3rd Year HF Analyst Q&A

BlackHat's picture
Rank: Almost Human | 7,620

Prior reading: Hedge Fund: The Investment Life Cycle. Quick background: Penn undergrad - 2 years at AM firm - 2 years at large HF - currently in 1st year at 2-3b long/short HF with heavy emphasis on value.

I still had some questions floating around my inbox that I may have missed and some questions from the comments from my last thread, so I figured if anyone still has questions from the last post, or new questions, I'd be happy to answer them here.

I can field questions related to breaking in, recruiting, the investing process itself, lifestyle, etc. I've just recently been getting a bit more involved in the non-investing related aspects of the fund such as employment and plans for future fundraising, so I can get into a bit about that too if anyone has specific questions.

Post questions in the comments, or if you prefer them anonymously, send me a PM. As always, I'm also open to answering personal questions via PM if you prefer them held out of the thread, but doing this for everyone's benefit first and foremost. Fire away.

Comments (70)

May 7, 2012

As a value investor, what potential opportunities/threats do you think will reveal themselves as interest rates rise after 2014?

The current generation hasn't been around long enough to deal with higher interest rates and inflation which may lead to a significant number of bankruptcies in the following years. Maybe high yield and restructuring will become revitalized, but from an equities perspective do you see certain players as having an upper hand during this period due to large cash stockpiles, strong revenue streams, etc.?

Thanks for doing a Q&A, always interested in hearing your insight.

May 7, 2012
Determined:

As a value investor, what potential opportunities/threats do you think will reveal themselves as interest rates rise after 2014?

The current generation hasn't been around long enough to deal with higher interest rates and inflation which may lead to a significant number of bankruptcies in the following years. Maybe high yield and restructuring will become revitalized, but from an equities perspective do you see certain players as having an upper hand during this period due to large cash stockpiles, strong revenue streams, etc.?

Thanks for doing a Q&A, always interested in hearing your insight.

I wish I had the opportunity to answer this question before David Einhorn wrote his "Jelly Donut" piece for the Huffington Post. I have to echo what he said now, even though it's been a somewhat agreed-upon hypothesis for a lot of guys I've talked to lately. Rising interest rates, which technically are inevitable since we have nowhere to go but up from here, are actually a good thing. We have a lot of the public, particularly the retiring public, out there right now with no choice but to be involved in the stock market - they can't afford not to be, given how low rates are. As the most risk-averse piece of these investors exits the stock market once interest rates turn back up, we'll see a decline in the stock market. Most of the companies we're seeing with these disgustingly high P/Es are going to see runs on their stock prices, and those who choose to stay in the stock market are going to be piling back into the "steady Eddie" stocks. This is part of the hypothesis of going after the most growthy-y of the growth stocks right now and shorting them while we have the chance. The same strategy can be said for those companies that we think are more "boring" but are defensive positions that are likely below their intrinsic values. Essentially, once these rates start to climb (though I have no idea when that will be), we'll see a reversion where people are giving more respect to the safe, blue-chip stocks and less love to these Sodastream/Green Mountain type companies that had sky-high valuations given their low earnings.

    • 3
May 7, 2012

Random questions.
Is it possible to break in from BB ER? Does the CFA help?

Are there people in HFs who have not worked in finance before their MBA?

May 7, 2012
JamesHetfield:

Random questions.
Is it possible to break in from BB ER? Does the CFA help?

Are there people in HFs who have not worked in finance before their MBA?

YES! The truth of the matter is what you do in ER is as close to what you'll be doing as an HF analyst as possible, especially compared to IBD. You make a lot of contacts in ER on the buy-side and if you're good at your job, you may be hearing from them in the future. Aside from just that, we don't discriminate between ER guys and IB guys past a certain extent. Typically the modeling skills are better for ER (for our purposes) and you have a better understanding of a certain industry or industries. However, the reason bankers tend to get the edge is the (possibly unchangeable) belief that the most "capable" people tend to go into banking, so we want those people for our funds. Our fund personally doesn't give a rat's ass about that, but most of the larger, more name-brand funds do.

As far as the CFA, I've always held the belief that it doesn't help unless you are coming from a "non-target job" such as F500 or something like that. If you're coming out of IB or ER, I don't see why you'd need it. Obviously it helps, all else held equal, but it's nothing I've ever considered needing. The same can be said for an MBA. But to answer your other question, no, I've never come across anyone who came from somewhere completely outside of the finance world. Actually, my last boss hired his niece straight out of undergrad with some non-finance major, and she ended up quitting after 2 months because she had no idea what she was doing and nobody was going to hold her hand and teach her. Hah.

May 7, 2012

Do you enjoy your career? Pros and Cons

Whats the matter? Scared of my little red fuzzy anus? Don't be shy,let me show you the way, give me your hand and I will take you to paradise <3

Kind Regards,

ElmElm

    • 1
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May 7, 2012

is that you in the pic?

May 7, 2012

can you give us an example "day in the life of blackhat" ie what is a typical workday like for you, from rise to crash

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Best Response
May 7, 2012
AndyLouis:

can you give us an example "day in the life of blackhat" ie what is a typical workday like for you, from rise to crash

Given that our fund is small in terms of headcount, my days fluctuate pretty significantly, but I'll try and give you a run-down of what a typical day is like when things aren't too out of the ordinary:

6:00am - Wake up, hit snooze
6:30am - Time to get up. I never shower before going into work, which sounds odd now, but...
6:45am - Throw on workout clothes, walk to work. I meet my boss every morning to play squash. I'm still learning but he seems to really want me to get good so he has a decent squash partner. I'm athletic enough to beat his ass already despite my inexperience, but for now I'll let him beat me so he can keep giving me tips. I'll start shitting on him once it's time for him to write me a bonus check. He'll think he's the reason I got so good. (Wow I hope he doesn't read WSO)
8:00am - Back at the office. Shower, change into business casual. Start looking through market news and reading any emails I've gotten. Hopefully a late-night discovery by a fellow analyst or a sell-side analyst giving me a quick tip on something we had been trying to figure out the day before. I'll follow up on all this stuff after breakfast.
8:30am - Breakfast with a few co-workers. Sometimes my assistant will surprise us with a platter or danishes or something so we don't have to make an effort to get food ourselves.
9:00am - Start checking over the pre-market earnings announcements and how my positions are looking coming into the open. If anything weird is going on I'll run to my boss like a little girl screaming at him to see what we should do about it.
9:30am - The bulk of my day. I'll continue following the market while doing my general research on whatever position I'm looking at. My previous thread would explain what most of this entails. Calling analysts, reading 10-Ks, etc. You know the drill.
3:00pm - What can I say, I eat a late lunch compared to most. Unless I'm meeting with other analysts or we have investors in town that want to meet some of the team, I'll almost always eat at my desk. I actually prefer it, given my intense hatred for eating. It's a doubled-edged sword.
4:00pm - Finally the market's closed. I'll listen in on any earnings calls of major comp companies to my own positions, or obviously the calls of my own companies if they're reporting that day. Sometimes I can get in touch with a sell-side guy I know to ask a question for me if I'm lucky or desperate.
5:30pm - Work out at the gym a few floors below us.
6:30pm - Come back up, screw around on WSO for a bit and see who's still around. If I still have work or feel like waiting an extra hour I can get a free dinner out of it. I'll do that considering it's a Tuesday and none of my buddies are doing anything tonight anyway. Plus my girlfriend hasn't started texting me yet so life is still peaceful and good. I'll keep reading those recent 10-Qs for one of my new potential short candidates.
8:00pm - Eat dinner, wish the other guy still in the office luck (his picks have consistently been at the top of our "top 10 losers" print-out that goes up on the wall every week), and head out.
8:30pm - Meet up with friends, maybe the girlfriend, do whatever. Since it's Tuesday I'm not going out. I'll be asleep by midnight hopefully.

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May 9, 2012
BlackHat:

8:00am - Back at the office. Shower.

with your squash boss?

May 7, 2012

SB for you man. These are the best threads on the site.

May 7, 2012

jelly donut link for anyone that cares: http://www.huffingtonpost.com/david-einhorn/fed-in...

May 7, 2012

going the lazy route, huh?

May 7, 2012

What backgrounds do your fellow analysts seem to be coming from, both from an undergraduate/MBA point of view, and from a previous job perspective?

May 7, 2012
cooldurg:

What backgrounds do your fellow analysts seem to be coming from, both from an undergraduate/MBA point of view, and from a previous job perspective?

Just like you'd expect, most people in our office came from IB, but first and foremost from other HFs. We have 8 analysts in our office, and not a single one came directly from IB. That's specific to our HF though I think. But tracing their backgrounds to what they did right out of undergrad, I believe 6 came from IB, mostly from BB and top boutiques. I came from an AM/HF background, and the last guy came from BB ER.

Definitely makes us sound snobby, but our boss has a strong preference for people from a few certain schools, so other than one guy who came from a non/semi-target, everyone else is from an Ivy. I'm pretty sure only 2 guys here have MBAs actually. Most don't.

May 7, 2012

What did you do in AM? How did you get there? and how did it help you get into HF industry?

Do what you want not what you can!

May 7, 2012

can you make $500k - $1MM as an analyst or do you have to be a PM to make that kind of money?

May 7, 2012
BigHedgeHog:

can you make $500k - $1MM as an analyst or do you have to be a PM to make that kind of money?

lose yourself

Do what you want not what you can!

May 7, 2012
BigHedgeHog:

can you make $500k - $1MM as an analyst or do you have to be a PM to make that kind of money?

ya. you can.

May 15, 2012
BlackHat:
BigHedgeHog:

can you make $500k - $1MM as an analyst or do you have to be a PM to make that kind of money?

ya. you can.

Do you? =P

    • 1
May 7, 2012

Did you work as analyst or ER in AM? I am planning to go to ER and wonder if it will help me transfer to HF down the road. Thanks!

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May 7, 2012

Wow, you are who I want to be in the next few years.

I am also a Penn grad going into a large AM (equities side), and interested in going to a HF in the long run. I have some questions about your jump from AM to HF. Is there a recruiting process like there is for IBD->PE? How does it work/how did you break in? I read your other thread and you mention hybrid AM/HF firm that you started out in. Does that mean that you were in the HF group/strategy of an asset manager? Also, how do you get "poached" by HFs? Do you just call up PMs and ask if they have an analyst opening?
Also, do you start out as an associate at the AM and now are you an analyst at the current fund?

May 7, 2012
YGCS:

Wow, you are who I want to be in the next few years.

I am also a Penn grad going into a large AM (equities side), and interested in going to a HF in the long run. I have some questions about your jump from AM to HF. Is there a recruiting process like there is for IBD->PE? How does it work/how did you break in? I read your other thread and you mention hybrid AM/HF firm that you started out in. Does that mean that you were in the HF group/strategy of an asset manager? Also, how do you get "poached" by HFs? Do you just call up PMs and ask if they have an analyst opening?
Also, do you start out as an associate at the AM and now are you an analyst at the current fund?

I never really got a chance to be part of any recruiting process there might have been, given I was literally just called up one day by a headhunter asking me if I had any interest in taking an interview with XYZ Hedge Fund. And as far as the AM/HF firm... it's really hard to put it into either category, but yeah I'd say basically we were an asset manager with the ability to go short, use leverage, etc. I never did any "networking" to get the call from the headhunter, but I think the reputation of the firm I was working at in the investing community made me and probably a few other guys at similar places targets. All the junior-level guys at that firm were simply called "investment research analysts" and there was no real analyst - associate - etc hierarchy like there is at most places. Actually, the same goes for my fund now. Everyone except for our boss (the founder) is called a Research Analyst. Comp definitely defers based on experience and performance but we all have the same title other than him.

May 7, 2012

does every position in your book have a hedge in place?

May 7, 2012

I'm starting in buyside value ER as an associate out of undergrad (soon) - have you seen most people reach the Analyst level of HFs coming out of B-School+CFA or are they direct hires from ER/IB with just their CFA. Curious to know what you have personally experienced as a common path to value HF analyst. Also, do you enjoy your work and any recommendations to someone starting a career in value investing?

May 7, 2012
eriginal:

Also, do you enjoy your work and any recommendations to someone starting a career in value investing?

I feel the rest of your question was similar to what I answered to someone else a moment ago, so I'll focus on this part.

I'll start with my recommendation to someone who wants to be a value investor. My main suggestion, or really my only advice, is that it has to be something that fits your personality. Are you a logical person? Can you detach your emotions easily? Trust yourself? Are you willing to do your own work, and not just take the advice of others or follow trends? These things are important to being a value investor, because the only way you can be successful doing it is if you actually BELIEVE IT. I used to be obsessed with trading and thought that there was no reason to buy and hold because prices changed so much that if you were good enough you could make money all day long taking advantage of short-term fluctuations. After reading some value investing books and seeing that methodology, it just seemed like such a more logical approach with a higher hit-rate. Not only that, it worked with my personality a lot more. Following your research, despite what the market happens to say one day, is 90% of value investing. It's hard to answer your question with a single answer, but my best advice is that you'll only find success and enjoyment in it if you actually believe the methodology. The best feeling in the world is seeing it work after you've put in months doing research and sweating out a market that doesn't agree with you at first.

And as for work - I love it. It fits with who I am. I'm given a ton of freedom but a lot is expected of me. That allows me to do what I think I need to be doing to get the job done, sans the bureaucracy, and still be able to sweat about it and work my ass off to see that I come out on top. I wouldn't trade it for anything. The hours are long and it's stressful, but I'd hate a job that wasn't. I still have plenty of time to enjoy myself outside of work, and the freedom allows me to do that if I've gotten my work done on time. Although it's not my plan for life, I could see myself happily working here until I retire. One day I wanna be the one calling all the shots, though. Whether or not that's possible here is up for debate.

    • 1
May 7, 2012

I know you covered this briefly on your other post but I'd really appreciate if you could elaborate how you source ideas in more depth. I was lucky to get a sneak peak of some investment theses at a top global macro HF and am completely amazed at how creative some of their ideas are. How do you connect the dots?

May 8, 2012

I would love any advice for someone outside finance trying to break into the HF world.

I'm a quant guy (from politics originally, where I did quant work for campaigns/political orgs), and my partner is a quant guy (PhD candidate in statistics, worked in a consulting firm doing quant work), and we developed an algorithmic trading system that backtests very well and has been trading with 90-95% profitability in live testing over the last 5-6 months. We are up 13.5% currently since inception, with the average hedge fund up ~4.5% over the same period according to most indexes.

So we've got our real money test fund running, and we've raised money to actually launch our fund -- we're hoping to have all the legal documentation in place and the LP set up between July 1st and August 1st, depending on when a California registration exemption rule gets passed, and how fast our law firm can move.

The only piece we don't have is an anchor investor. Our goal to launch is not enormous but not insignificant either -- 2 million -- because at that amount we'd be self-sustaining off our management fee. We have Morgan Stanley and Lazard Capital Markets both offering prime services and both doing cap intro for us, and we're networking like crazy, both within our personal networks and anywhere else we can find (like SALT).

So that's us. A couple of outsiders who are trying to break into the HF world in a non-traditional way. I'd love any advice you can offer.

May 8, 2012

As a value investor/analyst, how much focus do you place on econ. research/analysis? And if so, what do you look at/for and how do you go about doing the analysis.

Also, for someone interested in becoming a value investor, what steps would you recommend them take in learning this aspect of investing (econ.) and be able to infuse it into how to analyze companies.

My question stems from the fact that key econ. figures like CPI, PPI, etc. tend to move the markets as well as affect specific industries.

May 7, 2012
arzoo:

As a value investor/analyst, how much focus do you place on econ. research/analysis? And if so, what do you look at/for and how do you go about doing the analysis.

Also, for someone interested in becoming a value investor, what steps would you recommend them take in learning this aspect of investing (econ.) and be able to infuse it into how to analyze companies.

My question stems from the fact that key econ. figures like CPI, PPI, etc. tend to move the markets as well as affect specific industries.

It's late, so I apologize for this answer possibly being too short and less detailed than it could be. For me, about 90% of these economic indicators are pure bullshit. The consumer sentiment measure put out by the University of Michigan leads the way in terms of biggest piece of economic bullshit that somehow moves the markets. CPI is a bit more important, but still, it's all arbitrary what you decide to include in your little "basket of goods" or what have you. Even unemployment numbers aren't entirely reliable. Oh cool, unemployment decreased from 8.7% to 8.4%. But wait - the number of people in the labor force dropped by 4% over the same period? So you're saying we're fucked? Cool! Let's buy stocks!

As a value investor, I don't take these too seriously. The only thing I like about economic indicators like these is that they move the markets in what I believe to be irrational ways, and can often create great buying or shorting opportunities, depending on what happened. Other macro-type events, like what the Fed does with interest rates, are a lot more important for me to consider though. These are real issues that actually change the way the economy runs, not just arbitrary diagnostics that we can react to for seemingly no reason. In the case of something like interest rates, refer back to my answer to Determined's question earlier in the thread. I think there will be some interesting changes once Ben decides to start closing the discount window a bit.

May 7, 2012

Quick question: Then what in the market are you following?

BlackHat:
arzoo:

As a value investor/analyst, how much focus do you place on econ. research/analysis? And if so, what do you look at/for and how do you go about doing the analysis.

Also, for someone interested in becoming a value investor, what steps would you recommend them take in learning this aspect of investing (econ.) and be able to infuse it into how to analyze companies.

My question stems from the fact that key econ. figures like CPI, PPI, etc. tend to move the markets as well as affect specific industries.

It's late, so I apologize for this answer possibly being too short and less detailed than it could be. For me, about 90% of these economic indicators are pure bullshit. The consumer sentiment measure put out by the University of Michigan leads the way in terms of biggest piece of economic bullshit that somehow moves the markets. CPI is a bit more important, but still, it's all arbitrary what you decide to include in your little "basket of goods" or what have you. Even unemployment numbers aren't entirely reliable. Oh cool, unemployment decreased from 8.7% to 8.4%. But wait - the number of people in the labor force dropped by 4% over the same period? So you're saying we're fucked? Cool! Let's buy stocks!

As a value investor, I don't take these too seriously. The only thing I like about economic indicators like these is that they move the markets in what I believe to be irrational ways, and can often create great buying or shorting opportunities, depending on what happened. Other macro-type events, like what the Fed does with interest rates, are a lot more important for me to consider though. These are real issues that actually change the way the economy runs, not just arbitrary diagnostics that we can react to for seemingly no reason. In the case of something like interest rates, refer back to my answer to Determined's question earlier in the thread. I think there will be some interesting changes once Ben decides to start closing the discount window a bit.

May 9, 2012

I have a bunch of questions. If you can only get to just one of them, I'll be grateful. Thanks again for offering up this Q&A.. you rock!

1) Do you have any tips for someone coming from a long only fund on the AM side to improve his shorting skills with the ultimate goal of being a useful addition to a long/short fund?

2) You mentioned you model out every company from scratch. Do you ever find this isn't worth the additional time? And if you believe every company should be modeled differently (an idea that I'm not contesting) then does it make comparisons to other companies even more difficult? A real general question that I'm getting at is, at what point do you feel the incremental increases in valuation accuracy are not worth the extra time spent modeling? The feeling I get is that you place a lot of emphasis on the target's business strategy and sustainability of competitive advantage. Does spending too much time in excel ever interfere with your ability to step back and evaluate some of the more qualitative aspects of a target's business strategy? Do you ever feel like you've missed an investment opportunity due to not having moved fast enough? How many positions on average are you maintaining at any given time?

3) Does your preference for the smaller fund you're currently at opposed to the larger more hierarchical fund you were previously at have anything to do with how you described the previous fund as being "on its way down"? Would you take a pay cut to work with your current fund if the larger fund wasn't dwindling down? Are there any advantages to working at larger funds?

4) Is your process for maintenance mode and deciding when to exit a short position basically the same as for your long positions? You decide to get out of the position if it goes down to your price target or if something materially changes that might improve the outlook for the company or at least limit your previously expected downside? Can you possibly give an example of this?

5) You spend a lot of time going through 10-ks. What kind of approach do you take to this and do you have any particular insights or strategies you like to use? Do you take a forensic accounting approach and try to root out any fishy business? Or do you take your experience in dealing with annual statements and talking with management to help you read between the lines and know what is really going on?

6) What other subjects are you interested in reading and knowing about that don't directly relate to finance or the markets but that you think help you improve as a stock picker? I'm also an online poker guy and I do see some analogies to be made to value investing - in your opinion, what about being a poker player has helped you the most with your investing?

7) How much of the portfolio do you typically hold in long and how much in short positions? Is this a strategy that the PM sets which then guides you in looking harder for short ideas when he is more bearish on the market and vice versa? Or do you rarely involve macro predictions in the decision process and rather take a pure value approach to finding strictly undervalued/overvalued companies? Put a slightly different way - are you guys generally more excited about short ideas?

8) Is there a specific format you use when you're finally ready to pitch an idea to your PM? Is it more along the lines of an informal chat? Or more along the lines of a formal and well prepared presentation?

9) Do you consider yourself a generalist? Did you ever focus on any particular sectors at either of your buy side stints or were you never limited? What are your opinions on being a generalist analyst versus having one, two or maybe three sectors you specialize in? I focus mainly on TMT which does offer a decently large universe of choices to research, but sometimes I consider trying to move into a more generalist role if for nothing other than as preparation to someday be a PM who must know something about everything and ideally a lot about everything.

I also wouldn't mind getting a discussion going of your preferred valuation methods whether cash flow based, comparables, ratios, etc. and what your experience has taught you about the reliability of them. I realize this could be a thread (or a book) all on its own, so no worries if you don't want to get in to it.

May 8, 2012

Thanks for the reply.

Earlier, you mentioned that you are one of eight analysts. Can you elaborate more on the working environment.

  1. How much interaction is there between the 8 of you? Like do you/they ask help from one another or collaborate on certain ideas or is the environment more of competition? And does it ever occur that you end up pitch the same issues?
  2. When you or other analysts were brought in, did they screen for specialties, ie. avoid getting 3 analysts who have expertise in same sectors, etc.
  3. Given that all of the analysts are value oriented, have you observed differences in the way value investing is carried out? If so, what tratis/characteristics/methodology, etc have you noticed from those who are successful?
  4. On the other hand you mentioned the analyst that has consistently picked laggards. What mistakes, issues, problems do you see that is done by those who often choose losers (not specifically to the top ten list guy)?

Feel free on whatever added information you wish to share.

Another question I'd like to ask is do you go through 13F filings of known value managers or other sites/resources on the web to get ideas. For example, a number of value funds were following Michael Burry's blog posts way back when he was a medical intern, and many analysts go through 13F's of the known hedge fund managers. What are your thoughts on this?

May 7, 2012
arzoo:

1. How much interaction is there between the 8 of you? Like do you/they ask help from one another or collaborate on certain ideas or is the environment more of competition? And does it ever occur that you end up pitch the same issues?

  1. When you or other analysts were brought in, did they screen for specialties, ie. avoid getting 3 analysts who have expertise in same sectors, etc.
  2. Given that all of the analysts are value oriented, have you observed differences in the way value investing is carried out? If so, what tratis/characteristics/methodology, etc have you noticed from those who are successful?
  3. On the other hand you mentioned the analyst that has consistently picked laggards. What mistakes, issues, problems do you see that is done by those who often choose losers (not specifically to the top ten list guy)?
  • We all know who's covering what most of the time and we talk quite often about it. Sometimes another analyst will have spent a decent amount of time covering a competitor for the company you're researching and you spend a lot of time asking them quick questions as you run across stuff in your own 10-K, or want them to check your model against the one they made for the comp. Things like that. There's really no sense of competition in the office since we're pretty flat in terms of hierarchy and all of our bonuses typically depend on fund performance almost exclusively (give or take a small discretion by our PM) so it's actually more of a team environment than anything. You want the other analysts to be pitching good ideas and winning. But, like one of your questions mentioned, when you're picking bad ideas we do tend to get pretty pissed off pretty damn quick.
  • No, we weren't really screened for specialties. But we definitely have sectors that everyone knows are "ours," meaning we know the most about them and have the most contacts in them. There's no rules as to what you can or cannot cover, but organically it pretty much gets to a point where everyone stays in their lane, because if there's someone who can do it better than you, maybe you should just talk to them about it and hand-off whatever you think you have up to that point. For example I'm not a "consumer/retail and new tech/media analyst" but those are my "specialties" and the boss knows this, so ideas coming from that sector hold more weight if I'm the one pitching them anyway. We are all though, in name, generalists, and were recruited as such.
  • Tough to answer, not enough time right now but I'll get back to it if I can find a reasonable way to explain it, haha!
  • Usually some combination of getting emotional with a stock and recommending it too early, or having some personal preference toward it (not based on research) and then conducting all necessary research in some biased way. One example that makes me say this is an analysts I know was very high on a particular tech stock and never really had any reasons backing it up. He'd always preach about how his fund was long and he's loaded up in his PA with this stock and can't wait for it to "pop" but never told me why. That, along with a few other reasons, actually made me start looking at the stock as a potential short. We ended up shorting it and we're up almost 50% on it in a month. (So now some of you know what it is, haha)
  • And as far as 13Fs go, sometimes I do look through them to see if a bunch of funds we like/respect are holding something that we don't know a lot about, then I'll make a few phone calls and maybe start doing a bit of research to see if we should be involved too. We don't follow any random Michael Burry-style blogs though, but that'd be pretty damn cool if one came to our attention. Most of our stuff is done in-house though, we're a very arrogant group.

    May 9, 2012

    Sent you a PM.

    May 10, 2012

    Blackhat thank you for being awesome. I definitely have more questions. But I'm sure I must temper the frequency. But still, it very generous of you to be willing to be so helpful, as well as being, in my opinion, the exact opposite of some of the more ludicrous characters on WSO.

    "Everything comes to those who hustle while they wait."
    -Thomas Edison

      • 1
    May 10, 2012

    I've heard that some firms won't hire you if you didn't study abroad. I feel this is quite prejudiced, not taking into account a person's willingness to learn or be coachable. Or the fact that I paid my own way through school without help from my parents (nothing wrong with that of course, I hope I can do it for my kids one day), which kind of ruled out the opportunity costs with being an independent student. At any rate, was just going to ask yall's and Blackhat's thoughts on that particular piece of "hearsay".

    "Everything comes to those who hustle while they wait."
    -Thomas Edison

    May 7, 2012

    Probably the dumbest rumor I've ever heard. In no way, shape, or form is that even remotely close to being true. Totally not the case. Everyone I knew who got good jobs out of UG did not Study Abroad, actually.

    May 11, 2012

    Interested in further thoughts.

    May 11, 2012

    By far the coolest job description post ever on WSO, kudos. I'd give you a SB but i'm too damn jelly...

    May 11, 2012

    If I want to do value investing, should I shoot for research analyst positions on the buyside ASAP? Or is sell-side ER also acceptable?

    Do you know any IBD->value HF people?

    Was your previous fund also value oriented?

    May 7, 2012
    Midatlantica:

    If I want to do value investing, should I shoot for research analyst positions on the buyside ASAP? Or is sell-side ER also acceptable?

    Do you know any IBD->value HF people?

    Was your previous fund also value oriented?

    1. Yes.
    2. Most people do this, but in my experience the best value guys came from some form of research. Not to knock the IB guys but they know I've said this before.
    3. No. It was "multi-strategy," though technically we are too. But they were just huge and trying to do too much to employ all that capital.
    May 11, 2012

    Any advice on breaking into value investing from a semi-target?

    How should I prepare for interviews? How important is it that I already have modeling experience? I imagine interviewing for a value fund is more intensive than a typical IBD interview.

    Do you subscribe to any value-oriented investment magazines like Value Investor Insight?

    Thanks for answering all of these questions! SB for you :)

    May 7, 2012
    Midatlantica:

    Any advice on breaking into value investing from a semi-target?

    How should I prepare for interviews? How important is it that I already have modeling experience? I imagine interviewing for a value fund is more intensive than a typical IBD interview.

    Do you subscribe to any value-oriented investment magazines like Value Investor Insight?

    Thanks for answering all of these questions! SB for you :)

    You don't "break in" to value investing, but I know what you mean. Preparing for interviews is as simple as just doing research on a few companies, truly understanding the economics of an industry, and being able to talk about the market in general and having your own opinions. Knowing what metrics are important to a company, why certain one-time events create a buying opportunity without affecting the company's actual competitive position, etc. Read some of the books I suggested in my other thread and you'll understand the answers to most of this and be able to practice it a bit "in the field."

    Modeling experience is not any more important than it is for any other HF fund. Most of the modeling is sanity-check type stuff for the main investment thesis that we have on an idea.

    May 7, 2012

    Based on your post, I assume it is more behavioral questions along with market-oriented questions. Am I missing your points?

    BlackHat:
    Midatlantica:

    Any advice on breaking into value investing from a semi-target?

    How should I prepare for interviews? How important is it that I already have modeling experience? I imagine interviewing for a value fund is more intensive than a typical IBD interview.

    Do you subscribe to any value-oriented investment magazines like Value Investor Insight?

    Thanks for answering all of these questions! SB for you :)

    You don't "break in" to value investing, but I know what you mean. Preparing for interviews is as simple as just doing research on a few companies, truly understanding the economics of an industry, and being able to talk about the market in general and having your own opinions. Knowing what metrics are important to a company, why certain one-time events create a buying opportunity without affecting the company's actual competitive position, etc. Read some of the books I suggested in my other thread and you'll understand the answers to most of this and be able to practice it a bit "in the field."

    Modeling experience is not any more important than it is for any other HF fund. Most of the modeling is sanity-check type stuff for the main investment thesis that we have on an idea.

    May 11, 2012

    Would you say that the ITW in activist funds (like Third Point) which also emphasis on value would be similar to what you're desbribing or not at all ? Do you know what kind of background these funds would appreciate more than others ?
    I would love to work for an activist fund but they're few of them and I really don't know how to get in, there is no such thing as a path like PE...

    May 7, 2012

    One of the funds I came closest to working at actually was an activist fund. They seemed to ask very similar questions to the fund that I'm currently working at, during the recruiting process. I'd say that they look for people with that value perspective because a major foundation of value investing is assuming that you're buying the entire company when you buy shares of it. You're right there is no path, but they take people out of IBD, from other HFs, and often from PE too.

    May 8, 2012

    Thanks BlackHat. Definitely one of the best threads on WSO. Really appreciate your time and effort.

    Based on the way you have described your work along with the environment and relationships there, I can understand why you love your current situation.

    Here's to your continued success.

      • 1
    May 13, 2012

    Great thread. Thanks BlackHat

    May 13, 2012

    Can you outline how you pitch an idea? What do you compile and present to your pm?

    May 8, 2012

    In coming up with valuations, both entry and exit, do you prefer using absolute or relative valuation methods and why?

    May 7, 2012
    arzoo:

    In coming up with valuations, both entry and exit, do you prefer using absolute or relative valuation methods and why?

    Almost always both. It depends very often on whether or not I believe the entire industry is valued appropriately or not. In most cases it's hard to get a comfortable answer for this, so the logical answer is to go with both an absolute valuation and then a sanity check via relative valuation. For example if I was valuing GM and I happened to come up with a $23 per share price at the end of my absolute valuation, I might run some multiples compared to the industry to see if relatively it makes sense. I tend to trust my absolute valuation more than my relative one unless I'm way off on the absolute. But if I think the entire auto industry's valuation is fucked compared to GM, that relative is going to be weighted much less in my eyes. Hope that helps.

    May 8, 2012

    Thanks, your methodology does make sense.

    Great thread!

    May 16, 2012
    1. I realize this is difficult to generalize, but how does compensation trend over time? You mentioned you have been working there for 3 years, so how has your compensation changed or is it more just linked to the performance of the firm? I'm in banking and thinking about moving to HF. I think the general compensation progression for PE and IBD is well known, but I really have no idea how compensation changes at a HF as you progress.
    2. How do you think about career progression? Do you think you will eventually have to leave or start your own firm to become a PM?

    Thanks

    May 7, 2012
    mwgr5:

    1. I realize this is difficult to generalize, but how does compensation trend over time? You mentioned you have been working there for 3 years, so how has your compensation changed or is it more just linked to the performance of the firm? I'm in banking and thinking about moving to HF. I think the general compensation progression for PE and IBD is well known, but I really have no idea how compensation changes at a HF as you progress.

    1. How do you think about career progression? Do you think you will eventually have to leave or start your own firm to become a PM?

    Thanks

    1) My compensation is pretty much composed of three factors: first is obviously a salary/base, second is a defined percentage in my contract of how much of the total incentive fee pool I am to receive (I'm told this is not very common but we are small in headcount and our PM is very focused on finding people who want to stick around for the long-haul and thus this is an equity incentive basically), and third is a discretionary bonus which is usually $0 in an up year, but would be taken out of our management fee if we were in a down year and the boss thought I still deserved a bonus. So essentially the bulk of my comp would come from getting in on a % of the performance fee, though the other two would be the bulk in down years, so very correlated to our performance. For example - and these numbers are arbitrary - let's say you were getting a $250k base, with 5% incentive fee, and a discretionary bonus. The firm is $2b and does 20% this year. Standard 2/20 means $20M + $80M, and as your offer stated, you are compensated $250k in salary, plus 5% of the 80M incentive fee ($4M), and a discretionary bonus most likely of $0, given your rather large incentive fee. So your all-in comp came almost entirely from your chunk of the incentive fee (note: that 5% is very high, for example purposes only), and that tends to be the way most HF comp trends the higher up you go, one way or another.

    2) I've been told several times that if you put in the years, gain experience, and show your ability to generate great ideas that are consistently being put into the portfolio, one would be able to manage a certain portion of money at the fund on their own, essentially becoming a "mini-PM" of sorts. I've always wanted to one day run my own fund, like so many other monkeys, so that is the direction I'd like to go. But obviously being the #2 guy at a successful fund could be something that would be just as satisfying and give you the kind of enjoyment and responsibility that you could want out of your long-term career progression.

    May 18, 2012

    Thank you very much for taking the time to do this BlackHat. It is very much appreciated.

    My question is related to the whole recruitment side and breaking in, yep another one of those! I'm currently due to intern at BlackRock, however within PAG (Portfolio Analytics Group). Ideally, I would want to progress to their PMG division as soon as possible, or break out to a Hedge Fund. I turned down some trading offers, for this role, do you think this was wise? I'm also considering doing a Masters degree and interning within IBD next summer. Would this add any weight to breaking into the Hedge Fund industry?

    I'm very keen to do something similar to what you do in idea origination. My question is, what type of roles should I mainly be applying for when I come to apply for Grad roles in September? Or should I accept BlackRock PAG, if they extend a full time offer after the internship? I have a feeling perhaps Research within the sell side might be a good option, but then I think surely working on the buy side is a good idea if that's where I wish to end up? If it makes a difference, this is for London.

    Also, just another question on the importance of programming in Hedge Funds? Is programming used a lot in your role, and is it used a lot of in a PM's role? Are you expected to know languages before you apply? Thanks once again.

    May 7, 2012
    Impossible_Living:

    Also, just another question on the importance of programming in Hedge Funds? Is programming used a lot in your role, and is it used a lot of in a PM's role? Are you expected to know languages before you apply? Thanks once again.

    I'll tackle the Blackrock question later, but this one applies to everyone so I'll focus on it for now. Programming isn't really a big thing for us at my fund, but for quant funds or HFT funds or whatever I'm sure it's a lot more important obviously. I know some places like DE Shaw take that shit real seriously and they're looking more for engineers than they are for true investment professionals, but for us it's almost nonexistent. Our PM couldn't program his way out of a paper bag and there's only a few of us here who are even any good with VBA. Nobody expects you to know anything like that at a value HF for the most part I would assume, but obviously it's helpful. I have people asking me all the time for my VBA scripts for certain stuff because they make modelling more convenient or something, but it's not like they're a make or break in the recruiting process. As I said though, I'm sure it's much more important for quant funds that run algorithms and shit for whatever purpose, but I don't know much about that, and if anything I'm biased against those funds, haha.

    May 18, 2012
    BlackHat:
    Impossible_Living:

    Also, just another question on the importance of programming in Hedge Funds? Is programming used a lot in your role, and is it used a lot of in a PM's role? Are you expected to know languages before you apply? Thanks once again.

    I'll tackle the Blackrock question later, but this one applies to everyone so I'll focus on it for now. Programming isn't really a big thing for us at my fund, but for quant funds or HFT funds or whatever I'm sure it's a lot more important obviously. I know some places like DE Shaw take that shit real seriously and they're looking more for engineers than they are for true investment professionals, but for us it's almost nonexistent. Our PM couldn't program his way out of a paper bag and there's only a few of us here who are even any good with VBA. Nobody expects you to know anything like that at a value HF for the most part I would assume, but obviously it's helpful. I have people asking me all the time for my VBA scripts for certain stuff because they make modelling more convenient or something, but it's not like they're a make or break in the recruiting process. As I said though, I'm sure it's much more important for quant funds that run algorithms and shit for whatever purpose, but I don't know much about that, and if anything I'm biased against those funds, haha.

    Thank you very much for taking the time to reply. I did initially think that programming wasn't so important, but more recently I have been seeing a lot of job ads that require programming skills, so I was quite curious.

    I would love to hear your thoughts about BlackRock, and this being a path to being eventually where you are right now.

    May 21, 2012

    This is great. I'm posting to keep encouraging responses. How do you/your fund's PM feel about business school for you. Is it unnecessary? Not encouraged? Would it make you more valuable or just be an unnecessary detour?

    Thanks again.

    May 7, 2012
    The Biz Kid:

    This is great. I'm posting to keep encouraging responses. How do you/your fund's PM feel about business school for you. Is it unnecessary? Not encouraged? Would it make you more valuable or just be an unnecessary detour?

    Thanks again.

    My personal thoughts on it has always been that it's an unnecessary detour if you know what you want to do and are certain that it's working at a hedge fund. You're obviously not going to learn anything in B-school that's going to help you out really, and the networking definitely helps but if you're making moves from the get-go right out of undergrad you probably already have what you need to break in or at least go for a buy-side job of some kind. Needless to say, though, all else constant the guy with the MBA is going to look more attractive to us and to any fund out there I'd imagine. It's just not necessary and having one doesn't make you any more qualified than someone without one in reality.

    May 24, 2012

    Blackhat, thanks for sharing your thoughts.

    Do you have any recommendations on transitioning from one fund to another? What if anything do you wish you'd known going into the new fund? For example, did your experience give you insight on how to make a great impression/prove yourself to the new firm? Are there things you'd recommend doing in your first few months on the job that might not be obvious? Thanks.

    May 7, 2012
    tempaccount:

    Blackhat, thanks for sharing your thoughts.

    Do you have any recommendations on transitioning from one fund to another? What if anything do you wish you'd known going into the new fund? For example, did your experience give you insight on how to make a great impression/prove yourself to the new firm? Are there things you'd recommend doing in your first few months on the job that might not be obvious? Thanks.

    I think the biggest thing I learned from my first two jobs was how different cultures can be across Wall Street. Luckily, my first and second jobs were at firms with cultures on absolute opposite ends of the spectrum... one being a laid back, intellectual atmosphere and the other being a bureaucratic, in-your-face, short-term profit motivated environment.

    I mention this because one of the most important things for making a good impression is gauging the culture. As bad as it sounds, if you end up at a firm where it's an "eat what you kill" environment, you have to be able to recognize it and adapt to it so that you don't come across as someone who isn't gonna make it. When I came to my current firm I saw the similarities to the culture at my more relaxed job, turned off "kill mode" from my last job, and went back to being myself. Once people see that you fit in well you break that initial barrier and can start actually proving yourself based on your talent/merit rather than how well you represent the firm/fit in. In HF though I'd venture to guess that the talent is more important than the fit, whereas in banking or something that might not be the case because your results aren't nearly as quantifiable.

    May 25, 2012
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    Mps721