What distinguishes the top managers from the rest of the crowd.
As someone who currently works at a hedge fund, big bank etc., what would you say is the difference between your regular fund manager, MD at a big bank etc. or even those with regular finance careers to the guys who make it rain such as Michael Platt, Soros, Dalio, PTJ, Griffin, Klarman etc.?
I am not looking for some kind of tips or step by step guide of how to reach the heights of aforementioned titans, instead I would like to hear from someone experienced in the field, someone who perhaps could sum up the difference and reasons why a small minority become extremely successful, amassing huge fortunes in the process and why others seem to hit a wall.
Really, no-one?
Don't really have a view on the other managers but have interacted with top guys who have worked for Ken and started their own funds. He hires great hardworking and really fucking talented people. It's not necessarily the culture that attracts people to work for him, it's the skills you gain, meritocracy, and taking a chance to someday start your own shop. The top guys who've spun out like Candlestick,Fifthdelta,Holocene etc we're a product of aligning the best people at the time and letting them flourish. ( just my 2 cents). To add on to my original comment. Although he hires the best it's not as linear as hire the best => generate great idio rtns (even the funds people on this site make fun of as of recent hire great people). You can also factor in running a Multi strat firm helps alot. Even ken and some firms/pods that run the low vol, multi strat, high leverage blow up too (BAM,Aptigon).
.
Tough question. Think if we had the answer we'd probably be them, lol. Partially kidding.
My PM is probably top 100 at what he does, maybe in the world. There's only so many PM's and hedge fund managers, only so many bank MD's and PE partners so if you really whiddle it down the %tile type outliers are actually more impressive than one could think. What he shares in common with other top managers from both qualitative and quantitative perspectives are: 1) appetite and depth for knowledge, 2) major understanding of risk (this might be a HF specific quality), and 3) raw instinct and horsepower for "process." I know this doesn't explain the Soros vs. Citadel PM debate, but I think the large takeaway is those top guys have replicated a pattern and notion of a successful process over, and over, and over; over large periods of time in vastly different markets where they've adapted to conditions successfully, almost every time. Would imagine this separates them from the Citadel PM who's insanely good, but has only existed in one strategy under fairly stagnant market conditions.
Tough to cross-compare the qualities of IB bank MD's who have superb abilities to both socially connect with management teams but provide them objective and rational advice, while engineering deals to make that a reality with the likes of fund managers whose sole purpose is to drive returns. I think those with the hungriest devotion to learning fare better generally. Those with a dedication and passion for just understanding the world I've found is pretty much parallel across top, top managers.
All of it can be boiled down to some combination of an art and a science. In HF the art part is instinct, feel, pattern recognition, sentiment, etc. The science is modeling, numbers, arithmetic, etc. In IB the art is connection, strategy, value creation. Science would be synergies or something along those lines (basically accretion, ROIC).
Druckenmiller put it best that he runs very concentrated - the edge those larger guys have had has been their ability to hone in on an idea but be so focused and concentrated that they can size it appropriately while managing risk simultaneously. These guys go the extra mile in terms of understanding the nature and probabilities surrounding a bet, size it accordingly, and then hedge it as they need to. They see the matrix in a way that's such forward, derivative thinking - constantly evaluating both probabilities of events but in a forward-thinking way. Druck says "I try to think of where the world will be in 12-18 months, and understand which assets are mispriced today based on that view."
They all have vastly different characteristics though in what drove each of their success stories to be fair that is very much worth noting. Dalio and Soros have very different world views and processes than a Klarman, who's different from Ken Griffin. The strategies that have made them their fortunes are tremendously different so it's important to just bear in mind perhaps that there might not be an end all be all way to develop the same habits, because they're all different.
All great points. I will only add all the really successful ones must also have truly aligned LPs.
Soros and Klarman are different, and arguably a dying breed.
All the others, and particularly KG, Dalio etc.. they stopped getting involved in trades personally a long time ago, and they focused on building a business with scale. They are more businessmen than investors.
Focus on process, hiring, etc. Even Tiger Global has proved to be more of an "asset class" firm with unparalleled access to private market opportunities, rather than an incredibly astute investor.
What competitive advantages do they have that give them an edge when it comes to investing opportunities? Or is their business model someone brand & relationship driven?
Assuming this is mostly for SMs (or funds that have once started as SMs). I've asked this question to a few very successful hedge fund seeders since ultimately they were in the business of trying to identify these exact qualities. Here's what they consistently pointed to:
1) A unique combination of personal qualities: Many good managers do one thing well. Many extraordinary managers do many things well, and understand their deficiencies and solve for them. Universally though, these qualities are important: a) Absolute obsession with investing 'for the love of the game' (most of the characteristics following flow from this crucial element); b) Constant drive toward self-improvement and a natural sense of curiosity; c) The tendency to think differently from the pack, discern when consensus is right and wrong to develop an edge, and having the courage and confidence to act decisively when one identifies such an edge while having the self-awareness to know when one is wrong (or if sentiment may be irrational longer than you can remain solvent); d) Ability to communicate clearly to LPs. Inherently there will be periods of tougher performance, and it's important for LPs to understand where the source of underperformance is coming from and what you're doing to mitigate future underperformance risk. e) Confidence is key, arrogance is a killer.
2) Understanding a hedge fund is a business: A hedge fund isn't unique -- it's just a really high margin, highly-scalable business. The best managers understand the importance of setting and maintaining a culture, inspiring talent to join them and gaining their trust as their leader (particularly at the beginning when said talent may be taking additional risk/pay cut to join), thinking strategically how to scale, understanding the importance of operational elements, understand tail risk to the business and competitive positioning and landscape, marketing/communication ability, etc.
3) Having a defined process and knowing ones strengths and weaknesses: Without a process, it becomes impossible to understand where one can self-improve, which makes adaptation impossible and eventually leading to the downfall of the fund as paradigms shift. A key defining feature of great managers is their ability to generate good returns in nearly any market environment (though understanding some environments they may perform better in than others, which is totally fine. They know how to ramp up exposures in periods where they excel and preserve capital in periods where they do not). A great manager has the ability to identify when a trade loses money, whether it was due to a failure in process or simply losing on a bet. This is crucial as, provided the manager has some semblance of risk management understanding, a single idiosyncratic event should not endanger a fund. However, a failure to identify a flaw in a process can easily kill a fund over time.
4) A structural advantage: This one I think is often overlooked, but simply relying on looking at data and "being smarter than everyone else" as the driver for ones returns could yield decent returns but not extraordinary returns over the longer period. Great managers have identified something that is structurally unique to their process and lean-in on that, developing tools, expertise, and safeguards around it to take advantage of that as long as possible. There is a reason why RenTech and Citadel have been able to scale to such a degree -- they've been consistent in pressing their structural advantages in the marketplace.
5) Isolating edge and risk: Simply betting on one side of a bet or another without any real advantage usually leads to median or worse performance. Not understanding hidden correlations, misunderstanding where one's own returns come from (alpha vs. beta), or not appreciating the power of those correlations leads to tail risk. Monkey, typewriter, Shakespeare's play. Given enough time, correlations will align and market will move in a way that can lead to devastating consequences for the fund if one does not understand the risk that one is taking in the market or assigns the movement to "random" forces when in fact it is deliberate and structural.
6) A bit of luck (or rather, stacking the deck massively in your favor for the initial launch): Funds often live or die based on their first few years. What I think should keep any emerging manager up at night isn't whether they can generate 5-10 year solid returns (if you have the above qualities, I think there's a good chance and once you gain people's trust and establish goodwill you can do almost anything and still spin a way to survive or resurrect yourself -- i.e. John Meriwether, probably many of the levered beta tech funds and biotech funds now, etc.), it's whether your first 20-40 investments will represent your strategy and investing acumen. Well-aligned LPs, who are ideally locked up for at least a few portfolio turnovers, are the gold standard here to safeguard against this. I often wonder how many great managers we're missing because they had two sigma events happen to them in the first 6-18 months and never had a chance to showcase their abilities over the long-run because of low N sample size combined with misaligned or overly-optimistic LPs. Timing of the launch is also very important -- every strategy and manager has strengths and weaknesses, and you want to be launching in an environment that is aligned with your investing style (i.e. levered biotech focused on crossover investments to generate returns should ideally not have launched March 2021).
Adding onto the point about "tendency to thinking differently from the pack", it is vital that you don't get arrogant about being contrarian. "Oh everyone is thinking X but I think Y, I am being very smart." You'd be surprised how many people resemble/think like this (especially new HF analysts, including myself at one point).
Just important to stay humble when you're researching and realize that most of the time the consensus is right. You aren't in Big Short.
How'd you view the likes of Paul Singer , Bill Ackman, Dan Loeb in a discussion where we idolizing klarman, dalio
Quae officia ut laboriosam quia adipisci nulla quas. Sequi est placeat qui aut sit veritatis ad sed. Omnis voluptas et quibusdam veniam expedita blanditiis cupiditate. Nemo omnis corrupti deserunt facilis ea. Sapiente ea iste sed harum consequatur.
Dolorem impedit minima esse quas voluptatem porro ullam quia. Qui sed nam sunt sed. Natus rem aliquam voluptatem.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...