First, I want to thank a big user on this forum (who shall remain anon) for helping me with my situation at the time.
I am very interested to hear everyone's take in order to refine my belief on this subject, as my view is very much shaped by my personal experience.
For the readers who do not know, I resigned from my start-up hedge fund role to build my coaching business, which has been my long-time passion to help others identify well-aligned career path, save time and money.
I am not going into too much detail, but I left because of the firm’s lack of clear investment philosophy (literally every style that has been described in my previous article is a go at my old shop).
This week I want to discuss with you why I believe most of you should not consider working at a start-up hedge fund. At the very least, not as a first buy-side job.
I will vaguely weave my experience into the discussion points below to illustrate the issues I experienced. With that said, my opinion and experience reflect one of the tens of thousands of hedge funds out there, so it’s impossible to generalize.
Unattractive Compensation
Salary will be below market at a start-up hedge fund, which is then made up by offering a fixed % of fund’s incentive fee, a bonus structure that you don’t get if you work for an established fund as a junior person. The whole bet of joining a start-up is that the fund can grow its assets under management (AUM).
Inadequate Access to Resources
Because of smaller AUM, access to third party resources like sell-side research is limited – something that was valuable to me when working at an insanely high idea velocity environment where literally every company with a pulse is fair game to research.
Expectation Almost Always Grows Faster Than You Can Grow
Human resources are also lacking. I can imagine most start-up funds have this dynamic, where the firm wants you to function as an independently idea generating Senior Analyst ASAP but pays you junior analyst salary.
Zero Stability
Every start-up hedge fund is one blowup away from shutting down. In the last 2 years, we have seen many idiosyncratic events that the world has never experienced before, so you can imagine how difficult it is to be reactive to market regime changes constantly.
Even the best in this business cannot adequately position the portfolio for something like COVID outbreak or Putin’s invasion of Ukraine.
Disorganization
Hedge fund is a business as well. Without resources, the founder / Chief Investment Officer is almost always spread too thin, where she has to analyze stocks, manage portfolio, raise capital and deal with all the operational aspects (such as interviewing junior analyst and fund operation people, onboarding prime brokers, writing fund letters, etc.)
While the senior people have established personal investment process, the firm does not have an established process for junior people to function optimally and receive proper mentoring.
Without a clear organizational process (by the way, I can totally relate now running my own business) in place, it’s very hard to get leverage out of junior people because it ends up being a chaotic free for all – which impacts the quality of research, and worse, decision making.
Lack of Brand Recognition
Every high-profile hedge fund launch has the narrative of a star stock picker from a big hedge fund (eg. Tiger Cub, Moore, Druckenmiller, etc.) taking a few people from their old shop to start a new shop with sizable AUM at launch.
Unless you can hop on one of those trains as an outsider hire, most of us tend to source opportunities with funds that don’t have as much as a brand and are therefore subscale at start (hard to define “subscale," let's say $100 million).
Of course, the founder of these subscale start-ups always paints you a picture that they are on a trajectory to become a $500 million to $1 billion fund, but when you do the diligence, they have been at $100 million for 3-4 years, a giant red flag.
So without the right lineage such as a Tiger Cub, which I consider to be the only golden ticket to raise money in this business today and going forward, more often than not, you are betting on a dead-end fund where the most valuable thing you get paid on is real buy-side work experience.
Investing Skill /= Fund Raising Skill
One of the crucial diligence points in assessing a start-up’s ability to scale is whether the portfolio manager can raise money. It’s easy to assume the PM’s ability to generate alpha, given that’s how they became a wealthy individual and are able to start a new fund in the first place.
The ability to raise money requires a distinctively different skill from generating alpha. Entrusting money to someone else to manage by paying high fee is a big mental hurdle to overcome for investors (the limited partners, “LPs”). It’s 100% PM’s responsibility to convince the LPs to buy into the PM's vision of generating consistent returns. Large portions of start-up funds flake out because the PM is either a great investor or a great marketer, but not both.
Exceptions
With all that said, there are exceptions to the rules. It requires a deep diligence on the founder, the investment strategy, the lineage of the founder, the time in the stock market and many other factors to go into forming a comprehensive decision to bet a few years of your time for a shot at becoming a partner of a start-up hedge fund.
There was a great passage on WallStreetOasis that talks about the difficulty of making it big at a start-up hedge fund. Three things have to align for you:
- The fund has to grow: a function of PM’s ability to pick right stocks, manage risk and raise external money.
- You significantly contribute: a function of your philosophy alignment with the fund, firm having robust organizational process and your work ethic and intelligence
- Founder isn’t an asshole: which you have zero control, but you can do deep diligence on whether she is a fair person and whether people on her team on the prior shop got screwed on bonuses, etc.
If you are interested in learning more about professional equity investing (the "buy-side"), I have two other great articles for you:
+1 SB. I'd give you more I'd I could . I think this post is spot and is a great resource for many people who are interested in breaking in through a startup HF
I find this thoughtful but have a different view. While all these are issues one should diligence there are significant advantages.
1. Very hard to get a job at an established fund so being open to start ups significantly raises your odds. The industry is already brutal to get into and so most of the gross additions of new seats come at launch funds.
2. Potentially you have a chance to be mentored by and work more closely with a good investor in a small shop. This is an apprenticeship business in some ways - while not everyone good works for someone good, working closely for someone talented is the highest probability path to getting good yourself. And if you have skills and experience, even if there is not much brand, you'll be better positioned to get your next job than starting at zero.
The early stage nature can cut both ways. As discussed above, it can be no mentoring. Or it can be that the founder needs early employees to work out more than at an established firm (where they had huge budget to hire plug and play people), and focuses on training them more than if they could afford say, a bunch of experienced laterals. I have seen people whose resume would get screened out of traditional big shop processes can get a shot working for say $50k at a small firm and get well trained because the founder needs help ASAP. These people wound up with strong skills and this broke the chicken and egg issue of "can't break in because I didn't work at IB/PE/Big Brand."
Of course this depends on if the founder is a good investor and interesting in mentoring, which is key to underwrite.
3. Getting paid at a large fund usually has some level of politics and lobbying. You may be able to get a higher and more fixed % of the economics, which is very valuable if the fund grows. While the odds are stacked against you, bootstrapping to a big fund is still possible in public markets investing and I've seen previously no name funds make it that way even in recent years. It takes luck, business acumen and investing chops, as mentioned above.
4. You learn about the business issues in the industry first hand, which is helpful for the rest of your career. Knowing how the business side works, how to raise capital, etc, are important skills for the industry, especially if you ever aspire to launch your own firm.
Some of the happiest people I know in the industry are folks who joined a start up that worked out. They have good economics, feel proud of their contribution, got great hands on training, and learned a ton, and they have seats that they'd never be able to get via a headhunter because they helped build the business. On the other hand, as discussed above, probably the majority of these opportunities don't work out. The answer, I think, is that this is most attractive either as a way to break into the industry (if your relevant alternative is not having a seat and you don't have the resume for Viking) or if you feel confident in your ability to evaluate if someone is the kind of founder who can make this work. Thinking about how the person would handle all the issues above is a good component of that DD.
All of the above is good advice and none of it feels wrong to me, but I want to provide a different view.