1/14/18

Happy 2018. Going to start it off a bit heavy here.

I think in the last ~5 years things have been getting worse for your typical fund analyst/PM, and I think the trend is only accelerating. When I say getting worse I mean the growth path and (especially) the compensation for your moderately talented hedgie are far worse than they were early in the decade, not even in the same league as in the aughts, and ... well everything was better in the 90s.

The basic issue is an influx of talent (lemmings) into the industry in the aftermath of the GFC, where being aggressively long/strong made a few funds massive and highly visible. The lemmings (MBAs) competed down wages in their pursuit of hedge fund glory, till the point where many analysts are hardly better off (compensation wise) than they would be on the sellside, and a lot of 2+2s are regretting going to the public side. Ever the clever investors, hedge funds (especially the platforms, but increasingly everyone else) began to see analysts/PMs as disposable commodities that could be ditched right before they start demanding partner money/ a share of PnL.

The really great jobs (senior analyst at Pick Your Random Multi $B Tiger Global, Coatue, Viking, Baupost, w/e) remain really great jobs, but other than the signs are not good for this getting better:

  • Fewer spots available as decent sized funds shut down (Perry, Passport, Hutchin Hill, Blue Ridge) shut down
  • Performance at many decent sized funds (not naming names but acronyms GV, MC, TC, PS) have sucked. As they stare down the abyss hedge funds tend to become more aggressive/ desperate with personnel policies
  • Compensation is down across the board, as CIOs/founders/PMs keep a bigger piece of the pie and treat you like the easily replaceable excel jockey you are. I know several 2+2s that are making less than they did (post carry) in their PE jobs a few years into the public transition. I also know several bankers (at non-preftigious groups at non-preftigious banks doing non-preftigious work) that are crushing the buyside guys by virtue of having stayed 6-8 years and gotten rapid promotes to VP/director level.
  • The lemmings keep coming. There is a somewhat absurd preference for hiring newly minted MBAs and junior bankers even in a talent-saturated labor market because they are more 'moldable' (LOL). This means the labor pool keeps growing, while the need for (especially) equity analysts really isn't

My recommendation: starry eyed model monkeys should think long and hard before going to the public side. You gotta love the game more, because increasingly it doesn't love you back.

Thoughts?

Comments (29)

1/2/18

Wouldn't this analysis apply to every "hot" job from the 80s/90s? Banking, Law, PE, etc. Comp is coming down in every field...

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1/3/18

To some extent its inevitable. In a competitive market profits (wages in this case) will experience downward pressure till they reach ... mc? Hope not.

Its a bit different for Hedge Funds tho. Law and banking were well-established industries in the '90s, Hedge funds were still a baby and largely considered the 'wild west'. I think law comp/ career prospects have held up, though it has been eclipsed by other industries. Banking is actually fine, though trading is getting devastated (also structurally f***ed.
As for PE, it was actually experiencing a (apparently cyclical) downturn in the 90s, and I would argue we are in the golden days right now. Not hearing of any real comp pressure here.

1/4/18
dazedmonk:

though trading is getting devastated (also structurally f***ed.

Do you have first hand experience of this? What would you say are the worst areas of (sell side) trading to be in?

1/4/18

Read earnings transcripts for the major investment banks - this has been going on for a while. Every area is affected, though I think equities / vanilla fixed income is more structural and commodities are cyclically depressed

1/10/18

Yeah, agree with this. Commodities trading is doing so badly in this secular downtrend, low-vol environment it's making desks in big banks consider turning to crypto just to get some price action. Regardless of where you stand on that topic, the situation is definitely eye-opening

1/10/18

This.

And it's still the best game in town aside from tech, which is also getting over-saturated. Not every Comp-Sci major is getting a job at Facebook-Google.

Best Response
1/2/18

-The Russell 1000 Value trailed the R1K Growth by 17 percentage points in 2017. The R1K equal weight trailed the R1K by 5 percentage points. Any active manager had a headwind and any value-oriented manager was really climbing an uphill battle. There will probably be more headwinds if the flows to passive and quant keep up at this rate.
-Many of the Tiger funds were making way too much money for the last five years. Lone Pine and Viking were taking in $300mm-$500mm year in management fees alone. Sector heads were making $4mm/$5mm year. The 2+2+HBS analysts were making $800k-$900k by the time they were 30/31. It was excessive. Some places like Greenlight were more balanced and long-term oriented. Ackman paid some of his young guys absurd, laughable amounts of money. None of us are getting the checks a certain Ginger got in 2014.
-It is a very loose parallel, but Tiger shut down in 2000, people thought Buffett had lost his touch, and Baupost had 5 year annualized returns that were less than half the index (on only a few hundred million in assets). The next 4-5 years anybody that was loosely value-oriented crushed it. Seth Klarman couldn't beat the index in 1995-2000, Whitney Tilson could crush it in 2000-2005. Two incredible extremes. Maybe that will loosely be the case when this cycle turns? I hope that is the case.
-PE is oversaturated but more stable in the long run. Locked up capital, the ability to manipulate capital structure, etc etc. Its way harder to start a PE fund than a hedge fund and allocators have made more money off of them.
-Despite HFs really hurting right now, I'd still take way less money to work at a HF than at a bank. I don't think its a permanent state of affairs. Bank VPs make what, $500k-$700k?? There are still a ton of analyst jobs at HFs that pay that much. They don't involve 90 hours weeks, completely mindless work, and working with insufferable douches.

HFs have always had less of a clear, defined ladder than PE or banking. In the past talented guys that hit 30 could get PM seats at multi-managers or be sector heads at Tiger funds. Not the case nearly as much now. Entrepreneurship is tricky but markets are arguably less efficient with the passive flows and way less people trying to start small funds. Good luck trying to find seed deals in this environment though.

TLDR: Largely agree, but still hopeful

1/3/18

What about HF strategies that arent long/short equities?

1/4/18

2+2+MBA at Viking still get $900K, which actually seems reasonable (compared to PE VP comp of $500 - 700 + carry or comp for someone who had been at a fund with no career setbacks). The squeeze is mostly in the great middle, and I expect it to continue as talent continues to flood into the industry (especially L/S), with ppl now thinking of investing as more of a 'process' job and another rung in the ladder (2+2+MBA/HF).

I'm also much less sanguine about a cycle turn. Last two years have actually been pretty low correlation and high dispersion (at least at a sector level), which should be the main driver of l/s spread generation. A lot of the funds that are sucking are also pretty significantly net long, so I'm not buying the idea that they will get better once the markets (and the economy) stop zooming straight up. That of course assumes they even last that long.

I do hope you're right tho, I want more small funds to succeed to become big or medium size funds. A world where the only things left are platforms is a nightmare for us.

1/4/18

Why are those #s excessive? That $800-900k actually seems on the low end considering that a 31 year old who skipped PE/HBS and went straight up the hierarchy in banking would be a VP by that level and making $500-700k based on your numbers here, especially adjusting for the much higher difficulty of getting into a good PE firm, then HBS/GSB, then XYZ top long/short. This is compounded by the fact that those 2/2/2 kids also have the optionality of interviewing for PE VP spots which pay up to $500 in cash with a similar equivalent annualized amount in carry, and these spots I would assume have lower chances of getting fired due to a bad call as well as lower day to day market fluctuations relative to the post-MBA analyst seat at a L/S fund.

1/5/18

It's absolutely stunning that there are guys in their early 30's making $800-$900K/year. Holy cow.

1/5/18
Rufus1234:

It's absolutely stunning that there are guys in their early 30's making $800-$900K/year. Holy cow.

I find the figure mindblowing as its essentially a 3rd year HF equity research analyst

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1/2/18

Second this!

Interned at a small ~$100m fund w/ 2 PM's and that was it. They even acknowledged that they were part of the "overcrowding" and that they contributed to the difficulties that hedge funds faced. That in mind, if you can charge upwards of 1.5/15 on your fee structure, you're going to be making a great living.

Also, bear in mind that markets are cyclical and bubbles burst. Take BTC which recently created futures --> tons of L/S funds took on MBS exposure during the crisis in one way or another. I wouldn't be surprised if certain funds reigned successful as the volatility of cryptocurrencies were to continue.

All in all, not to just be redundant in what Gray Fox said --> HF > IB. You're making decisions (or at least supporting them) at a junior level as opposed to being a monkey in IB till you hit MD. The $ is great either way, and in HF's you're subject to far more unpredictability in comp. There's still going to be a larger upside as HF's just inherently follow different rules and structures than a large corporate bank would. They also charge fees that directly relate to a handful of people's performance as opposed to an entire division.

Again, being optimistic and don't see huge changes. With 2018 starting it'll be interesting to see where capital is moved around.

1/4/18

Great post.

  1. There are way too many hedge funds, and a lot of them will continue to shut down. This will result in more consolidation, as money flocks to the big name hedge funds. The people who there will continue to crush it, but good luck getting in. Consolidation is happening across industries, including in tech and media.
  2. The financial crisis and its aftermath was a true paradigm shift for the financial sector, not merely a bad business cycle. Regulations, banks taking on less risk, markets being driven by monetary policy, banks hiring fewer MBAs, firms taking less of a chance on candidates who don't have the standard banking+PE resume. It's unclear to me why this will change anytime soon.
  3. Lot of investors have realized that active investing is overrated. Pension plans and other allocators are withdrawing money from alternative investments. Capital is flowing to ETFs and index funds.
  4. Automation will continue to have a major impact, although the precise nature of this impact is yet to be determined. I think relationship based businesses such as banking and PE should be fine. I could see even long-short equity funds becoming glorified quant funds, where they run quantitative strategies disguised as "stock picking." Regular equity analysts, except the superstars at the top funds, will either get squeezed out or face stagnation in terms of their compensation and career trajectory.
  5. The barrier to entry will continue to increase. Even a top MBA will no longer get your foot in the door unless you have highly relevant experience and a rock-solid pedigree. One reason why so many MBAs from top programs have been going into tech is because many of them got shut out of buyside. They still want prestige and great pay, and tech seems to fit the bill.
1/5/18

"Trading will never be great again"

I think I'd take the wisdom of a moderately intelligent floor trader over your ib pe mba Guy anyday.

No doubt it got overrun. But now you have all the smart guys going to tech so competition will lesson. All those mbas were trying to be traders 10-15 years ago and running from tech. Trading will never be what it once was again because information has gotten cheap and the fed has vastly improved their monetary policy framework which has reduced vol. the lack of public ipos is hurting equity trading. Now there's a ton of established companies with less differentiation which sort of fits better for indexes.
But traders are killing it in cryptos now. The game doesn't change it just occurs somewhere else. Maybe 5 years from now Japanese housewives start tradingequities instead of cryptos and provide an alpha source for traders there.
Trading can't die. It has to exists. Market making might be dead but the market will always need traders to transfer risks from one institution to another. It's not like pimco decides to sell 5 year bonds the same day the boj decides they want 5 year paper. Someone is always going to need to be there to buy when one large institution decides to sell and then inventory it for a bit until another institution decides its time to buy.

Maybe it won't be a game that creates billionaires but the game is still necessary and should be a highly paid upper class profession. Just maybe at a smaller size.

Someday all these giant tech companies are going to face antitrust problems and get broken up and they won't have the pricing power they have today. Google can't grow 30% a year forever (and pay Apple amongst others to force drive traffic to them). As consumers they are getting away with it because their services are free. But we pay a ton for it indirectly. Business pay huge money to them for advertising. 99% of google profits come from search. It's actually a fairly easy company to clamp down on and kill their pricing power. If you ban them from pre-installing or paying other companies to drive tech then you would see atleast a few other search companies competing and some pricing power is lost. Same thing with fb. Split up Instagram and Facebook and force the platforms to compete. Ad revenue would compress.

No idea when this will occur but the monopoly profits in tech will dissipate. At some point antitrust kicks in.

Apple is just a bit different. I don't see monopoly power but consumers choosing to pay more for their phones. Big threat with them is consumers decide the $25 amazon phone does everything a $1000 Apple phone accomplishes without the status whoring.

Array
1/14/18

@traderlife

Great post, for what it's worth. I am actively looking to start trading in crypto. I know a few banking past 100k+ in profits so far. I am not sure why you are getting MS'd.

No pain no game.

1/5/18
Rufus1234:

Great post.

  1. There are way too many hedge funds, and a lot of them will continue to shut down. This will result in more consolidation, as money flocks to the big name hedge funds. The people who there will continue to crush it, but good luck getting in. Consolidation is happening across industries, including in tech and media.
  2. The financial crisis and its aftermath was a true paradigm shift for the financial sector, not merely a bad business cycle. Regulations, banks taking on less risk, markets being driven by monetary policy, banks hiring fewer MBAs, firms taking less of a chance on candidates who don't have the standard banking+PE resume. It's unclear to me why this will change anytime soon.
  3. Lot of investors have realized that active investing is overrated. Pension plans and other allocators are withdrawing money from alternative investments. Capital is flowing to ETFs and index funds.
  4. Automation will continue to have a major impact, although the precise nature of this impact is yet to be determined. I think relationship based businesses such as banking and PE should be fine. I could see even long-short equity funds becoming glorified quant funds, where they run quantitative strategies disguised as "stock picking." Regular equity analysts, except the superstars at the top funds, will either get squeezed out or face stagnation in terms of their compensation and career trajectory.
  5. The barrier to entry will continue to increase. Even a top MBA will no longer get your foot in the door unless you have highly relevant experience and a rock-solid pedigree. One reason why so many MBAs from top programs have been going into tech is because many of them got shut out of buyside. They still want prestige and great pay, and tech seems to fit the bill.

I think everybody on the thread would agree, the best contra-indicator is where the MBAs are flocking to at any given point in time.

1/5/18

So short tech ? Probably on a 2 year lagged time frame.

Array
1/5/18
Gray Fox:
Rufus1234:

Great post.

  1. There are way too many hedge funds, and a lot of them will continue to shut down. This will result in more consolidation, as money flocks to the big name hedge funds. The people who there will continue to crush it, but good luck getting in. Consolidation is happening across industries, including in tech and media.
  2. The financial crisis and its aftermath was a true paradigm shift for the financial sector, not merely a bad business cycle. Regulations, banks taking on less risk, markets being driven by monetary policy, banks hiring fewer MBAs, firms taking less of a chance on candidates who don't have the standard banking+PE resume. It's unclear to me why this will change anytime soon.
  3. Lot of investors have realized that active investing is overrated. Pension plans and other allocators are withdrawing money from alternative investments. Capital is flowing to ETFs and index funds.
  4. Automation will continue to have a major impact, although the precise nature of this impact is yet to be determined. I think relationship based businesses such as banking and PE should be fine. I could see even long-short equity funds becoming glorified quant funds, where they run quantitative strategies disguised as "stock picking." Regular equity analysts, except the superstars at the top funds, will either get squeezed out or face stagnation in terms of their compensation and career trajectory.
  5. The barrier to entry will continue to increase. Even a top MBA will no longer get your foot in the door unless you have highly relevant experience and a rock-solid pedigree. One reason why so many MBAs from top programs have been going into tech is because many of them got shut out of buyside. They still want prestige and great pay, and tech seems to fit the bill.

I think everybody on the thread would agree, the best contra-indicator is where the MBAs are flocking to at any given point in time.

100% correct. MBAs jump on the bandwagon; rarely do they create or innovate. For instance, HBS and Wharton are planning on launch courses on cryptocurrency. Yeah, time to get out of your bitcoin!

1/4/18

Also, even if these funds close - it is not like they have no skills or options in the labor force. They may just not make an (excess) amount of money anymore

1/6/18

This seems to be aimed primarily at L/S equity. What about other strategies?

What are some opinions of what would be an ideal fund profile coming in as an analyst to mitigate these concerns? (i.e., size, strategy, single manager/platform)

1/6/18

Don't know as much about other sectors. Equities employ the most people/ distribute the most/highest comp, so they are best overall gauge. Credit is humming along, but not a ton of money being made (low volatility) and has always had lower cieling than equities (on average).

Of the smaller (based on employed numbers) sectors Macro has been struggling (unless you're Michael Platt), but I think thats largely cyclical. Quants are crushing it right now, but think that's also cyclical and in any case not applicable to most WSO types

1/10/18

macro is structurally fcked. Macro makes most of their money off central bank incompetence. Central banks have gotten better. Money can still be made in this space, but I don't think there will be any Soros/Tudor's happening.

Array
1/10/18

Hate to say I told you so...

"Elections are a futures market for stolen property"

1/10/18

Fuck my AM/HF dreams I guess. I'm going back to school to get a math degree and hitting a coding camp so I can be a quant like @DeepLearning ... jk, gotta be determined in this game, chaos is a ladder baby!

1/14/18

I 100% can't agree more with this analysis having been on the HF side. You are disposable at an instant and the exit opps are not great compared to banking. What do you think are the new jobs that will become the next wave of so called "hedge fund" jobs. Are we at peak tech cycle for jobs right now?

1/14/18

Tech/engineering will be in high demand. What I have seen in the years, is similar to banking -

Low salary for a highly-skilled technology/engineering job. It's absurd. They ask for 3-5+ years of experience and want to compensate in the low 70-80's. Not happening. Technology companies continue to shut down/get bought out.

What is worse is that companies will expect a technician/tester to do work of an engineer.

No pain no game.

1/18/18

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