Q&A: Non-target->BB->PE->HF (thank you, WSO)

I guess it's all relative right? Can't speak to sell-side research, but at least when you're in IB, you're offering a commodity product (balance sheet aside) - so "more" is more - and a lot of times that means more analysis just to show "hey look how much work we did for you" to impress a client - when realistically it will be the same analysis, with the same sources, except with a different blue-colored logo in the corner (GS, MS, JPM, BARC, CS, RBC, BAML, DB - I think they all went the way of the blue). But for the client, one of those pages might probably sell them on picking them as a lead-left or a sole advisor right? - so you never know when that useless analysis brings in some revenue (though I do think that just being in their revolver with a 2-page deck is better than a 50-page deck without having a financial relationship)

I most definitely could have - I certainly appreciate spending some time there, which helped me a lot learning about structure. Typical buyout PE in general, or at least the spot I was at, their value-add/returns weren't from being necessarily exceptional at business selection/traditional investors but moreso the financial engineering that comes along with it (the idea that you could buy a business at 10x, sell it at 10x and still make your IRR target). So could have I made without it? - Yes; Do I think I have done better at HF due to my limited experience in PE? - certainly. Hope that helps - it's just different way to look at businesses/investments but each have their merit and use  

It was definitely a tad hard for me to sound as enthusiastic when I was talking to the pod shops - and I want to be clear, by no means am I dismissing them - they're clearly very successful and amazing shops to work at and frankly I would have taken the offer had I received it. The way I spun it there was talking about their coverage universe rather than the particular style. But I think you hit the nail on the head with your second questions - as I was navigating the process not only did it help me clarify what I want to do long-term but also helped me understand the type of shop I want to be at/type of team I want to work with. Had I landed at a pod shop I would have likely tried to move to another fund later on. With banking and PE jobs, I went in planning when I am about to leave - vs my current job my plan is to be here 5-7 years from now and then Ill re-evaluate. I have always had the "non-target" guy chip on my shoulder and beggars can't be choosers so I would have taken almost any HF offer. Once the current opportunity presented itself, I definitely put everything else on the back burner and focused strictly on this one - kinda all or nothing approach.    

Nothing to write home about/no astronomical figures (in comparison of course, I realize how lucky I am in these positions in general). Banking at a bulge bracket did right in-line with what you'd expect as a better performing Analyst at a rather busy group (~75% of base as a 1st year), same w/ PE (~1x base as a 1st year). HF is the one that's just so dependent on performance so I don't really know what "in-line" is - but was certainly very happy with it. Base at HF is quite lower than base in PE but upside is way more (or zero... obviously depending on performance) - Im in my mid/late 20s so I don't expect nor am I trying to become wealthy now so for me the work experience was way more valuable and the comp was an after-thought (not pretending to be holier-than-thou, just banking for me was miserable and PE ended up being boring/non-engaging so just the satisfaction from the job makes rest of life that much better). That being said all-in did quite better at HF than in PE (hours were longer though for what its worth and it was also a pretty darn good year for Hedge funds)

I definitely got the "you're now in PE, everyone wants to do that - why in the world would you want out?" question at at least a few places. I think if you genuinely enjoy investing, you will have an answer to that question - which might be an anecdote. Surprisingly, one of the topics I ended up talking about for quite some time was around the IPO I worked on while in banking - IPOs aren't exactly hot commodity when you're an analyst in IB because from a modeling perspective it's kinda boring work and the rest is process - it just is what it is - but for me this particular IPO was fascinating. I thought the investment pitch during the roadshow was poor, the timing was off, and the sponsor was too aggressive with targets - sure enough it opened right around the same share price it priced at and it has been below the IPO price ever since.

Regarding time spent on analysis/process - in PE my modeling wasn't around the P&L so much but rather it was in the cash flow statement - most of the "fun work" was just creating a super flexible model that could run our gazillion structures and that was really the risk management procedure - how can we structure a security to get a certain rate of return - in P/E that was about...30/40% of the work? Maybe a little more in the beginning stage (once you get CIM etc.). The rest was all lawyers, accountants, HR, updating memos, etc. Now in my current seat everything I do is an analysis (I guess there is the occasional write-up to communicate something but no one has time for elaborate long text like what I am doing right now) - I actually got chirped a little for a while because when i was walking through some data I had made it look "nice and pretty" like I used to do in banking. My PM is in the models constantly and he can usually tell when I have been there because there would usually be some elaborate chart/graph/table with matching colors etc. - i'm a visual learner so it helps me read it better. But yeah there really isn't any process work - i might not be modeling all the time just because our models are all built out but I will spend plenty of time reading into data, seeing what that implies, comparing it across the coverage universe and ultimately deciding what happens to the P&L. So there is less "modeling" but there is way more "analysis" - if that makes sense

I honestly wouldn't stress about it. Also depends what IB you're looking at (small regional shops love the local school). I mean best shot? - Probably an IVY but could you do it from any and all school? - absolutely, it would just be tougher. It's all about networking - I went all out just because I was at a "non-target" and tried to talk to at least one person /week when I was a sophomore. That way when it was time to recruit I knew what I wanted to do, where I wanted to do it, what to do to get it, and who to talk to to help me have the best chance - also a little word of advice - talk to HR at that bank, I actually got several interviews or introductions just by being super nice to HR - they know all the steps and if you show them the respect they want, they will help you. There is plenty of time for everything in college so just don't forget to have fun - looking back at it, I definitely overdid it and am a little surprised I didn't get burnt out. 

Yup - I read your post when I was almost dead-set on making the switch! Wanted to make sure I wasn't just going to do another job-hop so when I say "thank you, WSO community" I mean that to guys/gals like yourself  who took the time to lay it all out

Well one big benefit for me was no FOMO - I now know i don't want to do PE so that gives me comfort knowing there's nothing else I'd rather be doing. Also 7 months in vs 12 months in IB is actually a massive jump - for me 7 months in was powerpoint, and the next 5 months were all deal-work and modeling. All that being said, I know people who started ~a year into IB and seem to do just fine. Let's put it this way, I don't think i would have been able to get the current seat I have had I tried to recruit 7 months into banking - that's not to say that you can't - I just didn't really develop a solid base that is needed till at least a few years post-college.  

EDIT: My bad missed the part about deals I closed - pretty large IG grade debt issuance (little to no work), two-refis (not lead left, but decent amount of work), lead left on a pretty sizeable financing (term loans bonds revolvers all that jazz - decent amount of work), IPO (lead left, decent amount of work), and sole buyside advisor plus financing on a several bn deal (f*ckton of work there but all worth it, it was a pretty detailed asset-based model so 80% of my work there was excel/modeling/talking to CFO) 

I'm sure your primer broker could send you their report on how funds generally performed, which will give you a way clearer picture given my frame of reference besides my shop's performance comes mostly from that. I can see you're in Macro (if your title is correct) - so that's a completely different world from the long/short equity funds (whether it be net neutral, low net, or long-bias) most of the good equity shops posted better-than-S&P returns but it was also a "great hedge fund year" (unlike the start of this one with the massive momentum unwind) so highly levered low net equity funds probably made a killing (again your PB could probably give you detailed report on it). 

Answered this question earlier so please refer to that for more detailed answer but - base salary is lower than it would have been had I been this level in IB or PE and then bonus is anywhere from barely anything to a lot (I guess it's all relative right?) and highly highly dependent on the P&L

During both my IB and PE jobs I went in and within a few months I knew that this aint it. My HF job has been quite different though - I have been at it for quite some time and I'm still in the "honey moon phase" - I think again it boils down that everything is quite analytical (so there is almost no burn out of chasing fake deadlines), I got extremely lucky with my team and how well we get along and communicate. As of now my "5-year plan" is to stick it out here and see how much I can learn - so long-winded way of saying yes, I do plan on staying here long-term.

Your second question is a slippery slope and could quite frankly lead to a dissertation. I will try to be short without boring people to death. If you are thinking of the "old Graham & Dodd value investing of this used to be 9x, now it's 8x so that's value" - that's rare, I mean you could see it but there is usually a reason as to why something is all of a sudden at "a discount". My fund is a fundamental bottoms-up fund which doesn't necessarily mean value, but rather "mis-pricing" if that's the right word? Pulling an example out of thin air - say a company trades at 25x but the industry trades at 20x - well there are a plethora of variables that could go into it and just because it's 25x it doesn't necessarily mean it's "expensive" and could be "mis-priced" (if it's actually worth 30x intrinsically) - for example we are long a company right now that trades at a premium to its historical valuation and to peers. Popped up on our radar as we were previewing that space and when I was doing the work my initial thought was that this would most certainly be a short due to some temporary craze. Well after doing all the work, it actually looks like the market is not pricing in the full opportunity in front of the company and is giving partial credit to the TAM and % share that this company could ultimately control (especially since it has somewhat of a first-mover advantage - and im not talking about EVs or anything crazy like that, it's a rather boring business actually) so in that scenario we are seeing a mis-pricing of the growth we see, which could be interpreted as value. But there also always will be "pure value" plays - we shorted a foreign company that was selling goods in the US - had a big spike due to COVID and then I just think the investor base (foreign and mostly passives) didn't follow US-based data so we had a leg up and could see that the premium it received wasn't warranted in the long run - so that's an example of traditional value short. Anyway - could dig deeper but that's just my two cents - Howard Marks was recently on Bloomberg talking about this (I think last week) - and while he sometimes stumbles over his own words and leaves you more confused than anything, if you are interested in the topic he was laying out his opinion on what "value" investing is nowadays 

Sell-side research is always there and that's really what "consensus" is. Plus they talk to everyone and that's their big value add imo (corp access & just being out there talking to people and companies). Fund I work at doesn't rely on sell-side research itself a lot - obviously we compare just so we know where we fall in the spectrum but would never really use it as a guiding point. SS research at the end of the day is the same product you ultimately produce as an analyst - a model w/ some price target or risk/reward. SS can tell you where they differ from the buy-side so all helpful points really - and what we do read from sell-side is if they held a mgmt meeting or if they hosted a non-deal roadshow.

I think one big thing though is - you would be surprised how much information a company's stock price could ultimately have especially since the world I operate in is pretty DCF-able and valuations are "usually reasonable." To put it very simply if a company just grew topline 2% last year but price jumped 20% w/ the same margin, you could mess around and see what kind of growth that would imply for it to warrant that price. And then obviously there's company guidance, whether it be quarterly, annual or their 3-year restructuring plan, a company's stock price will often linger between "yeah we think you will smash this guide" and "no way you're getting near it" so you could figure out where on the spectrum it sits. Most funds also use a plethora of third-party data that helps you figure out what the company's universe is doing so if TAM is growing at ~2% and your company has a share of 40% - you could even make it an easier debate and ask yourself whether they should be losing or gaining share and that will tell you whether it's 1% or 3%. There's no really one-way to do it - you just kinda figure it out as you pick up your coverage and ~ a year in you know what to more or less expect from all of your companies. And for the middle of the P&L - it's a lot of filing reading - MD&A section lays out why margin acted the way it did or why SG&A was what it was and from there you start looking at input costs, pricing dynamics, etc. and how they translate into the P&L.

It has been interesting but not horrible - majority of communication happens through BBG chat so not optimal but I think I just got really lucky with the team and people spent hours walking me through everything when I first joined. I was also just aggressively proactive. What's nice about HF work is that if the PM takes 2 hours out of his day to explain something exactly the way he would do it/wants to see it - that will save him a lot of time in the future - we have a very flat structure so the same way I'm in the model and send around notes from calls, PM does the same thing. At the end of the day the P&L is what matters and it behooves him for me to be efficient and as up-to-date as possible. To use an expression I'm sure most all of you hate "drinking from the firehose" is the best way to put it - benefit of that is that it makes "normal times" seem easier.  

I will try to answer all your questions in order, please let me know if I miss something:

1) Sometimes you were looking at full buyouts (cims from banks), sometimes it's a minority equity investment, sometimes its a preferred stock, sometimes it was some equity structure with options just plenty of different opportunities. I definitely had an interest in it because it was another learning experience and seemed somewhat unique (though that was just because almost every I know went to MM and large buyout shops, once you do it you realize there are plenty of places that do the same thing) - I think what I got out of it was - I became decently versed in financial structuring/engineering - a buncha of my friends in traditional PE hit me up during COVID when traditional buyout shops started getting more creative with PIPEs and other structures. Now - and this is really just my guess - I would assume that your typical buyout shops are better "investors" when it comes to business selection. In reality even a crap business can be structured in a way where you extract money out of it

2) The "financial engineering" (and I'm using this very freely since it's not rocket science - it's just structuring a security) in typical PE buyout (super simplified) is buy at 10x, cut some costs, increase margin, paydown some debt sell at 11x - your value add was really 1x but since your equity investment went from lets say 6x to 10x you made a lot of money. Was certainly more interested in the creative ways to finance a deal, traditional PE from a "structuring perspective" is fairly vanilla

3) Literally any type of structure you could think of up and down the capital structure - structured equity with minimum IRR/MoM where you are made hold at the end if you don't get paid enough on the transaction, or a minority investment with an equity kicker (warrants), um.. preferred equity w/ dividend, PIK interest /half paid in cash, half in equity - so let your mind run free when it comes to that (though there are only so many options to pick from)

4) Yeah most definitely, I don't see why not. I really had no interest going to a buyout shop though, if anything the transition to HF was harder imo than that of one PE to another

5) It's no secret what IB's email formats are - i'm sure there's a million threads here that can guide you. So every now and then I used to reach out to people via email (cold-email I guess you could say) and just ask them if we could hop on the phone to learn more about their experience. Once you're on the phone with them is the part where you just have to show them you're personable and from there on I found that most people would be happy to introduce you to the person sitting next to them in the office. I actually got an interview at a pretty decent bank (think along the lines of DB, UBS, RBC, WFC) just from networking and having zero alumni there. You gotta realize that if someone went to Yale and they get 100 calls from Yale kids, it's tough to distinguish them, but it's easier to remember when you're from ...idk Kalamazoo or something (just always loved saying that, I didn't go there nor do I know anyone that went there)

Im sorry man I genuinely have no idea how it works in Europe - I gotta imagine theres plenty of topics here for you to look up though that will tell you how it works

It all depends on the fund really plus the term "hedge fund" is nowadays very loosely used for anything that invests pooled capital. So there are some "long only" hedge funds that im sure the transition would be rather simple-ish. I think it all depends on the fund you are looking at and by no means is Banking or Private Equity required - I know several people who made the transition from equity research for example. People like banking because it tends to give you the technical know-how of digging into SEC filings and understanding how everything works and how to build a model (though there are plenty of funds that take templates for sell-side and plug in their assumptions). I think once you manage to get your foot in and you're past the first interview - your background goes through the window and it's all about how well you perform with the PM/Analyst/CIO whoever it might be. 

PE is structured like your interviewing for banking was - the headhunter throws a bunch of names at the fund, they interview you once and pull the trigger (over-simplifying obviously). Hedge Funds is very different and I know people hate this statement but "it all depends on the fund."

For example lets go through my pod shop process - I met with that Pod shop's head of recruiting through a third-party recruiter, she signed off on me, met with three associates, then got passed on to the analysts they work with and finally met with the PM. Then got invited back to do the ever-so-dreadful 3 hr modeling test (which to me is BS since I have never in my experience had to build a model in 3 hours and make an investment decision - but I get why they do it, they got so many people to chose from).

Now - at some of the other funds it was a way longer process simply due to timing and when the PM was available etc. So I think in PE you can start tomorrow and be done by mid-next week (or if you get those fun phone calls at 1am because some fund decided to recruit now you can get an offer tonight) - that is extremely unlikely in HFs. Another example - the fund I am currently at - I interviewed for well over a month and a half and it included a week long case study of a name that they cover actively. I then had to present a full model as well as a write up and present on it (as well as field some questions) - that for me is a way more accurate representation of what a hedge fund analyst/associate does.

The "technical questions" are also completely different from PE - during my PE interview they were just a notch harder than the same questions I got in banking (LBOs and all that jazz) and the PE model is all about the cash flow statement, while HF you're more focused on the P&L (unless its a special situation). Hedge Funds it's a lot more about the "so what does that mean?" For example let's say a company switches it's revenue model from a subscription based model to an advertising revenue model - what happens, how does it affect cash flow, how does it affect valuation, should one deserve a premium over the other, etc.? Most of the "technicals" I got in my hedge fund interviews were before I got to the modeling phase, at which point the conversation focuses on do you understand how the company you just modeled generates revenue, what levers do they have in their P&L, how are they positioned, did you do your due diligence (reading SEC filings MD&A, transcripts, etc.). And as always you gotta make sure you're personable, HF teams tend to be much smaller than most of your PE shops so you are spending a lot of time with these people and communicating with them a lot. 

I apologize that I couldn't really give you a straight answer but imo there's no real way to prepare for a hedge fund interview - just because you never know what the PM will care about or what he will be focused on  as an investor. Some of the processes might take 2 weeks but I have heard of some that took 3 months. I even interviewed with a special situations/event-driven type fund where the PM and I went back and forth over email for a couple of weeks over a situation he had me analyze. So all that is to say that there isn't any step-by-step guide (unlike there was for PE or at least so was my experience) - lmk if I can be helpful in any other way

I never worked in Asset Management so can't really speak to that world. I think the reason why people lean on banking is the "modeling" aspect. I have certainly seen people lateral over from Equity Research and traditional AM so as long as you push hard enough, you won't have a problem. The "banking background" just sells well - it's very finance-y. For me the biggest benefit was just having the mental map of the three financial statements and what each change meant overall to the company - at the end of the day banking is as I called it "applied accounting dragged to the right". Investment Bankers are not investors (unless you're in DCM investing the bank's balance sheet I guess) so you don't learn anything about what makes a good investment and what doesn't.

When I was talking to a CIO of a quite well known fund back when I was in college I asked him for advice how to get into the world and he said "go to banking because I don't want to teach you the basics nor do I have the time". I am fairly lucky in my position because I ended up in a place where I'm not a model monkey and then my PM takes the model and decides what happens but a lot of funds look for people to do that for 2-3-4 years and there the better you are at modeling, the better product you can give your PM.