Q&A: Multi-strat HF Analyst
Multi-strat HF analyst focused on public equities. All opinions are my own, any views on specific funds are purely anecdotal, will not answer anything too detailed on my background or specific funds, but happy to speak to broad industry generalizations.
Could you talk a little bit about
Your path to where you are now
How many years of experience you have
How you would describe your or your team’s investment philosophy and process
Thanks!
With the caveat that do not want to go into too much detail on my background:
Do you find that most of the people at your shop have similar backgrounds?
What does the sourcing process look like for you and what typically might constitute a catalyst?
Never really quite understood risk arb, could you give an example of either a historical trade you have put on or the elements of a successful one?
Thanks for sharing!
For quant to work well generally you would need liquidity, low transaction costs, price transparency, ability to leverage and some kind of statistically significant relationship between securities and data sets. This should leave some markets on the public side relatively untouched, though these will almost by definition be niche. Risk management at quant funds has improved, but the leverage inherent to quant strategies means that if they are putting on similar trades and there is some degree of drawdown, this can lead to forced selling which can create more forced selling. There is an element to the current in-flows into quant which is likely cyclical and will change when these strategies face a more straining environment, though suspect the main casualties will be newer, smaller quant funds who have absorbed the more recent incremental demand vs. the more established players who are already capacity-constrained. Part of the quant trend is likely structural though in terms of more quantitative techniques being applied to risk management and portfolio construction as well as certain tasks being automated. But honestly, who knows.
Personally given the abundance of information available online I look for some investment ideas as part of interviews and how they think about them. Having some kind of investment idea and having something resembling a thought process that has gone into it seems to be a good filter in terms of motivation.
At a high level I planned this path in terms of taking steps that would make it easier to get a job in asset management, but the specifics of which firms and which roles I ended up at were not planned. Networking helped in terms of understanding the industry better, but I did not get a job directly through networking.
What did you compensation progression look like? How many years out of school are you?
Again, with the caveat that do not want to give too much detail on my background:
Just curious to know how you would define your PE fund ? MF ? and could you give a range of AUM for your HF?
Other than this, how has been this year given the weak performance of L/S Equity funds?
What are your views on 2+2? What types of PE firms/associate experiences best prepare you if you decide to move to a hedge fund? Were you at a generalist fund or industry-siloed?
2+2 has clear value in signalling and networking for the purposes of HF recruiting. Anecdotally I’ve heard of several funds who have 2+2 effectively as a minimum requirement; personally recruiting for HF was a lot easier from PE than from IB. You gain a lot of experience as a sheer function of hours worked if nothing else. You are paid well given your lack of differentiated skills or experience.
The price you pay is lifestyle. Given you are paid literally multiples of the average salary for your experience level, you are unlikely to get much sympathy, but think it is fair to say that it is not a question of whether something like 2+2 will have a negative impact on your physical and mental health, but how much.
I would say the actual experience of PE is secondary to the signalling and branding aspects of it, so it is not so much that you need PE to prepare for HF, but that being hired by a PE firm that is considered competitive to get into can make your profile more interesting. In general if you have done PE you have got some more experience in general, will likely be slightly more mature (just as a function of time...), will have had a chance to put a ‘buyside’ hat on while still being considered ‘moldable’ in a public market context - while this is all true there is a risk of overstating how important PE is to HF as there are plenty of people in HF who do just fine without ever having gone near it. But as the HF industry matures and the competition for ‘good’ seats increases, PE does seem to be being used as a differentiator by some funds.
With all that in mind, the best PE experience is probably the one with the best brand / signalling attributes. I was at a generalist fund, but an industry-focused fund can be an interesting way to differentiate yourself, particularly if you know you want to focus on something relatively niche. Given a lot of generalist funds seem to essentially focus on tech, consumer and industrials anyway, joining a fund focused on those can be a way to differentiate yourself with some degree of industry expertise without making your profile too niche, if that makes sense.
Do you see yourself staying in the HF space long-term? Why/why not?
And how do you find the everyday work compared to PE?
Yes, though in an industry with so much personal career volatility and one that is facing some material structural challenges, who knows what the industry will look like in 10 years. I still think investing is fun and interesting and the HF space seems about as meritocratic as it gets in financial services.
The most obvious difference to PE is the day starts earlier and ends earlier. PE at the larger AUM end is more process-orientated (and similar to IB in reality). The main difference would highlight is not so much the work itself, but that PE can be boring, but there is downtime, whereas being marked to market every day in a HF context there is more daily stress.
What are you thoughts on those that enter buy-side analyst programs out of school (PE, credit, mezz,etc.) in entering the HF industry. Is there a benefit to building the investor mindset earlier or is there a significant barrier to entry coming from a non-traditional path?
From a signalling point of view depends on what program, but a more traditional path for more institutionalized funds provides something in the way of false comfort that ‘you know what you are getting’. Don’t think there is an enormous benefit from doing something on the buyside out of school, but could show strong motivation. Personally I think the training, diverse set of experiences and forced work ethic you get on the sellside makes it valuable, but I don’t think someone who went straight to the buyside would be disadvantaged, ultimately as long as the program will get you in the door for interviews then you should be more or less on the same playing field, and I’m sure some funds might even prefer it to the extent you are seen as more ‘plug and play’.
Thanks that’s helpful and good info to know moving forward, happy new year!
Networking, cold call approaches with investment idea write-ups.
Doubt it.
Banking on average, equity research just more inconsistent.
Motivation, curiosity, intuition.
Thank you! I truly appreciate it
How difficult is it to move from prop trading at a market maker to HF? How much do advanced degrees (Data Science, Artificial Intelligence, etc.) help differentiate from the traditional IB/PE background? What percent of your firm has the more traditional background?
No idea on these questions to be honest. Most of the quant people I have come across have done more traditional degrees, but suspect the kind of advanced degrees you are referring to have not been around long enough to make a real judgement.
Thanks a lot for the AMA.
Really appreciate your time for answering my questions.
Margin of Safety and You Can Be A Stock Market Genius. There is a new book by Gabelli on risk arb which looks good. Merger Arbitrage by Melka and Shabi is decent, and Risk Arbitrage by Wyser-Pratte is the original one, though is a little denser in content. Obvious caveat that while these books are great, experience counts for a lot, potentially more so in risk arb than other equity strategies.
Would say that at multi-strats in general there is more emphasis on defined formulas for compensation, but there are also desks where analyst payout is a purely discretionary decision by the PM.
There are several subscription services like Mergermarket / Dealreporter, though most information flashes up on Bloomberg or Reuters anyway. Other than that Twitter is useful.
Think I’ve answered the career goal question to some degree elsewhere in the thread.
In terms of hard catalysts, having a deal close (if that counts) can be nice as typically the upside is defined whereas with other catalysts you are more dependent on the public market to tell you what upside it decides to grace you with.
1) what are your career plans down the road? Do you want to be become partner at this HF eventually?
2) what was your HF interview like? Was it pitching an L/S equity idea?
3) what are your hours like?
Most HF interviews seem to entail some kind of investment idea, general market awareness and discussion around motivation / reason for wanting to move roles. In general HF interviews are less structured than IB and PE which makes it hard to generalize.
Earliest have heard of people working is 6am and latest is midnight. If I had to guess an average would say 8am to 7pm, but very fund and PM dependent. Have heard of some working weekends, but usually more research / background reading and to be honest at that point the lines start to blur in terms of what is work anyway.
how common are former BB S&T guys at your fund?
as an incoming BB S&T guy, how can i best position myself for HF down the road?
Depends on the strategy, at the risk of stating the obvious, the desks where ‘markets’ experience is more valuable is where you tend to find more people with S&T experience. Traders tend to come over from S&T.
Would try to position yourself on HF accounts, network, put in the extra effort to be seen to be good on these accounts and a few years in start to kick the tyres on moving over.
In your experience, have there been people in the HF industry hired straight out of undergrad? If so, do you know what kinds of things they did in college that helped them get the position? Thanks so much for doing this.
Yes. Usually an IB internship or an internship at another buyside fund helps as does participating in investment societies at college, and having some personal investments you can talk about. Networking also helps as usual (as does good grades).
What are the chances of going from ER -> Multi-Strat HF vs L/S Equity HF. How does one bolster their profile (other than the obvious CFA designation)?
ER probably sets you up marginally better for Multi-Strat but have come across people from ER frequently in both.
Assuming you have some influence over your coverage would try to gravitate towards sectors which make you more marketable and which HFs tend to weight themselves towards. Not saying you could not get a decent HF seat as a REIT analyst, but if your sector has decent liquidity and addressable market cap as well as a lot of dispersion within your coverage you are probably allowing yourself more opportunities (though the contrarian could say that these sectors will be more competitive and have less alpha). Goes without saying that networking with HF accounts is key and networking is a lot easier if you are seen to be a ‘good’ ER analyst. While what defines a ‘good’ ER analyst is debatable, would suggest in a Multi-Strat HF context these things are potentially more important than having the ‘right’ buy / sell / hold recommendations: proactively sourcing and tracking alternative data, leading indicators and industry news coverage, providing quick results summaries, interacting with senior management, industry experts and private competitors frequently, keeping tabs on flows with your trading desk, proactively trying to piece together a perspective on sentiment and crowding in your coverage (at a high and generic level between client types) and attending industry conferences.
What are the chances of moving from a shop like Fidelity or Brandes to a top equity HF? At some point in a few years, I'd be interested in making the switch depending on career progression at my current shop. This is assuming one transitions right after a target undergrad and stays for 4-5 years with the CFA completed as well. Just curious to get your thoughts on this
Moving from a top AM like a Fidelity should be achievable though that profile is better suited to funds with longer term time horizons. Would say that profile should get you in the door for interviews, only caveat is the longer you stay potentially the narrower pool of jobs you could realistically get (+5 years for example could push you out of ‘junior’ analyst roles).
Thanks for doing this.
How far/long will the firm tolerate losses before you or your PM start feeling some heat?
How much does mark to market factor into your decision making? If you feel that there is a lot of volatility and stock could trade lower before it gets better, do you push through with long term conviction or is that a major obstacle due to shorter term optics?
How much do you value being in the info flow with other buyside and sell side people? Do you find valuable ideas through those channels or feel like it’s noise? How aggressively do you network to be in the loop?
Do you see event driven credit guys make the jump to your strategy?
Hard to generalize as depends on the tenure / background of the PM. A PM who has built up a degree of political goodwill over time and has historically been a good performer likely has more leeway, but many Multi-Strats do have strict risk limit rules which if breeched do not so much bring ‘heat’ as reduced capital allocation and even termination.
Volatility impacts sizing so can attempt to ‘bottom fish’ a ‘falling knife’ if really wanted to, but in practical terms it would be unusual to allocate a lot of capital to this unless had some conviction around a short-term catalyst (i.e. unlikely to chase these names on valuation alone). Year-end mark to market implications are relatively well known for its impact on decision making.
A lot of it is noise, but the shorter the time horizon the more a sense of sentiment and crowding has value. It is useful to sense-check your own thesis and to get a sense of what consensus (both sellside and buyside) may be assuming. But ultimately a lot of it is noise (but if that noise moved one of your stocks materially you will want to know what the noise is).
Don’t see as many credit people move across, but don’t see any reason why they couldn’t, particularly at a more junior level.
Could you talk a little more about your experience in PE and what exactly is transferrable? I've always imagined a PE associate would be in a better position to make money for a l/s fund than an IB analyst - but from what you are saying that doesn't seem accurate?
A PE associate should on average be in a better position shorter term than an IB analyst, but the comparable I would highlight more is does someone who did IB and PE have more of an advantage looking a few years out than someone who went straight from IB to HF (and spent those years gaining public market experience instead of doing PE).
Transferable skills include due diligence, modelling, structuring investment recommendations, soft skills like interacting with senior management and sellside. There is a lot which is transferable in theory however in reality at larger AUM funds you will spend more time on process management and modelling for the sake of it (running dozens of scenarios based on different financing packages and exit assumptions) as opposed to having to apply a lot of independent thinking to whether or not something is a good investment.
A bit out of the norm than other questions but I’m curious - what made you decide to not do the mba stop pre-hf?
Never seriously considered doing an MBA to be honest
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