What valuation method are you supposed to do in hedge fund pitches and case studies? What's the general structure of the model?
Hey everyone, apologies ahead of time if this is a dumb question. I'm currently trying to improve my modeling and valuation skills, but I'm stumped. What's the general structure required for pitches and case studies? Do i start with an operating model/revenue build which then feeds into a three statement model? Or am I supposed to just build a DCF directly? Are there any examples anyone has to share or available online? I’m mainly trying to understand what the expected workflow is and how detailed the model needs to be for a hedge fund pitch or case study.
Uh, depends so much on the fund type.
Like for L/S equities
Probably just DCF and comps. Idk, most L/S these days is more thesis driven and event based than valuation based. That's what I've seen at least.
I generally build down to FCF and will model the associated balance sheet lines to get me there. Don’t have to do a full 3 statement model.
From there it’s usually multiples/comps or a DCF if we’re talking about something longer in duration.
Remember the purpose of valuation in your pitches is to frame the upside/downside and how it either amplifies your return or minimizes your downside. It’s not supposed to be a thesis and it really shouldn’t be in your top 3 bullish or bearish points.
If you’re in growth tech stocks you project out revenue, slap a multiple on it based on feeling the vibes and looking at historical mults, then discount for time, I’m 100% serious miss me with that shit that any more precision is necessary. FCF necessary if you think it flips to being valued on earnings. If you do this lazily you are retarded you still need to understand the biz closely.
go get a decent sell-side report, they will show how they model. especially initation report. dont get the quarterly updates. replicate that with one stock. it points you in the right direction as to how sell-siders come up with their assumptions which is the most important thing. the 3 statements are basics but coming up with your own reasoning as to why the next qtr ebitda or coverage ratio will drop differentiates u from other people
it's way more about the thesis and reasoning than the modeling. modeling is just table stakes/a commodity, so long as it's detailed enough and not blatantly wrong you should be fine
There's no single answer here because it depends entirely on the type of fund, their strategy, and the company itself.
A long-only fundamental fund with a 3-5 year holding period? They probably want a DCF. But if it's a highly cyclical business or commodity-driven, you might be better off with a normalized earnings approach. If it's an early-stage, non-profitable high-growth company, you're looking at a P/S multiple...and that is totally different from valuing a mature consumer staples business where you're focused on steady-state FCF (or P/E or EV/EBITDA depending on how much debt in capital structure).
A long/short equity fund with a 6-12 month time horizon? They care more about what's mispriced right now and what specific catalysts close the gap. You're probably building a simple operating model focused on the 2-3 variables that actually move the stock, with a price target based on a forward multiple tied to your differentiated EPS or revenue forecast. The model exists to support your variant view, not to demonstrate that you can build a 3-statement model. And in this case, your primary research should tie into the model as well.
Stepping back, the mistake most people make is thinking the model is the pitch. It's not. The model is just a tool that supports your thesis. Most people massively overinvest time in building the model and underinvest in actually understanding the business. The PM sitting across from you doesn't want to see that you can build an elaborate linked financial model...he wants to know why the stock is mispriced, what your variant view is, what the specific bear case is, and what data points would prove you wrong.
Start with the thesis - that's where you should spend your time and what will get you hired. Then build only the model you need to support it.
I went to Harvard
Mostly multiples, then add a layer of vibes on top
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