After reading a bunch of studies, I am hesitant to ever make the move to the buyside. The overwhelming majority of active investors underperform the market over the long-term. Something like 99%. I know some hedge fund strategies are not benchmarked to the market but generally it seems most don't add value compared to their passive alternatives. Regardless of job stability, I find this statistic very disheartening to pursue a career as an investor.
I can't seem to find the value proposition for active management anymore when ETFs are a fraction of the cost for virtually the same return. Even if you're a superstar active manager, how will institutions identify you, and how can they be sure you will perform just as well in a different market environment 10 years from now? Seems like the no-brainer would be to just stick with a passive or quasi-passive strategy.I guess all this to say, I'm curious to know what keeps you hedge fund guys going.
Do you feel like you do not have great job stability? Are you concerned about the future of the industry like I am?
Bump
I’m actually really curious about how you can find SS ER interesting but not want to be on the buyside. What about SS ER interests you?
Previously came over from IB and have always loved the public markets. I feel that my role in SS ER is almost like a consultant for hedge funds and I haven't minded it so far. Granted I'm in a sector that I personally like.
Anytime HFs have a question about a company's certain revenue segment, industry trend, competitors, management conversations, why my thesis varies from consensus etc., I'm able to hop on the phone and walk them through it. Even though I'm not the one buying the positions, idea generation is a big element of the job and I like that aspect without taking the risk myself. After all, famous quote is you make more money selling advice than taking it.
That said, SS ER is definitely a launching pad for a lot of HF roles so I always had that in mind. Decided to try out ER after IB because it was easy to switch internally, wanted a better lifestyle, and the group of people seemed pretty cool. I also thought that I'd have more exit options coming from ER at a reputable shop than if I jumped to a MM HF and decided that I didn't like it.
Your finance professors (especially that one quantitative finance professor that splits duties running your school's investing club) and the folks in your ER internship are motivated to tell you that to justify their own career trajectories. If you have time to make up a fake career history on WSO (despite posting under an anonymous pseudonym to begin with...), go reach out to your alumni that work in PE, or work in the Citadel and Point 72, or work in distressed at Anchorage and Elliott. Ask them about their strategy and how they create value - you'll come across a million different flavors of L/S equity before you even get into other public strategies (I included PE because there's tons of public companies and hedge funds that create value the same way PE firms do).
Here is a good start - google each phrase and learn what they mean. Side note: if you had found the below thread your sophomore year and started talking to banking alumni about these strategies, you would have landed the IB interviews you wanted and gotten into that one finance club a lot earlier.
https://www.wallstreetoasis.com/forums/different-pe-strategies
After reading about them, ask if things like that interest you before you think about comp. The comp will be there in any industry for true right tail performers; the question is whether you think any of those, or other strategies like merger arb, investing around special events like spin-offs/M&A, mixing in venture with public investing, etc, are interesting to you where you're motivated to get out of bed in the morning like you're binging a good TV show.
Can you comment on what comp looks like for SS ER? I am thinking of making the switch to SS ER from a family office. Any color would be helpful. Thanks
With pay bumps across IB's, first year ER associate total comp is anywhere from $120-$150. This figure would rise about 5% each year until the senior associate level where you'd get $200k all-in. VPs clear anywhere from $200-$300k and MDs $400k - $1.5 M.
There can be variation in pay depending on firm and sector too. Comp at the senior levels is based on buyside votes and IB activity (essentially).
Here's my theory:
Up through the 1960s, active investing was not a sought-after profession. There were far fewer market participants with no investing technologies and many of them did not have the same level of education as the industry does today. For these reasons, markets were vastly less efficient to the point where smart and relatively educated people like Warren Buffet & Ben Graham could exploit these inefficiencies based on fundamental valuation. In the Intelligent Investor, Ben Graham literally said that it wasn't uncommon for companies to trade below their cash balances. Buying any company for less than the cash it has on its balance sheet is quite literally free money.
As time moved on, by the 80s and 90s more and more people became aware of the opportunities in the stock/bond markets. This resulted in more market participants which drove up the market efficiency. This meant that most assets would now be accurately priced based on past/current fundamentals so there was no more opportunities of buying fair companies that had greater book values than market values. Instead, most of the investing efforts were focused on future expectations (FY+1 EPS, P/E, etc.). This was still fine for the majority of active investors since there were still information barriers in the market (no Google, FactSet, Bloomberg). Compared to today, the 90s also had fewer market participants and hedge funds were a relatively new phenomenon. This meant that the average fund had less assets under management than today so it was easier for funds to take on positions without moving the market (affecting their returns). That said, 90s were the best decade for hedge fund returns.
Ever since the 90s/early 2000s, even more people saw the attraction in hedge funds due to their past success. This lead even more people to enter the industry (kind of like what we're seeing with private equity today). Even worse, more institutional investors fell in love with the idea of active investing that they dumped billions of dollars into hedge funds. Hedge fund assets under management now greatly surpass their 90s counterparts. What does this do? It lessens returns. Studies show that after you reach $500 MM or so, you can expect your returns to diminish as an active fund since its harder to move money around in the market without changing the price (especially true in small cap stocks which tend to outperform the market). Couple this issue with the rise of SPDRs (first ETF), its clear that passive investing offers great value after you account for fees.
All this to say, it's clear that markets are relatively efficient. Even with the current outflows of active management in exchange for passive, the AUM for active investing is still at a tremendously high level relative to when hedge funds killed it in the 90s. If I were considering a career as an active investor today, I would be very attentive to which fund I join. Statistically, the funds with less assets under management (LMM firms) have greater odds of outperforming; thus, maintaining their value proposition over passive investing. Personally, I feel that long gone are the days of Long-only active mega funds -- why the hell would you ever invest with them when passive is guaranteed to outperform them over the long-run.
Sell side ER has great comp? Then why did you mention that fact but not mention actual numbers?
He posted actual comp figures in a reply on 10/28, and you posted this reply on 10/31... lol.
ER got the same pay bumps that IB got this year - pretty solid
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