Mod Note (Andy): Throwback Thursday - this was originally posted Feb 2009
Since there aren't any decent/active discussions on the HF forum, I figure I start a thread highlighting the good, bad, and ugly aspects of working at a hedge fund. This is based on my personal experiences so don't take them as gospel.
Hopefully others will contribute with their own experiences over time to add more color to the discussion. It is my hope that those getting into this game will have a better understanding of what they are getting themselves into.
Life Working At A Hedge Fund
Before I get started, this thread is really intended for people already in finance (current banking analysts/buyside professionals) as a way to start an honest discussion about HF. I'm not going to answer "I'm an undergrad looking to break into hf" type questions in this thread. If I'm in a good mood, I'll start a separate "You're an undergrad and want to break into buyside...this is what you can do" thread later.
This initial post isn't comprehensive and I'll add more over time. There are plenty of thoughts I have on the subject.
Background of a Hedge Fund Manager
Work as an analyst at a multi-billion dollar fundamental hedge fund, and have been here 3+ years. I work in the special situations/event driven equities group, and specialize in long positions.
The Best and Worst Parts of Being a HF Manager
Good, Bad, Ugly, Random thoughts (in no particular order and hopefully it makes sense):
- Be happy with the fund's/group's strategy because you will get pegged. Some of you with restructuring/hy experience are already pegged before you even step foot at a hedge fund ("Jeez these recruiters are only calling me about distressed opportunities"). I would very much like to do distressed debt, short equities, and dabble in foreign securities, but those opportunities are limited for me since I don't have enough experience shorting/analyzing credit/foreign companies.
- Movement between funds can be very hard. Buyside is great, but it's really not easy to move around. Over time, you're going to be very particular with what you want to do, and the funds are going to be very particular with who they want to hire. Trying to find a fund that matches your preferred strategy, salary, location, culture, and career trajectory is a HUGE task. Most funds don't like paying recruiters so opportunities are usually found through the network. This is why when people move it is usually the result of a senior member branching out and taking junior people with them or networking with a past co-worker. B-school is also another avenue used to move to another fund.
- Most new hires (ex-IB analyst) are initially hired to grind out models and help "flesh out an investment thesis" (i.e. read the footnotes) for senior guys. You become really valuable when you start to develop an investment identity and begin sourcing ideas. Keep in mind, some places don't care about developing your idea generation abilities and you're only there to grind through the numbers. Obviously places like Tiger were hedge fund manager factories, because analysts were trained to source ideas and defend their thesis. Hopefully, your buyside opportunity is with a place like Tiger.
- Pay is volatile. You can be doing to same task at different funds and be paid vastly different amounts. Obviously pay at most places are based on fund performance, so be comfortable with knowing your financial well being is heavily reliant on the skills of your PM. As I reach an inflection point in my career, I'm starting to yearn for a situation where I can play a bigger role in killing what I eat and not be so tied to decisions beyond my control/recommendation.
This is a good stopping point...
A Day In the Life of a Hedge Fund Manager
- 6:45am - Wake up
- 7:30am - In the office
- 7:30am to 8:30am - Breakfast, Check inbox/messages, Read paper/blogs/etc., morning meetings
- 8:30am to 1:30pm - Depending on the day, read transcripts/filings (30% of time), investment meetings/calls (20% of time), build models (40% of time), investment memos/emails (10% of time). This is a juggling act since I'm usually working on 1-2 new ideas and 2-3 portfolio positions during the week.
- 1:30pm - 2:30pm - Lunch/Pay Bills/ESPN
- 2:30pm - 8:30pm - Meet with PM (ranging from 30 minutes for brief updates to 3 hours for research findings) and more modeling/reading/conference calls rest of the day
- 8:30pm - Midnight - Go home, dinner, gym, read paper/blogs/etc., read more filings
- Sometime between Midnight - 1:00am - Bed
Benefit of Working at a Small Hedge Fund?
The main benefit with smaller/newer funds is you can sling shot up the value chain if you do well. The main drawback is the fund sucks and you can't land anywhere else when it implodes (you can mitigate this somewhat if you worked at a big fund beforehand).
Real example: There was an analyst that worked at my fund a couple years ago. He could have stayed here and slowly move up the chain (bigger funds tend to be a little more bureaucratic/institutional). Instead, he jumped over to a much smaller fund to take on more responsibility and is now a PM. This is HUGE. Instead of just being another analyst at a big fund, he has a track record of managing a portfolio and a quantifiable track record to hang his hat on. Having PM experience obviously makes him much more valuable. On the flip side, if the small fund failed, he has the experience of being a large fund analyst to land somewhere else.
Most hf professionals go through the same learning curve. Enter the industry with basics (learned from banking, school, etc.) -> Step 1. Master the art of valuation/fundamental analysis -> Step 2. Master how to source/defend ideas -> Step 3. Master how to effectively manage a portfolio (knowing when/how much to buy and sell is fucking hard)
Big/established funds are a great place to learn Step 1. Smaller funds are great for Steps 2 and 3 once you have a good idea of what you want to accomplish. Think of big funds as a workshop to fine tune the fundamentals (and to meet other talented people). Think of small funds as an apprenticeship...the investment approach of your PM will probably end up being the investment approach you use the rest of your career.
Read More About Hedge Funds on WSO
- Stock Pitch Sample Template - Proven Examples To Help Ace Your Interview
- How To Get A Hedge Fund Internship
- Hedge Fund Careers: Getting A Hedge Fund Job Out Of Undergrad And Beyond
Looking to Break into the Hedge Fund World?
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Would you say that the PE skill set lends itself to fundamental long/short,event driven equity HFs? I assume it does as the valuation work and due diligence process are likely very similar but I would like to hear your perspective as you and I have have about the same amount of experience (3.5 yrs) in slightly different buyside shops. Ultimately, I would like to start my own shop with my current MP who comes from a PM/HF ($B+AUM)background and want to ensure that I am developing an appropriate skill set for the job.
Can you briefly describe an ordinary day...
6:45am - Wake up 7:30am - In the office 7:30am to 8:30am - Breakfast, Check inbox/messages, Read paper/blogs/etc., morning meetings 8:30am to 1:30pm - Depending on the day, read transcripts/filings (30% of time), investment meetings/calls (20% of time), build models (40% of time), investment memos/emails (10% of time). This is a juggling act since I'm usually working on 1-2 new ideas and 2-3 portfolio positions during the week. 1:30pm - 2:30pm - Lunch/Pay Bills/ESPN 2:30pm - 8:30pm - Meet with PM (ranging from 30 minutes for brief updates to 3 hours for research findings) and more modeling/reading/conference calls rest of the day 8:30pm - Midnight - Go home, dinner, gym, read paper/blogs/etc., read more filings Sometime between Midnight - 1:00am - Bed
I'm not lying when I tell people I am a professional footnote reader.
Your opinion is probably as good as mine, but it's probably a good sign that most of these guys got their start with seed money from Tiger.
[quote=longredbull]You mentioned prospective analysts would benefit from working at shops where they can develop and defend investment theses. Is it fair to say that one would one get this shot at a smaller fund ( Step 1. Master the art of valuation/fundamental analysis -> Step 2. Master how to source/defend ideas -> Step 3. Master how to effectively manage a portfolio (knowing when/how much to buy and sell is fucking hard)
Big/established funds are a great place to learn Step 1. Smaller funds are great for Steps 2 and 3 once you have a good idea of what you want to accomplish. Think of big funds as a workshop to fine tune the fundamentals (and to meet other talented people). Think of small funds as an apprenticeship...the investment approach of your PM will probably end up being the investment approach you use the rest of your career.
Step 1 is definitely a continual process, and why I like the fundamental value approach to investing. At the end of the day, I have no idea how good my assumptions/valuation/analysis is so I need a decent margin of safety. Anyway, this is what I did to get a good foundation before my hf days...
http://merlin.gsb.columbia.edu:8080/ramgen/video1/greenwald/Greenwald_B…
Reverse engineer ideas from good investors. I signed up for a guest membership to Value Investors Club and read the research reports submitted by members. There is some very good stuff on that site. I also looked at some of the older recommendations to see how the investment thesis actually played out and tried to understand why or why not an idea panned out.
Intern at a fund. This took some hustle on my part, but having this experience was key for my development. I got paid peanuts, but it was worth it in the long run. You should have access to the hf alumni network through the b-school you attend and you should definitely try hard to get a school year internship with one of the local funds.
Pretty standard advice that I agree with. I'll try to drill down a bit.
Reading everything is great, but it's not realistic. We're all busy people. I recommend when reading anything, always think about the potential catalyst that turns a story into an investment idea. That should help you narrow down the things you read. The Michael Price video I linked above shows how he reads a paper. I pretty much follow the same approach.
Given my background, I'm biased to event-driven situations. Look to pitch ideas with a catalyst.
Best way to see how much conviction you have on an idea is to use your own capital.
Here is a very brief example where #1 leads to #2. (I'll go ahead and use a fun example. The Video Game Industry.)
Consolidating industries tend to catch my attention so when I read that Blizzard and Activision were merging my immediate reaction was to ask myself how the other players might react. EA has an acquisitive history so maybe the 800 pound gorilla will respond with their own moves. I don't like own the consolidator so I start to sniff around and see if there were any good small names to own that might be taken out. This leads me to identify Take-Two Interactive (the makers of Grand Theft Auto). Before you know it, EA announces a hostile bid for Take Two. Boom. Profit.
Fast forward to today and we are seeing another interesting situation brewing in the space. Big media players have begun to take an interest in video game publishers with Time Warner even publicly stating their interest. EA has been battered and is restructuring to focus on its core properties. I love this type of situation. Companies with great core businesses tend to waste the money generated from their cash cow on dumb acquisitions and a bloated cost structure. So when a business like this finally decides to be more disciplined with their capital, they tend to generate outsized returns. On the flip side, if they continue to struggle/waste money, there are strategic buyers out there who would love to own the company (limits the downside risk a bit).
So these are the kind of situations you want to read about and invest in.
You probably don't expect an actual response to this, but I'm going to give one anyway lol.
Talk about a hard strategy lol. Trying to understand the capital allocation decisions of both governments and companies in the global financial ecosystem to identify a trend worth investing in is REALLY hard. It's also (more often than not) beyond the scope of what most analysts do. I've done a little work in this space given my past international experience and I used to cover financials (see Bronte Capital Blog to get a view of what the macro thinking process looks like)...It's really hard (Did I mention that already? lol)
Even if you've made the right call, the volatility might make you insolvent before your thesis plays out. Think of the "long energy, short financials" strategy that was so popular last year and left a few funds limping after energy cratered...or the irrational tech bubble that caused Tiger to shut down...or seeing the super successful Tontine close...For every Soros/Rogers/Paulson homerun, there are plenty you don't hear about that got wiped out.
A good case study on this approach are the Chandler Brothers. They've made some good calls over time, but they have had to stomach a lot of volatility (think down 30-40%) before their thesis played out. They can get away with that b/c they invest their own money, but a fund with client money would have shut down a long time ago.
Obviously the styles within global macro vary quite a bit (I'm sure the trend following guys are fine in this volatility), but try to make sure you work at one with more internal money that can handle the ups and down (if that's the direction you want to take).
...I work at a large global macro hedge fund in a pretty senior decision-making role. I think that the day that Mr pink describes is way more laid back then the one I have. Maybe its because he is an analyst and i have responsibility for p&l but my day is much more like this:
5am: Wake Up, log into my systems at home, check what is going on in Europe and what happened while I was asleep in Asia. The moment while I am logging on is one of the scariest of the day because you can get some very bad news about what happened while u slept. 545am: Get to work. Log in and begin reading research both from sell-side research people and from our in-house analysts. Also prepare for for the US markets open by going over any economic data or major earnings that are coming out that day. until about 5pm: Keep reading, watch markets, make trades where appropriate, discuss markets with sell-side salespeople/analysts, work on analytic tools i use like spreadsheets, etc., order lunch to my desk. 5pm: Leave the office. Make sure you have call levels left for the night guys overseas in case things go haywire. 5-10p: Either go out and do stuff...date/drinx, whatever, go to the gym, or go home, log in and watch Asia open up. 10p-5am: Sleep...sort of...wake up several times either to check markets or because you get calls from brokers overseas who have call levels on positions. Sometimes also if I have a large position in Asia or Europe and major economic data is coming out I'll wake up for that.
...generally if u do global macro it means no sound sleep ever again except friday and saturday nights and a work-week that begins 3pm Sunday and goes to the end of trading in NY Friday totally continuously except for about an hour every day between NY close and Asia open. So thats what you have to look forward to!
...As someone who has been both an analyst and a PM, some comments on this above pay post.
PM's generally have set deals based on P&L, there is no discretion to their bonuses...ie you dont make anything but your set base if you lost money and in some cases that base even becomes a "draw" against future profits so you eventually have to pay it back. This is how it works at all top hedge funds. I have never heard of a PM who lost 35% of his capital got paid..in fact everywhere I've worked that guy would be long gone by the time bonus time came around forget about payouts. Usually a 35% drop means some time at the beach to try to come up with a second act (and of course a fresh high-water mark). In fact, if you are down 35% at a fund where other PM's are up you will become a pariah because you may prevent others from getting paid depending on how the math works out. At that point people will make your life hell until you leave, guaranteed.
Also, the idea that an analyst has a P&L is ridiculous...unless that person is pulling the trigger and managing the position they are just generating ideas and have no claim to P&L. They can keep a record to help them lobby for bonuses but in the end no PM cares much. Managing a trade and dealing with the risk is 85% of making money in this business and good ideas are about fourth down on the list of what makes a good PM. So just saying an analyst claims to have a P&L of x% is probably just them bitching and their boss probably dosent see them as having created that value.
At shop "b", there is nothing egregious about analysts not getting paid when a fund is down 30%. At such a firm, nobody is getting paid, probably ever again actually since they are so far below their high water mark that the fund is likely to be in unwind mode very soon. Offering analysts equity is laughable since the equity is essentially worthless...understand that if you lose 30% you need to make back almost 50% to ever get paid incentive fees again. My guess is that the guys who run this 30 person fund will be trying to set up a new shop very soon or taking the aforementioned stint at the beach.
Also, more broadly, you have to understand that people set up hedge funds to get rich, not to start some lasting business that will transcend themselves...therefore offering equity to an analyst is rare unless the analyst adds so much value and is in such demand that they need to give equity to retain him. In 7 years in the business i've never seen or heard of it happening. I've seen analysts get promoted to PM so that they have equity in their own trading, and even that is very very rare, but never equity in the firm. Analysts generally are cannon-fodder that come and go regularly as PM's and partners get sick of them. In fact, unless you have a very good personal relationship with a PM that makes you "bullet-proof", the job of analyst at a hedge fund really blows...you just get ground down until either you snap and quit or until you have a string of bad ideas and get canned. And as I said above no PM thinks of an analyst as being responsible for any of his success but they will quickly cut one's throat as penance for a bad idea. I hate to say this since the book generally isnt that great and the kid who wrote it really had no understanding of what he was doing, but the book "Trading with the Enemy" written by a former junior guy at Jim Cramer's old fund tells it pretty well...he is anointed the golden boy because he makes a couple of good calls, loves the perks of being taken out by brokers etc., and then in a manner of months Cramer gets sick of him and blows him out in a frustrated, screaming fit. I have seen that career arch many times.
(I'm re-posting my thoughts on why multiples vary to try and keep my thoughts on one thread. Also, the next few posts will probably tie back to this topic)
For the benefit of everyone new to this stuff, I'm going to start with the basics and work my way towards explaining (or at least try to) why multiples vary. Please bear with me if this post comes off as "multiples for dummies". I found that this is the easiest way to learn this concept.
I. Drivers of Value
We already know that the theoretically "correct" way to value a firm is to take the present value of all future free cash flows. At its most basic level, value is future cash-on-cash returns (i.e. how many dollars am I getting back for every dollar I spend) So with that in mind, valuation (and multiples) are driven by three things:
Growth and returns drive the numerator of the DCF, and required rate of return drives the denominator. (I know...duh)
II. Growth
For the most part, growth is good. Just don't fall in love with it. Most people get tripped up on growth because they forget to account for the capital intensity required to drive incremental growth. Remember, valuation is driven by "FREE" cash flow so even if you're growing like a weed it won't do anything for your valuation if it requires spending an excessive amount of capital to get you there (i.e. you're incrementally spending more dollars for every additional dollar generated...in other words, you're killing your returns).
III. Returns
Returns are the biggest driver of value. When you see material changes in valuation/multiple, it is usually the result of changes in returns. Most of the value created in Private Equity is driven by improving an asset's returns (i.e. cutting bloated cost structure, disciplined capital allocation, etc.)
IV. Required rate of return
Not really relevant for this discussion, but it is helpful to see what the market is implying given an asset's growth-return characteristics. The key to good investing is to risk adjust the required rate of return. For instance, say you come across an asset that is trading at 5.0x. Assuming no growth, that implies the required rate of return is approximately 20%. Determining whether that 20% is properly risked is how you generate your alpha. If the discount rate is the result of a forced seller, you probably have a good buy on your hands. If the asset is eroding, you might be overpaying at 20%.
V. Multiples
Mathematically, multiples serve as a close substitute to the DCF. In practice, most investors use multiples as a shortcut to DCFs, because they are simple to do and easier to compare with other assets. Done right, using the multiple approach can effectively replicate the results of using the more theoretically correct (and usually more complex/time consuming) DCF.
Using the Gordon Growth Valuation Model as a framework, the multiple (in this case forward P/E) is calculated as:
Forward P/E = (1-(Growth/ROE))/(Required Return - Growth)
In essence, multiples are a reflection of the growth, return, and risk profile of industries/sectors.
The Top 3 Hedge Fund Media Myths (Originally Posted: 03/23/2013)
Now monkeys, believe it or not there are some good reporters out there doing solid research on the financial industry, have very good contacts, conduct good interviews and perform excellent due diligence so they are adequately informed.
However, for every media representative who does that, there are dozens who don’t do their homework and are responsible for perpetuating misinformation about the industry. Whether it is to sell papers or collect unique visitors, the media can wind up selling a lot of myths about hedge funds and private equity to the general public.
What is especially frustrating is that some of these “media myths” may even have a tiny kernel of truth to them—that seems obvious to the informed, diligent monkeys of WSO but maybe not to an industry outsider.
Here are the top 3 hedge fund media myths: 1. Hedge funds are all enormous, multibillion-dollar investments that can destroy publicly-traded companies.
It is true that there are some “megafunds” ($10 billion AUM and up) that account for about half of all total assets under management by the hedge fund industry. But the hedge fund/private equity space is quite heterogeneous in terms of size; in fact, the most common hedge fund AUM bracket is $200 million or less. If you think about it, one of those funds only has enough capital for a few modest positions at a time, especially if they are managing many different securities. A few million, give or take, is hardly enough to dramatically sway markets.
2. Hedge funds are totally unregulated.
The truth is that hedge funds are MOSTLY regulated. Although they are now required to register for the SEC and are not directly regulated by it, hedge funds are regulated at the asset level. What that means is that no matter what type of security they invest in—equities, commodities, real estate—they are still accountable to the agencies that oversee those markets. The SEC isn’t the only regulator on the Street, and frankly, since they haven’t even legally defined the term “hedge fund” yet, do you think they would have the slightest clue how to regulate them?
3. Hedge funds are always committing fraud and blowing up their clients.
An amusing quote I found while learning about hedge funds was that you only hear about “the top 1% in terms of wealth and the bottom 1% in terms of ethics” in the media. This tends to paint a picture of hedge funds being these shady and generally dishonest investment vehicles. In reality, a 2006 Capco study found that hedge funds most commonly fail because of operational breakdowns, such as process errors or key people leaving the team—not from redemptions due to poor performance or fraud. In fact, only about .1% of hedge funds have even been accused of fraud, let alone provably committed it!
So there you have it—next time you run into someone who blindly spouts off these “truths,” lay down the real truth instead! You’re welcome.