Will I flounder at a hedge fund?
I was in MFPE during the pandemic from a non-banking background and for the first year, they didn't really let me do much modeling because there was no real training, and then the second year I was managing another associate who was doing the modeling, so I never really got any reps, even though I kind of had a good idea of how it worked. I'm at HBS now and lots of top HFs are recruiting me and I think it might be a better fit since I get the gist of it but hated data room stuff and kind of suck at modeling (doing a lot of accounting work outside of core classes to overcome this). I can kind of wrap my head around being good at fundamental L/S in that I can think of "how the world thinks of this company" and "how I think of this company" and then make money off of the delta. Just not sure if anyone has any reactions to my predicament and whether or not I'd be a good fit for L/S. I don't live and breathe markets but I'm sufficiently academic that I could get into it and be a solid idea generator.
What are several ideas that you think are interesting right now? Don't need to use names, just generalities about why you think XYZ is a cool trade.
Not the OP but interviewing for a couple funds and have a few ideas I would love to stress test.
First idea is a school bus manufacturer short - long story short is they've been significantly impacted by both supply chain problems in 2021 and 1H 2022, and further impacted by the Russian war in Ukraine. Russia and Ukraine combine to provide 15-20% of the world's rubber supply and rubber trees have a 4-7 year grow time, which means the supply shortage won't be fixed anytime soon. Supply has also been independently impacted pre-war due to disease and lack of new plants due to low demand during the pandemic.
This particular manufacturer has been having trouble de-inventorying because they don't have the rubber or resin needed to finish their buses. Huge backlog (1 year revenue) and record high inventory. Only 12 months of cash + revolver runway left and they are heavily leveraged (5x normalized EBITDA and 20x LTM EBITDA) with maturity coming up in 3Q23.
Latest amendment to credit agreement states any junior capital raised needs to first pay down revolver balance ($60M) and require them to prepare 13-week cash flows until back in compliance with covenants. Stock is trading at 65x LTM EBITDA and 10x 2023E EBITDA (street is projecting 2023 will see return to normal performance / EBITDA). Stock is lightly covered with only 2 analysts from small boutiques.
I think there's strong potential for a short-term liquidity crunch as they literally can't get products out the door due to rubber / resin supply. Larger and more diversified auto manufacturers are using scale to take all supply that's out there and don't see the problem going away (war will likely continue and even post-war sanctions will remain). No equity investor is going to want to touch this since a big chunk of any raise will need to go towards paying down low-interest revolver balance and long-term prospects of business remain dubious. Think this has high chance to head towards restructuring or Ch. 11 given current state of capital markets.
FWIW, I really like this idea! Makes sense, not super crapco, get the sense that SS is asleep- only question is what is truly "normalized"?
I do however think I may know which one this is - is this sub-2.5Bn mkt cap? Feels like it...
As an incoming IB analyst who is interested in HF path, had do you go about finding these smaller name companies and being able to go so in depth on them? I've read VIC many times of these no-name companies and I just have a hard time understanding a company, let alone being able to analyze it as an investor, when I am not very aware of them.
Russia / Ukraine do not make natural rubber, do you mean synthetic rubber which does not grow on trees but is made from oil?
The modeling you can get by without being great at.
But the huge part you don't even mention is whether you will have the stomach/tolerance for the daily volatility in your positions.
How does someone develop the stomach to tolerate high, volatile, swings in their positions on a daily basis? What was it like for you when you started in this business, and how do you feel now?
Not sure it can be trained and frankly I don't know that I had particular confidence I was ready. But I was definitely aware there was an important emotional/stress management element to this job. And I loved the markets.
Original poster talks about it like picking stocks at a HF is some sort of debate club on an ivory tower... obviously far from the truth, though you never know, some of these Tiger SMs that recruit from biz schools seem to operate that way.
Good to know. I am creative and have a stomach of steel.
I'm not in the "swing of things" of idea generation though. I don't follow stocks. What is the way to start coming up with ideas? Just pick ~10 names, read the 10ks, listen to earnings, do expert calls about each, and see what you come up with? Do you need to model out all ideas?
I’m at Wharton from a PE background and looking at HFs right now too. From what I’ve gathered, the modeling isn’t going to be terribly difficult. If you’re sharp, and you clearly are, you can pick up any modeling you missed in PE within a couple weeks.
Curious what types of HFs are coming on campus for you this year? We’ve only got a handful or so of tiger cubs / other top shelf funds signed up right now. I thought that might just be because it’s a tough year, but sounds like you might have many more quality places coming through?
Given you already have a background in PE, why did you choose to go to B-school instead of directly recruiting to HF roles?
We have a handful of the Vikings/Mavericks of the world. Not more than a dozen or so.
Lol love this post. I’m at MFPE rn going to an SM in a few months and I also haven’t gotten as many reps with modelling as I would like. Nice to know I’m not alone and also relieved to see at least a couple of folks don’t think it’s a nonstarter. Can’t really answer your question about whether or not I think you’d flounder cuz we are essentially in the same boat, but I can say that I was pretty honest with the firm I’m joining and fwiw they didn’t seem to think it’d be an issue at all
Thanks for responding. Glad to hear it worked out for you too. I'm hardcore loading up on modeling and accounting classes if not for anything but overcoming the anxiety about being a shit modeler. How did you come up with your stock pitch? I don't know how to generate ideas. I am asking for the tactics of it (e.g., "I read X 10ks which I picked the names because of reason and I built a model for each one and then did [x, y, z] and read [a,b,c resources] about how to write up my idea) etc. Thanks in advance.
Had an above average interest and understanding of a particular sector and had been following a particular theme so the pitch was a long and short of how I’d look to play that theme. Read a bunch of 10-ks and transcripts and then built a pretty detailed operating model (more detail on the revenue side, with cohorts etc. but kept the rest of the P&L simple). Kept b/s and CF simple as well. The key value driver and the bet I was making was really in the revenue build and discount / premium in the EBITDA multiple relative to my chosen comp set. Spent a lot of time discussing my thesis more so than the nitty gritty of the model. I used this pitch for a few shops but was understandably most useful when I was interviewing for a seat covering the sector that I was pitching. It helped that the folks interviewing me seemed to agree with the idea (for context, I was pitching a short on a name that was a consensus buy). It turned out to be a good call but I actually don’t know how to short stocks (I don’t even have a trading account lol) so I didn’t make any money off it. Got the job though (:
oh and I forget the name of the resource I looked up for how to write up a stock pitch, but it was one of the first few results that comes up on google. Hope this helps!
Good luck—you’re going to need it.
LMAO at pizz talking down to a MF PE associate. This guy could run circles around you
Pretty sure I’m smarter and better looking than him.
I think the fact of the matter is that many PE ASO are completely clueless about how to make money in public equities within a one year time frame, year in and year out. You can’t blame them though - that’s just not what you do in PE. PE and HF are completely different animals which people learn eventually.
I'm a first few months into my job in PE and I've done a ton of modeling. Typically deal teams are senior partner, junior partner, VP, and ASO, so no double staffing.
Out of curiosity, if you're an ASO and you're not running the model, what exactly are you doing?
Year 1: Covid, no IB background, totally floundering re: models from scratch (doing tons of basic models for take privates and CIM models, nothing more than % of rev stuff for costs and 2-3 layer deep revenue drivers plus some basic C/F stuff).
Narrow time between Year 1 & 2: Modeling
Year 2: Good at job now, managing the associate who does the model and checking his work
Modeling isn't incredibly complex on the public side, but still a requirement...how else can you quantify an investment thesis and frame risk/reward? I'd recommend building some 3 statement models....i've never met an analyst who couldn't build a model. It may not be the most critical part of the job, but if you pitched your PM without estimates or a build out to FCF or earnings...you might as well be a VC.
You are probably smart and capable. So no you will not flounder.
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