclined and I’ll have points in the fund which I really like. The founders also come from a much bigger fund and had a great track record.
I’m more interested in understanding how hard it would be to move to those bigger funds / pod shops down the line if this fund doesn’t scale. I assume my training would be better at this start up fund than the average tier 2 pod PM
Would it be harder to move from 1 year a fund like this vs from PE?
It will always be easier moving from public markets seat to public markets seat. Do not drink the retarded PE Kool-Aid. PE does not teach you to invest. I don't understand why this is lost on the WSO monkeys. Literal monkey level IQ. Move to public markets ASAP if you want to do publics. Period end of story, no-brainer choice. The emerging SM vs mediocre pod choice is much more difficult and depends on a range of things that have been discussed well ITT. If your contract will enumerate your percentage equity in the fund, that is as good as you will ever get from an emerging HF
Don't do this. Join a pod.
Even than avg tier 2 pod? I guess my thought process is that pods are always hiring so should be easier to go from start up fund to pod vs the other way if this fund doesn’t work out?
why is $500mm SM obv worse than pod? That is $1-1.5bn of GMV with leverage and no risk limits, so incentive pool should be better than avg pod? plus management fee
As someone who started at a small fund and was even lucky enough to see it grow into a larger fund, I cannot stress enough to be VERY careful. I’m leaving and don’t carry regrets but if I had hindsight 20/20 I would have done things differently. I’m not saying never but please exercise caution.
You need 3 things to make it worth it and you rarely get all of them.
1. Ability to scale / have good economics. At a small fund it’s harder to make it worth it unless you see the aum scaling over time. You need the founder to be either very good, good at raising or ideally a combo of both. Most aren’t. I’ve known good managers who lost lp’s despite good performance and couldn’t raise. Exception would be made if you have great fee structure, but it’s uncommon. So ask.
2. Training. I cannot emphasize this enough. A lot of small funds will make you do busy work that helps them and advances your career negatively. You don’t want most of your learning to be done on your own. It breaks my heart seeing good guys and girls who have an issue at a small no name fund, quit/get let go and are totally not hireable because they don’t have baseline skills/ nobody will want to train them later.
3. CIO autocracy. Let’s just say you get great training AND you somehow raise money. You also have little leverage. With lack of formulaic comp you can end up way underpaid, deferred out, etc. You have no bargaining power. I only gained it over time and then subsequently left when my requests were not taken seriously.
For all these reasons, I generally would avoid. If you manage to find the needle the haystack though, congrats. It will feel amazing and take it as you could be a lifer for 10+ years. Just please be cautious. The good news with IB experience you can at least pivot if there’s an issue.
Very helpful! What do you mean by 'training' here? Is it about sharpening your judgement on when to buy/sell a stock? I'm assuming anyone who gets hired already has the mechanical aspects of the job like modeling on lock.
I'm an incoming MBA student looking to transition to HFs. How would you suggest improving on the 'training' aspect so I 'm ready to hit the ground running?
Don’t assume anything. And just because you have baseline modeling from IB won’t make you successful if you try and leave. People get rusty all the time or their shop doesn’t train them on how to actually model the way say certain pod shops or large sm’s like to. Beyond that, you need to learn how to actually work with and extract info from management teams and ideally build relationships which if you’re a junior you might not get jack. Sellside relationships, other buyside relationships, conducting an actual repeatable due dilligence process. All of this is relevant and if you are just tasked with basic 101 stuff or have zero structure it’s very easy to fall behind. Have had people walk into interviews completely not knowing basic stuff on how to pitch a stock (e.g. what is the catalyst path to getting paid vs. a regurgitation of random factoids on how the business is “cheap”). I know a guy who worked at a small shop and they just made him put together comp sheets, reformeatted sellside models and basic data analysis for names the PM got pitched by his buddies with zero other context and minimal work after that in most cases. Anytime they did it was across a crazy amount of sectors and market caps that this person never really developed any expertise in any (jack of all trades). That is an example of how you learn nothing concrete and don’t have training that will allow you to move to another shop.
How to get up to speed is live in the markets as much as possible. Interviews become way easier when you can naturally talk about key themes in your sector, events around certain names, and what you like and don’t like with specificifity. Do you have some models on names? Do you read a ton? You’re competing against people who do this day in and day out so try and emulate the relevant parts of what they track within reason as you won’t have all the same resources.
Look no further than this thread if you ever question whether we are at peak pod aka how much alpha is still left in that model if it is the only business model “worth joining” as a junior. (Spoiler: not much, obv caveat depends on strategy.) As per usual WSO is a great reflection of monkey brain behavior, which is to chase what’s worked for the past decade plus and assume it will keep working for the next decade as well. Finance overall is cyclical enough already, let alone MTM public equities
A rando PM at a shit MM platform with shit centralized risk mgmt and quant support is very rarely better than taking the right shot at a single manager startup fund. Above poster nailed it on the training part. In your first HF seat, training is all that matters. You’re viewed as mostly a fixed cost anyway so how well the fund does with or without you likely won’t be reflected in your comp no matter where you are anyway for at least the first couple of years. Shit pod blowing up randomly is far far more likely than shit LPs getting cold feet and causing fund to shutter. In both cases you’re in the shitter. So it’s not a straightforward choice. Anyone who tells you otherwise is drinking too much pod survivorship bias Kool-Aid or retarded or a college kid who doesn’t know tf about anything beyond what’s written on WSO
Thanks this is very interesting as someone new to the HF world. What would you say is the next 'investing style' that is generating consistent returns for LPs like pods have been doing?
Also what do you mean by 'training'? I asked this question to the other commenter too but curious if you have a variant view (heh)
Depends on what else you have
Tier 2 pod
Depends if you want a bit more stability with the SM or try your luck at a pod.
And depends on your sense of the PMs capabilities & management style , because that’s what it really comes down to
If you can consistently make good picks (defendable and succinct) and are easy to work with/take direction well and eager to advance your skill then the sky is the limit.
Make sure the PM is a good 1) stock picker and 2) a somewhat level headed individual. Otherwise it will be hard to learn from him and he may be a poor boss. I worked for a great stock picker and less great PM but he was a stock picker and I learned by watching and tracking his processes. He didn't like capital raising, IR, or being a good leader.
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