Q&A Discretionary Hedge Fund Trader

"eastcoastnontarget"

What kind of background do the flow vol traders generally have/need on the sell-side? I'm assuming most, if not all of the exotic guys have masters/PHDs, but figured you could trade vanilla stuff with just a quant-ish undergrad?

What's your trading strategy at the fund? Mostly fundamental work or do you take technical/RV views as well? Time frame on trades?

How big of a deal is the lack of liquidity in credit that seems to be getting mentioned much more often recently?

Do you do execution trading or just strictly manage your own book? Also, how common/difficult is it to move from S&T to the buy-side to manage your own discretionary trading book?

Thanks, really appreciate the thread

1) most guys on the vanilla desk i was on were undergrad econ (including me). Some maths, some arts based, some didnt have degrees. On the exotic side, depends, it was heavily skewed towards the grand ecoles students from France, whcih is a bit of a different system but known for producing mathematical talent. Id say to trade vanilla options and even light exotics you dont in theory need mroe than what you get taught as part of a more mathsy econ degree. Its much more about understanding mathematical concepts as they relate to the products you trade. I met very few Phds onthe sellside if im perfectly honest, maybe some of the quants were. The need for maths gets way overblown on this site for trading positions on the sellside.

2) mix of fundamental and RV, id say a lot of is quant overlayed with fundamental analysis

3) in Europe its a huge deal. You can definitely notice that market makers on the sell side just cant have the same inventory as they used to. And it is a bit worrying for whenever sell offs happen because you can definitely feel the volatility be exacerbated by the fact that there just isnt that system in place to absorb risk.

4) I manage a book on a discretionary basis along with a senior trader, but there is some execution help for other desks that are more fundamental based where I help out

5) Going from sell side S&T to a discretionary book is very difficult these days. I think you either have to be very senior on the sell side and responsible for a lot of risk, or you find an opening at a junior level like I did and make the move early. I think its very difficult if you are like a VP on a sellside desk and want to move unless you have a great connections. The reason its easier on a junior level is because you are still mouldable into a different product, so i could still jump from equities to credit, if you are a VP on the sell side you are sort of stuck in the product you are in for a large part. The tircky part is finding an opening on the junior level, but there is stuff out there, you just have to be constantly looking. I found my job posted on the companies website randomly so you never know.

"Acidophilus"

Thanks for doing this. Feel free to answer all/some/none:

- How did you choose the role you are in? What were your considerations when evaluating which role to accept?

- How is your fund structured - one of the multi-manager platforms with tight limits? Is execution centralized and separate from the PM teams?

- How did you "show" your fund your P/L track record from your sell side days before they hired you? How do they verify it - just take it on faith?

- Do you have full discretion over our own book or are you execution only? How did/do you transition to that full discretionary role? (Assuming you are using "discretionary" in the title to mean "not systematic")

- What is a decent/good level of return for your seat? Sharpe? Are you judged on $ P/L or % return on capital allocated?

- How scalable is your strategy (i.e. to what level of capital before you start seeing diminishing returns)? How scalable does your strategy need to be to get you a seat?

- If you had to move to another fund for whatever reason, how would you do it? Headhunters? Network?

1) Chose me in a way. I was only starting the buyside process and this was the first firm that i met with.

2) Cant say too much, but very team oriented as opposed to some of the reknown churn em and burn em HFs, i guess you would use the word centralized

3) I came in at enough of a junior level (i.e. non MD PM) that there wasnt a track record process

4) I work with a senior trader who is the PM and its discretionary. Again, it comes down to transitioning at the right time. There was an opening for a trader to come in underneath the senior PM in an apprenticeship capacity and you sort of go from there. If i had tried to come in as a VP from the sellside and tried to go right into that senior PM role then it would have been much harder.

5) Probably cant comment on the specifics there

6) Again thats probably a question that more affects someone at a fund like Brevan, where you get X amount of money and if you dont hit targets you are out as opposed to a very centralized team structure where you can find yourself working on very various things/investments

7) I get headhunter calls on a weekly basis, so thats probably the way to go. One piece of advice, keep friendly and in contact with any HHs you know, they can be a valuable info source and you want them to ahve you on the top of their list. Same advice for real estate agents.

"qs344"

- What role in the equity derivatives space do you think offers the most upside for non-execution buy-side trading/portfolio management? Any thoughts on index vs. single stock?

- Do you regret not starting your career in a product more intensely focused on rates?

- I read a previous AMA where you were concerned about layoffs hitting your desk - did you ever consider internal mobility/lateraling to another desk, or did you only come into interest with buy-side opportunities?

- I've heard of a "bottleneck" effect where if you stay too long at a bank you no longer become an attractive candidate for buy-side firms and lasts until you become truly senior - did this affect your decision to start looking early?

- What advice can you give on marketing yourself to the buy-side, as someone with a background that isn't directly parallel to your current role? Also, how did you "catch up" and transition into convertibles- was it self-teaching, or did you take on an intermediate role between the sell-side and your current role?

~Sorry if the below is naive, I don't know much about the convertible space~

- Is your strategy primarily finding traditional convertible arb opportunities (long/short convertible and delta hedge with stock)? Are there other vaguely RV trades you seek to make, like imp vol spreads between converts and vanilla options?

- How would you hedge against a convertible arb blow up like GM in 2011?

- Credit spread often seems to be positively correlated with imp vol - is this a unique pitfall of hedging convertible debt risk with CDS, or is there something I'm missing?

- How is the liquidity in the convertibles space vs. the listed options space? Does your background in single stock options help in dealing with illiquid situations?

- With the size you run, does share dilution upon conversion enter the picture when it comes to how you trade?

1) Uhm thats a very good question. I would say that equity derivatives isnt actually a fantastic starting point at a BB for discretionary HF. THe problem is that you really are just trading vol, so your exit opp is a vol fund, and there just arent that many discretionary vol funds these days (as in not quant vol arb funds). So your best bet is to go to some sort of macro oriented strategy where they are open to trading vol where you can add value, in which case arguably index has a leg up. However, if you can somehow develop fundamental analysis skills (i.e. via CFA or something like that), you could potentially transition from a single stock vol guy to a more fundamental oriented HF, because at that point if you can be a fundamental guy but at the same have trading experience thats def a plus. In terms of exotics vs vanilla, I am biased towards vanilla, but also because the exotic market is very retail product focused. The issue it boils down is that for any vol trading job, its usually very niche so its hard to find the opportunities. Its not like there are tons of HFs like there is for fundamental analysts kind of thing if that makes sense.

2) Not really, i know that rates are considered to be the building blocks but they just never really interested me. Ive read several rates books to know something, but it was more to be aware, never had a desire to trade the product. I have never found my lack of rates trading to be a hinderance, and i get enough sellside research to know roughly whats going on.

3) there was concern across the firm

4) Definitely. There is a window where you are running risk on the sellside and have a book, but are not yet VP, and I think this is a window where anyone interested in buyside opportunities should be looking for roles. At this point you are essentially in the bucket for junior trader roles at HFs but you have a good experience relative to the candidate pool (i.e. some kids considered will be 1 year expeirence or even out of university in some cases). I think most kids dont consider this option because they are managing a small amount of risk on the sell side, and in their eyes its a step back, but the payback time is about a year. I definitely took a step back in terms of responsibility initially because i had to build up my trust and credit with the desk, but you need to think long term.

5) In terms of catching up, there was just an understanding that there would be a transitional learning period, and importantly both me and my new employer understood that.

6) on the CB book yes its mainly traditional CB arb. In terms of single stock vol vs CB vol, its not done that often tbh, you are just paying too much slippage between the products in this market, and there actually isnt that big of an overlap between single stocks that are liquid in the vol amrket and CB issuers. You can sometimes think about a general vol hedge on the book using SX5E vol, but at the end of the day those can get out of whack quite significantly as its very different investors and differnet driving forces.

7) either CDS, cash bonds, or sizing where you are comfortable iwth the risk. Always knwo your worst loss and be comfortable with it. If you arent then your size is wrong.

8) both are crap :), the trading aspect definitely helps

9) depends on how big the convertible is relative to the existing market cap. Its definitly something you consider when an issue comes out, and how the convertible is struck (as the share price will usually drop day 1)

Feel free to re ask any of the CB questions if i wasnt clear enough.