Why Are Fund of Funds looked down upon?
I've noticed people here tend to shit on FOF when it's not a bad way to go directly to the buyside.
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WSO is populated by preftige whores who want to be involved in either dealmaking or finding the next GOOGL to invest in pre-IPO at a hedge fund.
FoF analysts don't get paid like HF analysts, they're not doing bottoms up security selection, and there's an argument that recruiting is less competitive than say Millenium.
fuck prestige, if you can get into a FoF and that's what you want to do, get that money.
You kids have the wrong idea. If all you care about is the "buyside", you're not going to do well in this industry.
Fund of funds is fine, but it is a very different skillset from other types of finance jobs (i.e. IBD, ER, HF, PE, etc.). If you like talking and meeting people despite the secular decline and double set of fees, it's a fine career choice. Plenty of people do well in FoFs that wouldn't do well in say, IBD, and vice versa. Is the FoF in equities, PE, VC, etc? Do you have the opportunity to do co-investments?
For every job in finance, ask yourself two things: 1. "What skills am I learning?" and 2. "What skills are required to become great at this job?" and see if you have those skills. If your only focus is on "buyside" vs. "sellside" you're doing it wrong.
I work at a FOF and like it quite a lot (easy hours / good comp / less corporate BS). Of the negative points above, the one I'd ascribe the highest value to is the skillset question - the stuff done at a FOF is pretty much not transferable to other finance jobs, so the ability to go into other sectors is about zero.
So the primary goal of most FOF teams is to put together a portfolio that has 1) low correlation to your typical beta factors / markets, 2) lower volatility and drawdowns in a crisis, and 3) positive expected returns (typically in the high single digits). FOFs, in a perfect world, should generate a steady stream of alpha that reduces the correlation of our investors overall portfolio.
When it comes to fund selection, this manifests itself in that we want to understand what their risk exposures are (especially the sensitivity to GDP shocks), how/why they make money doing what they do (we DO NOT try to pick the smartest guy in the room - this is pretty much impossible to underwrite and puts you in the same boat as other alpha chasing investors), and whether there is any alpha to be had in a strategy. Of course, things like fees and the quality of their middle/back office are also really important, but these issues are more go/no go evaluations (e.g. they are necessary, but not sufficient conditions).
I'm sure it varies across the industry but, at my firm, we're all generalists. People tend to develop an area of expertise as time goes on, but nobody just starts taking merger arb meetings and nothing else. To your modeling question - I'd say modeling is about 30% of my job and is typically much more high level than what I did in banking. Most of what I do is either statistics, writing memos, reading (lots of this!), taking meetings, or reporting.
I had superday with a $5 billion FoF in Greenwich a while back. The firm was fairly lean with 3 associates and 10 people total on the investment team. There were more administrative/operational folks than investment professionals. It sounded like associates did a good amount of traveling - attending conferences and listening to fundraising discussions held by fund managers where they discuss upcoming rounds, strategy, industry etc. Associates are responsible for taking notes and distributing them to the rest of the team. They also build FoF specific macro models, research portfolio companies to stay in the loop, etc, etc.
However, one interesting thing I noticed was the political nature of the investment process at FoFs... For example - let's say Sequoia is out fundraising and requesting a $100 million LP check for their 4th China Growth Fund. If the FoF doesn't agree with the new fund's strategy and decides not to invest, it could bite them in the ass as Sequoia won't let them into their flagship fund. There's a surplus of LP cash versus actual need for top "brand-name" funds which leads to political BS / the stroking of unenthusiastic checks. This obviously isn't the case with every firm, but it sounded like there was a good amount of politicin' involved.
Speaking strictly of PE FoF here:
I think it can be a great place to be if 1) that's what you genuinely want to do and are not trying to use it to get to a direct investing role (very difficult) and 2) at the more senior levels, like VP or above. I also think there's a distinction to be made among different strategies too - are you focusing just on primary investing (committing capital to new funds), secondaries (buying/selling existing LP stakes - and to further differentiate, are you looking at funds that have called 25-35% of capital or funds in the 80-90% range?) or co-investing (investing alongside GPs). Or maybe you're getting exposure to two out of three or all three.
I know two types of folks that have worked in PE FoF - the people who wanted to do banking/PE but took the risk in trying FoF and absolutely hated it and the people who wanted to be on the Asset Management side or were undecided on their career path and/or stumbled into it and liked it.
The bolded is completely 100% spot on. One can certainly move to the direct side but it will be very uphill and is very very rare. I did it. The work isn't actually that different in many ways at a higher level (which is what really drives PnL), but that is for another time (or a PM).
It's in the latter part of the post I really disagree with and have seen differently.
Yep.
Exit opps into Asset Management can be into other FoFs, or hybrid products. Sales? That's more like going into Cap Intro/Prime Broking, Placement Agent (if you want to see some rich people that few people know about and even fewer respect...), Product Specialist role etc and most certainly people do that. One has also forgotten about exiting into corporate/state pensions (9-5 jobs with solid and very stable 6 figure pay in which everyone gives you all the data to do your work), or the gravy train jobs at endowments/foundations (which pay even better and don't work that much harder). Family offices do funds as well. As do SWFs.
Yes on the people skills. The opportunity to learn technical things is there, but few take it because they would rather do other things with their life. A FoF investor who reads the odd 10k and understands a real business is much more of a threat to GPs when asking them about deals (you'd be shocked how few GPs can really articulate why they did a deal or the business case for it, or why their deal is unique and not just chasing the market that's chasing deals in the same space...) and thus a much better potential investor. Understand derivatives/options? You'll be in a much better position to grill multi-strats and PMs who are used to breezing by in these meetings because their counterparts usually have no clue. Yes it takes self study and time like anything else, but FoF can be a great launchpad to a stable, high earning and powerful career without having to put in 80-100 hour weeks through your 20s.
That said it's a dying business as investors (rightly) are sick of paying the additional layer of fees given that so few FoFs deliver any alpha. But that's for another thread...
Good Luck
Edited for clarity
Moved into a hedge fund and traded/managed a portfolio. I studied/learned a lot, used resources and networked a ton and for a long time. And most importantly, I got lucky, but the price was that I had to hit the reset button (ie start all over again). That said, progression at many hedge funds from grunt to above can be very fast.
Plenty of people have asset allocation responsibility without a previous fundamental background. (I am presuming you mean like endowment, pension, FoF allocators etc). For every endowment, pension, family office, etc, there will be lots of people without a banking/fundamental (ie. excel) background, or those who did it so long ago that they really don't know much about it anymore (how much do you remember from 20 years ago?). Furthermore, there are plenty of people with a fundamental background that go into a fund job and do terribly at it. It's higher level and they are just not able/willing to look at the forest instead of trees.
I fundamentally believe anyone can be taught either/both jobs, just that some time and help is needed.
Fund investing is much more of a people game. You are essentially investing blindly into a pool of assets and so have to make a judgement call on the people/team based on their past performance (which is not always clear) and cohesion, the terms offered, a peer comparison, timing/vintage (ie. I have $100m I can invest this year and need to generate x% return annualized and y% cash per year etc), and the supposed risks they take. Yes you can do some higher level work on multiples paid vs peers/public multiples, sector allocation, leverage used and even poke around a few companies, but remember we all only have 24 hours a day and one if often evaluating several different funds and strategies at once (depending on the shop). Many may claim to do much more work, but often have the same results (ie. invest in the same funds as others).
Public pensions have to publish the funds they invest in. It is all public. I think Foundations often publish that as well. Look at them on the interwebs. Most of them back the same horse or group of horses. Much like in HFs/MFs (who tag along and invest in the same stuff) etc there is a lot of group think because that is the easiest way to not get fired.
Ok, enough cynicism.
Actually wait back to cynicism, fundamentally, what does anyone really actually know about macro? Like really? There are far too many variables and assuming those people did, they certainly would not be working for some schmoes. They would be working for themselves and be stinking rich doing it.
Do PM if you have any questions.
Good Luck