I've been on these forums for a fairly long while, and I've noticed that, for various reasons, I've been stopping by less and less recently. If I were to guess, I'd say that's probably likely to become even more pronounced...
So before I go, I'd like to offer myself up for questions as a way of giving back for the fun I've had on here for the past several years.
My background: went to a top target, worked at a bb in ibd, and now am at a multi-strategy megafund doing fundamental long short (think like a Millennium/SAC).
Anyways, fire away.
How long did you work at the BB before you jumped over? Did you use a headhunter? I've wanted to work at a HF since college and feel like a slave at my current job (BB)
3 years. I didn't know what I wanted to do; thought I wanted to do PE first but then decided in my first year it didn't seem right so signed up for a 3rd year to give myself more time. I know that a ton of people say how they've been following stocks and reading Buffet since high school...I wasn't one of those. I had always liked markets in college but never focused on individual stocks, but then after time in banking realized I had a good background in corporate finance, so after I decided HFs (married the interest in markets with my skillset) I started doing all the reading etc.
Feeling like a slave in IBD is common. It's definitely way better on the buyside. Leave as soon as you can.
What kind of responsibility do you have at such a junior level? Can you describe day to day tasks? Do you have any of your own coverage, or do you support more senior guys? Is it up or out after two years, and if so, what is the process for promotion vs. having to move firms/go to b-school? Thx.
This is what's cool about being at a multi-strat firm. The teams are very small, especially compared to being at a giant concentrated single PM place - oftentimes PMs are supported by as few as 1-5 analysts depending on size. So your responsibility ramps very quickly - basically, as soon as your PM thinks that you're not an idiot, you start taking things over. The universe is large, and so having double team coverage beyond PM 'oversight' is inefficient. So every name I cover now is all my own coverage - I meet with the company managements, make the models, come up with the research plan, and make the investment recs (which obviously my PM can veto).
It's not up or out after two years -- in terms of promotions, different places have different philosophies. Some are looking to promote all star analysts to PMs, and others will just keep you as an analyst on the same team but give you more titles ('senior analyst') and more money. The process is pretty idiosyncratic to the fund, and obviously depends a huge amount on your PM (both in terms of success and willingness to support your growth).
Good stuff thanks. How do you get placed with PMs? What % would you say is from banking vs. experienced hire? Are the PMs industry-specific, all generalists, or both?
xqtrack, thanks for doing this - HF board has been rather dull lately, apart from the 15 year old HF prodigy. A few questions, if you wouldn't mind...
How did you find the change of work environment in terms of culture, camaraderie? Do you miss anything about BB IBD?
In terms of your current role, are you multi-asset, multi-sector, or is it more focused? When do analysts start getting ideas into the book?
It's usually that certain books are hiring and so that's what the fund is interviewing for; so if the PM has gotten approval for headcount, the firm's HR will be recruiting analysts to interview with him. And for junior analysts, generally most are banking or prior finance, though you do see exceptions every now and then. Most PMs at these funds tend to be industry specialists, though I do know of a rare few who are generalist.
Haha yeah I noticed that too..
I personally love the change in work environment because I no longer work with really dumb associates/VPs or overbearing MDs, and I get to be independent and focus on the thinking, without any other considerations (and I don't format slides! I don't even really do investment write-ups...)
But on the other hand, there's not really any analyst camaraderie (all the analysts are at least a couple years older than me and/or married), and we're not friends outside of work. I definitely miss that.
I'm in a focused industry portfolio. I made my first call 2 weeks into the job; I'm not sure when I got my first idea into the book, but at this point I'd say between 40-60% of the names in the book that I am responsible for are my own ideas. Also at some point a lot of names that were originally my PMs we took out and then I would put back in, so I don't know how you really count that. Suffice to say, at this point, if I have an idea, I am more than welcome to pitch it.
Any comp benchmarks you care to share? At what point do you get points at your firm, or is your bonus more discretionary?
If comp is formulaic, how would you say the incentives have changed your behavior? Are you more focused on the short term? Do you feel a lot of pressure to cross lines in order to perform?
Most people I know that invest very well and work in the industry are very intelligent. Despite how complex their thoughts might be, when I ask, they always break down their strategies in an incredibly simple way to a few fundamental concepts.
So if I might ask, what is your philosophy? I mean, what are the top 3 or 4 things that put you over the edge on a company and make you want to pitch it to your PM at risk of looking like an idiot? (Or, how do you know when you're really sure about a stock?)
So what's your approach? Is it your typical valuation model, or what makes it different? Multiples-based?
For a junior analyst, comp is known to vary in the 200-500k range depending on the fund you're at, and it's typically discretionary bonus. PMs typically have contract deals as a % of PNL, which tends to be between like 10-25% of pnl, again depending on the fund you're at. For both of these, there are obviously low and high outliers.
We are focused in the short term in the sense that yeah we want to make money all the time, and definitely within a year (but that's true for most places). That doesn't mean our investments are short term though, we can have (and have had) multi year holding periods. I don't notice it really changing my behavior in any way...we usually just do what we do, and hope that enough of our bets play out within the time frame we're going for that we will make money this year.
I'm confident about a stock when I think it is going to make more (or less) money than other people think it is going to, and reasonably sure that I'm right. There are also exceptions - sometimes I will buy things that are undervalued for irrational reasons (misunderstood, overly complex), or where there are balance sheet transformations in play that will permanently increase value. I don't really have a philosophy as to what works or not -- personally I think a lot of things do, so I try to be open minded about it and see things from all the points of view I can think of.
How do you find these? I mean, whats your trick on finding these companies that have deficiencies in the market?
see above response to texas tea. Typically multiples based, I have never built a dcf or done a roic calculation.
how much travel travel does a typical hf analyst do? how about for a pm?
it's the same for a pm / analyst, just depends on who has primary coverage for the company. i travel on average 2 times per month, though distributed such that there are months when i'm doing 4 or 5 trips and months when im doing none
What's your opinion on a healthcare coverage group at a BB for placement into L/S value funds that aren't split into verticals? If it is a 3-5B L/S fund does the group you came from matter in terms of industry experience? I guess what I'm asking is that if the fund doesn't focus on healthcare of even invest in it, would they even consider me given how specific HC is?
what are your hours like? are there any former S&T traders at your firm? if so, what type of roles are they in?
Yes, I think they would, mostly because they will care that you know the basics of corporate finance; your experience as an analyst is assumed to be of limited value except in so far as it teaches you corp finance; the fund will assume that they will have to train you to invest. For what it's worth, many value funds do invest in healthcare.
typically 50-70 per week, with decent amount of autonomy. get in around 730, leave around 6-8 mon-thursday kind of thing.
there are a lot of former s&t folks. they are usually prop trading whatever product they traded from when they were in s&t
Okay, thanks. I have a few very high up close contacts at some funds but they are more focused on tech/consumer-retail/industrials/media and telecom. Their portfolios have really no HC companies and I don't want them to not consider me because of the HC focus.
I don't know, to be honest. Sometimes your friends pitch you stuff, and you look at that. Sometimes you meet a management team randomly and say, hmm this is interesting. Sometimes you follow a company for a long while and suddenly notice that things are changing. Sometimes there is a catalyst like a restructuring or spinoff or ipo that means there is a higher likelihood of an asset being poorly understood and valued. Sometimes you read a news article and it makes you think about a bigger trend. Kind of all over the place...
This is awesome. To be honest, I always just assumed seniors were handing down companies to look at and see if theres something worth their time. This is really good to hear, as many of my personal investment ideas come in the same way. Thanks
Oh yeah, I forgot to mention, sometimes your PM says 'look at this for me'. That is fairly frequent, actually. But in that case, his idea probably came from one of the above mentioned things.
Hi thanks a lot for doing this. Just wondering how you decide PE was not for you, and what are the plans going forward?
I think it just felt too similar to banking, and not fast paced enough. Also felt kind of country club-ish and I think I always wanted to do something markets based.
Plan going forward is for now, to try and not get fired. If I fail at that, then I imagine I'll try to figure something out.
How many or what % of people at your fund (or a similar fund) are from non-IB/S&T backgrounds? Industry, consulting or Big4 accounting for instance? Do they struggle?
no big 4 accountants outside of the back office. some industry people, some other random type people. For fundamental investing, if they know corporate finance they can usually be fine. For other asset classes, I don't know how it works to be honest and I think it depends on strategy (for example, a quant strategy could probably be ok with a math phd who has never heard of a bond before)
Thanks for this. Come from a similar background as you - doing my second year of a three year stint I signed on for mostly because I had no idea what I wanted to do after year two. Firm where I work places very well into VC but I've come pretty quickly to the conclusion that I have no interest in the direction the VC market is heading. How did you come to the realization that HF was right for you and specifically, what kinds of things did you do to really be sure of it / prep yourself?
Just thought about what I wanted to do in life and what I wanted out of it. For me it came down to finding something that would let me have a lot of independence, was minimally process involved, would let me make a real contribution, would value me being talented, would have real potential upside, would let me have an outside life, would build on my skillset and experience
Then to prep I read a lot of books, and then tried to prepare some investment pitches in prep for interviews. My pitches were horrible, but luckily over the process of doing lots of interviews and getting rejected I learned how to improve them until I managed to convince my current boss to hire me
Any particular recs for books that were especially helpful?
http://www.marketfolly.com/2011/02/david-einhorns-recommended-reading-l…
check that out, and also some of the links under it for what seth klarman, dan loeb, etc recommend.
some of my favorites are - you can be a stock market genius - warren buffets essays, ed cunningham - art of short selling - distressed debt analysis - financial shenanigans - margin of safety (available as a downloadable pdf online for free) - confessions of a stock market operator
Thanks - which headhunters would you say are the best for hedge funds (specifically L/S)?
usual suspects...
Dynamics Search1 Glocap
are 3 that come to mind, but there are many, and it's important to blitz them all because oftentimes only 1 firm has the mandate
Are you from Dartmouth? Some of your language here would suggest so. I just graduated this year and I am working at a primary research expert network (glg etc) while getting my CFA. With a few years of this experience and my Dmouth degree, do you think I could be hired directly to a hedge fund from my current job, or do you think I would need to make an additional stop in equity research or the like before making the move? Thanks
I read your comments in the SAT scores for buyside recruiting thread and have a question. If I attended an Ivy, had a 3.9 GPA, and currently work at a BB (not-GS/MS) but have pretty awful SATs (1850), will I get fucked during PE/HF recruiting? What if I leave it off? What if I can spin it, will it affect me?
If you can spin it you should be ok depending on the fund. I would leave it off, and only provide it if they ask for it (resumes are supposed to make you look good; if your resume makes you look bad, you have hurt yourself twice because not only are you giving information that makes you look bad, you are also showing that you don't know that resumes are supposed to make you look good)
Haha, yea obviously. I meant more along the lines of the hedge hunters that ask for it to be included on resumes. Should I just ignore their request? Say I never took it? Any idea for MF/MM PE?
Hmm...I'd still likely skip it, but I don't know tbh. I wouldn't lie, that is bad. No idea for MF/MM PE unfortunately.
Thanks for doing this.
I'm very interested in working on the buyside Hedge Funds or PE. I really don't want to do banking and have always had a strong passion for investing.
I'm not in PE, so I could be wrong, but I think it is a lot more common to see PE --> HF then the other way around. I personally think banking skills are more relevant to PE than public markets investing. I answered some general comp ranges above, which is as specific as I'm going to get. Likelihood of becoming a PM depends on which fund you're at -- I talked about this above as well.
Do you know of people who work at L/S equity funds from a consulting (MBB) background? Also when it comes to the analyst role, how complex do the financial models get? What I am trying to get at is how much complex accounting knowledge and financial statement analysis comes in versus understanding/analyzing a company's business and story in a differentiated way
Is there anyone from PE in the L/S fundamental strategies? Do you ever employ tech. analysis? Thanks for the insightful thread.
Also, have any analysts or PMs left to start their own fund with the endorsements of their colleagues?
Can you point to a couple of things in your pitches that you did badly at first and were able to improve upon? Or was it more just learning to talk the talk etc?
Not personally - but I know they exist. And there are some funds, for example, like Brookside, that are all about the consultants.
Financial models get as complex as needed. So it's more about what's important...if you really need to build a drivers model in excruciating detail, then you will do that, and if you don't, then you'll skip it. It's more about getting to the right answer within a reasonable zone of 'fluffiness' rather than getting to the wrong answer with a high degree of precision (cf any investment banking operating model you've built as an analyst ever).
As to how important is the complexity of accounting etc vs the business story, I'd say I guess that depends on what company you're looking at. If you invested in google back when it IPO'd at $50, you were probably thinking about the fundamental story and that's what made you a lot of money. If you invested in Enron on the fundamental story, though...you may have later wished you had a better understanding of accounting.
So it's all about knowing what to use when. Having a more diverse toolkit never hurt anybody
Double Post
Yes, many people from PE. We will look at technicals in a 'oh isn't that interesting it crossed the 50dma' kind of way, but we have never actually traded on that.
Typically, yes you can see PMs leave to start their own fund; depending on the place, the founder can often have a right to make a seed investment in the PMs new fund in exchange for an equity stake or something
yeah just responded to this question from you above, sorry i missed it before. As to whether it's bs or not - I don't know? We don't rely on it, but since obviously there are people who make money doing it, they must find it valuable.
Steve Cohen apparently pays Demark a shitton of money to keep him on personal retainer, fwiw
It was more just my thought process. It's similar to the way I look back now at the way I used to think about investing just a year ago and it is radically different. This is what comes with experience and finding your style etc.
To be more helpful / specific --
Thanks.
Nice thread.
1) What are typical educational backgrounds of people in your fund (math, finance, econ etc.)? And which level (undergrad, masters, mba, phd)?
2) How many % of people in in front office are former s&t guys and how many % are from IB/PE?
3) What do you think about the MBB Consulting --> PE --> Value HF path? What path would you recommend if the goal is eventually working in a value oriented HF?
Thanks.
Hi xqtrack, I recently posted asking about Apollo credit but have not got any response. Perhaps you can shed some light on it (wallstreetoasis/forums/apollo-credit-interview-tips) or provide useful tips.
Thanks in advance
Great thread!
What is the approximate distribution of guys form S&T, research and IB at your firm? Do you feel that some of these types of background are better in terms of getting a job and being a good analyst? What do you (people at your firm) think of guys from research?
Thanks!
In fundamental equities, it tends to be either undergrad or mba, econ/finance kind of guys. In other groups, it varies and I'm not as familiar.
At the analyst level for fundamental, none are former s&t that i can think of off the top of my head, though I could be missing some people.
that path is fine - pe puts a lot of people into value HFs
sorry, I'm not at apollo and your question was about their interview process...trying not to be misleading here
For fundamental stuff, it's mostly all former bankers or former asset mgmt guys, with maybe one or two ER guys thrown in. I think being a banker is the easiest to get a job vs ER (obviously if you've worked at a HF prior than that's way better than being a banker); in terms of being a good analyst hard to call though in general I'd note that today banking is more 'prestigious' than ER so I'd assume that banking kids are smarter.
Great thank you very much!
I've one question left:
I have the choice between:
Assuming that the goal is working in a value HF eventually, what would you recommend me? Start consulting and network to finance, or start directly in finance 3 years later?
Thanks a lot for giving advice.
Second, I wanted to ask you how we could make the site more interesting / valuable so that you would stop by more and more instead of less and less?
Do you find yourself gravitating toward other sites more? Is there something you think WSO could deliver content wise that would make it more interesting to HF professionals like yourself?
Our Certified Users are the lifeblood of the site, so without users like you willing to give back, we'd be in trouble, so I'm open to any and all suggestions.
Either way, thank you for your time on WSO and for giving back before taking off!
Thanks, Patrick
How varied are the strategies (ie do you guys have quant, macro, credit, arb, etc in addition to fundamental equities)? How much interaction do the various silos (industry, strategy, etc) have with one another?
Would you say that working as a research analyst is lonely? I have personally always enjoyed analyzing companies, but I don't think I would enjoy researching all day without talking to other people
Thanks for the info. Just a quick question: What is the prevalence of people from non-targets at your firm? Basically zero?
do u like the culture of ur current firm and what is ur view on culture at large hf (general)?
Thanks for this mate, If you are working at one of the bigger firms, have you spoken to any guys that trade Macro? Are there any junior guys there trade Macro that you have come across, if so what has been there background?
Just curious have you ever seen people move from the investor side into hedge funds? Someone working at a FoHF for instance? Or is that more of a rare occurrence?
Quick question: You mention having had an interest in the market but not digging into stock-picking until later. Any books in particular you would suggest? Thanks.
Hey xqtrack, thanks for the great thread!
I know that you mentioned that you are on the equity side in your fund and am wondering a few things:
A) Does your fund invest in the high yield/distressed fixed income sector?
B) If so, where do many of those analysts come from?
I'm very interested in someday working towards joining some sort of fundamental fixed income HF, but the path for these sort of funds seems very non-linear in comparison with the equity side. I know that hy and distressed favor kids from IB that did Lev Fin or Rx, but I'm just trying to think of what other backgrounds that funds with that sort of strategy would look for (such as desk/publishing analyst, hy research, distressed research, etc.).
Thanks again.
do you keep track of every data point that comes out for the co's you cover
do you update your models on the fly during CCs
how long did it take you to completely understand the industry you cover
As a junior investment analyst at an event driven HF, what do you think would be a typical day or basically the main work/responsibilities? And for someone going direct from University, without IB significant experience? Is this very situation very unusual in the industry? Remunerations for inexperienced analysts (London) is much different from someone with IB experience? Cheers!
That's a tough one. I think either of those will get you into what you want (assuming the Master's is well respected)...I know that a lot of kids from McK can and do go to private equity, so there is a direct exit there as well. I'd do whatever sounds more exciting to you - you can't go wrong with the world's #1 consulting firm; if a master's seems more fun, do that.
I doubt that I'm going to shut down my account completely and never check back in; I meant it more in the sense of I've come less frequently, and it wouldn't be surprising if that tapering (hah, taper is basically a 4 letter words in markets these days) continues.
I think what's happened are a couple things -- first, I'm busier and starting to go to bed earlier, which means I visit less frequently. But more relevantly - this site is really useful when you're trying to figure out your career, and where you want to go. When I was in college and in my first job, that was a huge resource -- trying to figure out if staying in IBD, moving to PE, or doing something else, was the way I wanted to go (and also how to go about doing those things).
But now I'm in a different stage of my career - I've found what I want to do, and now my success is very much a function of my performance (or really, my team's) when it comes to investing. And generally, this forum doesn't have a ton of value to add there. There aren't really too many HF guys (who are actually knowledgeable) on this forum, and while there are some of course, the conversation tends to go towards the more theoretical, and tends to be dominated by particular points of view (not all of which I necessarily subscribe to) and participants.
I don't really go to other internet forums...the reality is that HFs are a very social world, and we all talk to each other and bounce ideas off of people. So really I get plenty of opportunities to talk about my job etc in that capacity.
So yeah, it's not that there's anything wrong here, just that I don't know, I'm past the stage of life where I feel like I want to jump out of a window after coming back from work at at 4am and where I need support and advice of how the hell to get out.
All that being said, I do really think this is a great forum, so I'm happy to share thoughts; and I won't be gone really, just likely less active.
Thanks for the detailed response xq...was just curious if there was a certain type of content we could feature more that would be interesting to you and other young HF professionals.
Thanks
yeah we PMs doing all of that kind of stuff. There is some general interaction at the firm's senior pm meeting (I don't go to those) which has all the PMs together I think like once a week; otherwise we will occasionally interact with groups that are relevant like credit if we're tag teaming something etc. Obviously though for some (most) strategies there is limited overlap, so the interaction tends to be mostly limited as well
nah I spend a lot of my day talking to other people, whether its my PM, other team members, sell-siders, company mgmts, channel checks, etc. There's a great rapport on our team so we have a lot of fun together and joke around (in the office). So it really doesn't feel lonely to me, though experiences vary I think.
It's definitely less camaraderie than banking with 20 other analysts right out of college though, and that is something I do miss.
yeah for the most part
I love it. Culture is key and varies widely -- our firm is very collegial and friendly. Some other firms are, and some other firms are...not. Make sure you go to a firm where people are not jerks, as this will be key to your happiness and general stress level. Like if your PM is the kind of guy who's going to yell at you for 30 minutes when you lose money, that will make your life a lot more hellish.
very occasionally i have spoken to some of them. there are some junior guys, and I think mostly they came from s&t backgrounds or were hired out of school.
I have not personally, but I also have not been around very long and don't know enough people. I think it's more rare, though I think bschool definitely helps to ease that transition
yeah i posted a reading list earlier in the thread
a) yes b) I don't know, I think backgrounds run the gamut from former bankers who dealt with those products like levfin / rx, former bankruptcy lawyers, and former distressed sell side traders
for what it's worth, i do have friends who are now doing hy and distressed and had banking backgrounds, and with my ibd background i got a couple of distressed debt interviews as well
i try to (though sometimes things slip by)
usually if i think it's important to and we are going to trade in the pre/post market, then yes
i still do not
I'm not sure - I imagine that you would be doing a lot of research and reading news articles etc. Eventually they'd teach you modeling and you'd go from there, I guess?
Yeah, it is pretty unusual, because for fundamental strategies, you usually need corporate finance. for special sits investing, you 100% absolutely need very strong corporate finance skills (especially if you are doing anything other than just straight risk arb, and even then you still need it). And most places aren't willing to take a chance on somebody whose corp finance experience mostly comes from doing hbs case studies in their sophomore year of undergrad.
I imagine comp tends to be similar in London, though I don't know.
"Every Master was once a disaster"
Question was already answered, sorry.
Thanks! Very good Q&A
Thanks for doing this, are there any people with a prop trading background at your firm? How common is it to see people from prop firms move into the HF space?
not in my group. in other groups, I don't know, but I'd imagine that it's not crazy - some places like Jane Street etc are very well regarded and definitely not chop shops
Thank you so much for doing this !
First of all thank you for your wonderful insight into the world of hedge funds. I would be starting a financial engineering masters program at a target school from this upcoming fall. I was wondering about my chances of getting into the hedge fund industry maybe via summer 2014 internship. I have minimal work experience in the finance industry in Asia as I am recent graduate and work permit shouldnt be an issue because I am a US permanent resident.
Hey man, thanks for doing this. As an analyst for the HF, do you deal with any quant analysts or traders as a part of your team?
do you see any post mba ibd associates able to make the jump to fundamental equities at your firm?
You'd probably need some corporate finance experience I would think...or an MBA. Not commenting on where I went to school beyond what I've already said
If it's from a target school then they will have good recruiting programs that quanty shops will come to, and you can presumably enter into things from there.
Not really no - they tend to be separately siloed
Nope. That tends to be rare - once you've gone IBD post MBA, it's tough to get to the buyside; your best bets are staying and rising or going to corp dev. There are many reasons for this, but to some degree it's a stigma that gets attached to you - post-MBA IBD associates aren't the bottom of the barrel of mba finance students, so there's an assumption that you're not good enough to hack it, etc.
Hi xqtrack
Thanks for doing this. A few questions that i may have.
1) How often do you see people coming from Sellside ER moving towards your HF? Does your current fund only look at people from PE or IBD?
2) Also, in terms of following the markets, do you just read only the Bloomberg Terminal, Wall Street Journal or FT? Any famous blogs/writers you follow like zerohedge, felix salmon etc?
3) Noticed you have mentioned earlier in this thread that you bounce ideas off people. Do you meet and chat up with peeps from other HFs or ideas usually just comes about from discussions between your colleagues/Portfolio Managers?
4) Do you do DCF/Trading Comps upon every idea your generating? Do you still even model ? Some funds just look at the financial ratios and probably a few qualitative factors before putting in the money. Correct me if i'm wrong though.
5) How many rounds of interview you had to go through? Did they ask you to do a writeup of 2 investment (long/short) ideas? Any long-winded case studies that you had to go through before they finally hired you? What tips would you like to share with us for a future aspring equity analyst to prepare for such rigourous interviews other than reading tons of value investing books.
Wishing you well in your future endeavours =)
Not sure how long you'll be doing this great session, but I'm just curious:
1) do you think for value investing, it is useful to know programming languages (e.g. matlab and R) to simulate potential stock price and market movements and to manage risk?
2) what is the usual holding period of securities in your fund?
3) do IB analysts also go to global macro funds occasionally?
4) how do you assess whether your hypothesis on an investment idea is right/wrong and when do you decide to get rid of a position?
Thank you and all the best!
Thanks for doing this.
Would there be any possibility of switching over as a Credit analyst at a top BB into a HF/PE role down the road? Or would that require B school probably.
1) Yeah it happens, though less frequently than other HF / IBD / PE
2) I read the WSJ and BBG, and since we're fundamental, we'll read industry news relevant to our coverage. I do read zerohedge, felix salmon, dealbreaker, etc, but it's more for shits and giggles than for any actual value
3) Yes to both; oftentimes you meet people at dinners, conferences, etc; also, brokers will host idea dinners. I obviously talk to my PM a lot, he talks to us and all his HF friends from his many years in the industry as well.
4) I don't do DCFs. Models are very important to what we do and the way we invest. I do look at comps, though I rarely build a set the way you do in banking...more just look at a couple key comps and where they're trading against consensus P/Es and EV / EBITDAs.
5) Yeah there were many many rounds and a few case studies. The best tip I can give you is to figure out what's important for the company to make money, what's misunderstood, and focus in on those things. For example, if you think that the entire street is bearish on the company's ability to put up a decent gross margin, but you can provide a lot of evidence that they're wrong, then that's an investment thesis right there. If you do a general 'my dcf shows this company is worth $60 but the current price is $30' that will not work (at least at my fund; there are places that are all about that and finding 'undervalued' companies). You typically need to show why earnings (or some other metric) is going to be divergent from what everybody thinks, which will provide the catalyst for stock value to move to 'real value'.
1) Mixed - not for single stock positions; however, to manage aggregate portfolio risk it definitely can be. Depending on your fund type (and this is especially the case at multi-strat funds), you do need to manage your portfolio volatility and stress various market scenarios. That being said, that is more of a PM job than an analyst job, though obviously in very small teams you can function a lot like a junior PM and so your thoughts on risk management are always welcome
2) Typically 3-9 month target; however, several positions 1-2 years (but these are ones that you think are going up in the next 3-9 months as well, though you just may end up holding them longer cuz they have further to run), and there are some that are shorter than 3 months. In general, you are trying to always make money so you can hit your yearly targets, so there is definitely short-termism in that you want your things to make money sooner rather than later. I'm actually very happy with this -- as the old saying goes, there's a thin line between being early and being wrong. Also, it is my own personal belief that low turnover requirements are what often lead mutual funds to underpeform; at the end of the day, it can be very hard to project that a stock will continue to compound growth for 3 years straight, and holding on to dogs really hurts your returns.
3) Sure, some do. Depends on the fund and how open they are to people with that kind of background. In that case, the background is pretty much useless so it's like hiring a college senior but you prob have to pay them more cuz they have experience...which is why a lot of macro funds will just hire college seniors instead.
4) Well you can do channel checks ('what are you seeing in pricing in the market?' 'are people still buying this product?') -- beyond that, you can wait to see if your thesis plays out in earnings. You get rid of a position completely when you've decided that your thesis was either wrong or something else came into play that overwhelmed it. That's not the same as sizing though -- often times you will cover a short on the way up just because your dollar exposure (and therefore risk) goes up as shorts move against you, and trying to win on a short without a catalyst can be very tough.
I imagine yes, especially if you were looking to work at a credit or distressed fund.
What is your team's yearly PnL target? Ballpark...
Does your team set a stop out for a position before entering a trade?
Do you use spread trades. I.e. long apple short a percentage of SP500?
Do you ever use options as protection for a position. As in we'll short amazon here but buy call options $75 OTM as a stop?
Thank you!
Forgot a couple:
Do you look at your risk using VAR? And if you do what would a VAR on a team at a megafund run?
At the end of the year does management look at your risk adjusted returns or is it just a straight up $ amount?
Sorry I can't tell you that. I will tell you that it's in the 8 figures, and that market neutral portfolios at multi-strat funds tend to have relatively 'low' performance targets (ie, 10% of long market value is considered a pretty solid year) because your entire return has to be alpha
Some teams do spread trades, my team doesn't, though we are always hedged
On occasion use options but tends to be rare
Some places use VAR and others use different vol metrics. Most places will give you a risk budget within context of your notional dollar budget. How much vol you are allowed to take depends on your fund and how much capital your firm wants to allocate to your book; some places will require daily fluctuations to be extremely small. I'll also say that you'd be surprised and there are some portfolios at these places that run substantially larger dollar notional amounts than most single PM funds.
At the end of the year you're typically evaluated on a $ p&l basis. As mentioned above, your risk budget is proscribed, and there are typically hedge requirements (like being market neutral) that end up making any p&l essentially very high alpha, so penalizing the p&l for it would be kind of unfair.
negged
Thanks for the post, appreciate it. Did you go through the typical headhunter process to find interviews? I'm also curious how open/common it is for your fund to hire people from equity research.
Is the university breakdown pretty concentrated (i.e. mostly harvard, wharton, etc.) or do you find a decent amount of diversity (i.e. ivies are the most common, but you'll find people from UMich or Penn State)?
What were you able to show them in the interview process that motivated them to hire you?
All questions answered. So interesting thank you very much for this session.
Yeah went through headhunters. We'll consider people from ER, though kids from IBD / PE likely have a leg up, unless your resume is really stellar.
For us, we are pretty target heavy, with few exceptions. That's obviously not the case everywhere.
Mostly that I was genuinely interested in stocks and had done a lot of work on my pitches.
Hi xqtrack
Thanks for answering my questions. A few more i might have:
1) You have mentioned that a few of your pitches were horrible when recruiting. How did you improve on them as time goes by? Feedback from rejections? Getting your Sellside ER peeps and those who are already in the HF industry to critique?
2) Any plans on pursuing an MBA in future or doing the CFA/CAIA since your already on the job?
3) How long do you spend researching an idea before you propose it to your PM? Around 1-2 weeks? If he decides its a good one, does he wait for months or weeks before putting the $$$ in?
4) Noticed that you are doing fundamental equity research, did you go into the job with lots of knowledge on technical analysis or your learning now from your PM on how to look at charts and historical prices?
5) How useful is reading sellside research (bulge bracket, retail etc) to you in terms of formulating your opinion on an idea? Do you read tons of them or just one or two just to have a feel of the company? Are you speaking to sellside ER/Sales people on a daily/weekly basis as well?
6) Do you have any tips that you will like to share in terms of reading/approaching an annual report (10k) of a new idea? Any of your favourite line items or key metrics that you have always looked out for?
7) Any interns that your fund has taken in? If so, what is your expectation of an intern in order to secure a full time offer?
Apologies if i have asked too many questions...
1) yeah primarily feedback from rejections, and then just having to go through case study processes is helpful because you just figure things out naturally (a lot of this business is just common sense logic). If I had friends in HF I would have practiced with them; I have helped people I know practice their pitches and they found it really helpful - if I had had that resource it would've been really useful. Asking people in sell side ER for help would've been like asking your high schools resident dope fiend to help you study for the SATs. They are typically absolutely awful stock pickers (there are exceptions).
2) depends on my future. MBA would mean leaving this job which I'll do if i think I'm dead-ending or I'm asked to leave. CFA is useless for HFs but useful for long only so its a possibility except its a giant pain to do. CAIA is entirely useless (from what I know)
3) no I usually spend a couple hours before I preclear it for work. Then its usually a few days to a couple weeks before I present my findings. Then there is follow up work and so on. We can initiate a position at any of the above steps, though the farther you go the bigger the positions get. Were highly diversified which means we never have enough ideas.
4) I read sell side research all the time and talk to sellsiders frequently. You have to be sure not to let them bias your thinking, but on the other hand they are very knowledgeable about their companies since they've been covering for years, they talk to the street and have good reads on buyside expectations and concerns, and they can move markets with upgrades and downgrades.
5) I know very little about technical analysis. My pm only knows slightly more. Fundamental analysts tend not to use twchnicals heavily though obviously people vary.
6) I think black hat has posted a whole thread on reading a 10k. Honestly there's not a ton to look for but it depends - if you're doing special sits then the line items in the filings matter a lot. Otherwise focus on figuring out how the business makes its money by segment and make sure you're modeling correctly. Conference call transcripts are incredibly important.
7) not so many interns since we primarily do experienced hires in our group. If you get an internship the rules are the same as everywhere - be enthusiastic and do great work
In your group, are there analysts with advanced degrees (masters, phd, etc) in quantitative fields? In fundamental long/short generally?
Interesting post. I have more experience than the OP and generally agree with most of the things that have been said. Since there have been a lot of questions on hiring criteria, I will add my perspective here.
I find that multi-manager platforms are much more willing to give people without sterling resumes a chance, if they can demonstrate intelligence, hunger, and passion. I have seen a good number of people at multi-manager shops from non-targets, lesser targets, or prestigious but low key universities (such as LACs). Ultimately, they care about whether you can make them money or not, that's it. There is less emphasis on things such as being well-rounded or a strong cultural fit (of course rapport with the PM is very important). That is why you often see more minorities and women at multi-manager shops, because they just care about making money, not necessarily building an institution based on a certain mold.
Single manager platforms will vary, but they often have a certain type of person they are looking for, and are very disciplined in hiring accordingly. Tiger funds and jocks are the classic example. Some funds want very confident people, some want humility, some want intellectuals, some want athletes, etc. Many will only look at people from targets unless the candidate has some other hook such as expertise in a particular area or a referral.
In equity long/short, analysts with advanced technical degrees are generally rare, although there are some MDs and PHDs in the healthcare space. There are some engineers on the tech side as well.
Compares to numner of ppl who came from IB, how many of your colleagues have come from S&T? And how do they look like in terms of breakdown by groups? (Fixed income, fx, equity..)
There are some advanced degrees, though not that I can think from in a very quant area though I'm sure people exist. It's more incidental than required. Some fields, obviously, there can be advantages to advanced degrees (for example, MD degree working in healthcare). But in general, there's no advantage to having a quant degree.
In terms of fundamental equity analysts, there aren't that many S&T guys. In terms of other groups, obviously there are a lot more S&T people. Breaking it down doesn't help a ton -- for example, most of the energy traders tend to have previously worked as energy traders.
I'd agree with what you're saying. Definitely way more diversity on the multi-manager side (including some people with completely crazy backgrounds that you would have never thought would end up in the HF side), though when I look at the people I meet in meetings / confs there is still a preponderance of the usual suspects in terms of background. But yeah, the Tiger funds often feel like mini country clubs (in terms of the guys I know at those funds) and very homogeneous, whereas multi-manager funds can run the spectrum.
You said earlier that there are some Big 4 alum in the back office. Any idea as to their compensation and the specific work they do?
What does IBD stand for? investment banking D___?
Derivatives.
Delegation
They do back office work. Like reconciling the books of the firm, etc. Not sure about pay, but I'm sure the more senior of them do quite well for themselves...
How much power and respect do you think the "back office" senior guys get? To me it seems like "back office" in this sense is a little different. A little off topic, just a question out of pure curiosity.
I think that depends on the fund. The COO of a fund is typically pretty well respected (and well paid) because it's an important job. But at the end of the day, these businesses are usually about the front office staff, so yes people will look up to them more, and they control the fund in terms of power.
Can you explain this to me?
I started out in SS ER and moved to the buy side as an analyst about 6 months ago. While I was looking for my role, I did see the bias of head hunters (and certain managers) preferring an IBD background over my ER background. That said, I don't get it.
I think an IBD background is great for PE but pretty meaningless for fundamental research. The line I always here is "good modeling skills" which to me is bullshit since "modeling skills" probably equate to 1% of the effort required in getting the stock right. I picked ER b.c. I wanted my job to be every day focused on learning how to research equities, meet with management teams, and put together models instead of pitch books.
Honestly, not trying to start a pissing match here. I'm fully aware that IBD has advantages, again, I just don't get it and I want to hear your thoughts.
Would say part of this is 1. IBD is most competitive generally (or at least perceived to be so), 2. You learned everything you know quickly and thus so can the IBD people, or 3. They are being hired to be pre-MBA support for a few of the analysts actually making investment decisions. I know many people who are even out of top B-school programs who do not have their own coverage. So bottom line, if I need a monkey to run my models and make sure he doesn't screw up, I'm going to hire the smartest kid with good modeling skills. Doesn't mean he's getting to make investment decisions until he learns the business.
Having said that, there isn't one set process, obviously evidenced by OP's experience and several others.
In addition to what above user wrote, I get the sense that AM want someone with a clean slate that they can fully mold. Someone in IBD has all the skills but relatively little sense on how to invest which works out for them in that sense.
I'd say the perceived competitiveness/prestige feels like it's the #1 thing, especially for people with
For someone working in industry (Corporate Finance), are there opportunities to cross over to a HF? If not, would going to B-school open up this door? I'm thinking specifically in Chicago. Thanks!
On the first part: Not that I've ever seen. On the second: Maybe but probability is low and probably involves making two less-than-guaranteed transitions: from non-banking to some sort of "high-finance" (buy-side or sell-side) and then from post-MBA associate-level role to a hedge fund. Hedge funds, in my experience, are extremely wary of hiring MBA grads without buyside experience, let alone without "high finance" experience, into investing roles.
I say this not to be mean or to say it's impossible, but to be realistic. Asset management in general, and alternatives especially, is an incredibly competitive industry with an extreme supply/demand imbalance. For every seat that opens up, you'll be competing with people with better grades from a better school and more relevant experience, and half the time they're somebody's nephew. In order to make this happen you're going to need to: a) Develop security analysis skills on your own/in your free time b) Be open-minded and flexible about what your next job is (sell-side, non-HF investment manager, etc) c) Network hard d) Get lucky
whoops keep screwing up edits
whoops keep screwing up edits
So other people kind of answered this, but I will pipe in with my thoughts too. From my point of view, it comes down to two things: 1) what's the most competitive candidate pool (ie who is smartest), and 2) who has the right skills to do the job.
As far as what the most competitive candidate pool is, there's generally agreement that getting into banking is tougher than getting into research. So that is what it is. The reality is most college kids don't know what they want to do or are good at or where they will get offers, so my working assumption is not that somebody ended up in ER because they wanted to do fundamental research, but that they ended up in ER because they wanted to do finance and that's the job they got. Same goes for banking...I don't know how many college seniors actually dream of doing m&a deals.
As far as 2) goes, ER is actually pretty hit or miss. For most of my stocks, there are 8-15 analysts covering them. Of those, I typically respect 1-3. And that's not universally; that's on that particular stock. For some stocks, the answer is 0. And to be clear, a lot of ER models are beyond atrocious (again, not all of them, but this is surprisingly common). And I disagree, I think modeling is actually really really important to the job when done right; otherwise I wouldn't waste time building my own (which takes me several hours) and would just hack equity research models. So when I get a banker I know I get somebody who was trained to care about making every single number tie to something somewhere, about chasing down details, and making sure all the mechanics are smooth. I'm more confident in that person's ability to learn to take shortcuts than somebody who doesn't have that training. And while it's possible that in ER, somebody was taught to think about research the right way, given the odds I stated above about good / bad analysts I believe it's far more likely that they probably learned things that are outright wrong.
So anyways, that's why I lean towards bankers. But to be clear, there are obviously plenty of ex-ER guys around, including some pretty big name PMs who make a hell of a lot more money than I do.
I think with bschool it is doable and can think of a couple people I know who have some non-finance experience pre b school and ended up HF post bschool but I do think it's also pretty rare.
Thanks for the feed back, guys. Basically, the answers are what I thought but still surprised at the weighting IBD gets.
For what it's worth, SS ER made it harder for me to get a job on the BS, but I'm better for it. I report directly to the PMs and research/source/pitch my own ideas.
You mentioned: "Asking people in sell side ER for help would've been like asking your high schools resident dope fiend to help you study for the SATs. They are typically absolutely awful stock pickers (there are exceptions)."
I'm new to WSO and from the different posts here this is something I've seen buy side and HF analysts mention quite a few times.
What are they doing differently such that their analysis is less than useful?
For someone who hopes to be able to go to the buy side what should you avoid, or learn to not end up as "that guy"?
I'll take a stab at the above before the OP chimes in.
Difference: a. ER is paid to get very short term earnings, give access to management, and help you "catch up" and is not paid based on stock performance (the money comes from trading activity so...). This leads to a short term focus and possibly promotional behavior. Buy side tends to think about what a business will look like in 2-4 years. b. I find many ER reports to list a lot of risks as just another line on their "risk factor item list" as opposed to really thinking about how much money they can lose and why. Buy side is allergic to losing money. c. Although it seems OP really hates on their models... I don't as much. Maybe it's because I'm not as experienced and think that the only thing that matters for models is having good inputs so you have good outputs w/ something reasonable to facilitate that. I think making your model as detailed as possible is actually detrimental (but make sure you are very detailed in the parts that matter). d. ER seems to do very little primary research except for initiation reports... at least this is what I gather from speaking to select people. e. ER reports seems to pick stocks based on stories (it's kind of hard to explain without you getting it yourself) where it's like the stock is worth X since Y will happen and none of the risks will appear. Buy side seems to think about those like "so if everything goes wrong our downside is this. Therefore we're effectively paying or getting for free this part of the business or an option on it doing well." f. Also, it sucks to have an opinion on every stock you are required to cover.
a. Position yourself under the right person b. Do the above c. Change your job to do the above d. Read a lot of online resources for stock writeups e. Trade stocks based on your own research so you can learn f. You need a certain personality/traits to be successful on the buy side (at least in my opinion). You either have them or you don't and it's as simple as that. Won't detail them all (not that many) but I think one of them is to be able to be extremely honest with yourself and review your own work in that light
floppity
Keen to know your opinion what kind of personality/traits it takes for someone to succeed on the buyside. Also where do you read online for stock writeups other than seekingalpha and value investors club? Care to share..
I think the biggest issue is that they are not actually paid to predict whether or not a stock goes up or down, so they're inherently less vested in that. Which means that when picks don't go their way, they can easily write it off without having to actually ever think or talk about it, which means that they don't really improve their thought processes going forward. If you've ever read a MS research report, you'll have seen the 'risk-reward triangle', which is, by far, one of the dumbest things I've ever seen (they literally draw a triangle that typically encompasses 50% up and 50% down and then use it to claim victory no matter what happens).
Another big issue is that sellsiders have to satisfy a lot of different constituencies. They need to get access to management so clients don't hate them, they need to keep managements relatively happy (so the firm's bankers don't hate the ER guys), and they don't really like to express a ton of negativity that is not already tacitly endorsed by the buyside because then PMs call them up and call up their sales coverage to bitch about them. So just on net, it makes it tough. There's a natural bias to just rate everything a buy, and to just believe whatever management says about their company, etc. (example: management says this new marketing program is going to create 20% growth! put that in the model, rate the stock a buy, slap a px target that's 20% above current and call it a day. 9 months later...program is a bust, stock down 15% on earnings. Happens all the time)
Sellsiders need to stick to their story. So making mistakes is tough - you can end up having to defend something that's wrong to the bitter end because you can't flip your opinion that often (for all the reasons above).
Also, sellsiders have a sector coverage list that they're always covering. So a lot of times they end up making relative value calls that make no sense, and need to rate stocks something because they need to be rated.
And there is the abovementioned point on modeling, which I think just sellsiders tend to be bad at. I know of some analysts who I'm pretty sure have never opened excel in the past 5 years.
So just on net, they tend to be bad at pitching stocks that actually do well. They are still very useful / knowledgeable about businesses though.
Anyways, as to what you can do -- it's just always about thinking critically, independently and in a disciplined manner. If you can do that, you'll be fine.
For the record, I don't think making your model as detailed as possible is that important. I think it needs to be as detailed as necessary, and a lot of time sellside models gloss over that. My big issue tends to be that oftentimes sellside models miss the processes by which inputs become outputs, which leads to problems (sometimes they miss what the relevant inputs are too). For a very quick example, I can't tell you how many sellside models I see that project non-variable expenses as a % of sales. It's completely insane from an economic standpoint.
Couple things I can add to this discussion based on my experience on both sides. Sell-side has its flaws but this is slowly turning into a shit-fest
1) Sell-side isn't as invested in picking stocks as the buy-side but that's an outcome of the process. When I was on the sell-side, the # of buy-sider who really listen to a sell-side pitch is small. Further, most buy-siders pay the SS for management access and data point. If your incentive is elsewhere, why focus on it? Despite that, MANY MANY SS-ers love stock picking and love to be right.
2) The BS LOVES to think it's smarter than the sell-side, almost regardless of the stock or topic. Buy side has the advantage of being broader with more data point and, surprisingly, more management access. That said, a smart BS-er can't know more than a sell-side analyst who has covered the names for 5-15 years.
3) It's easy to say that SS-ers don't suffer from bad calls, but that's often true for the BS. Most funds underperform and those analyst/PMs still keep their jobs. Being wrong about 1 stock in your 100 position portfolio is not the same thing as being wrong about 1 of 5 stocks you really care about as a SS-er.
4a) Studies have shown that sell-side models are more accurate than buy-side models. This is because of the short-term focus of the sell-side results in most management conversation being "how will x affect COGS, and how will y affect SG&A". Meanwhile, on the buyside analyst tend to spend more time thinking as a business person, which can give them a better sense of the economics.
4b) It doesn't matter that an sell-side analyst forecast non-variable comp as a % of sales. It doesn't take much thought to know that this line item should be roughly flat in absolute $ term on a sequential basis. To play devil's advocate, if you know the business really were, you only need 2-4 variables to get it right: sales growth, incremental margins, tax rate, and interest expense.
5) Everything one can say about the SS ER being too optimistic is the same true, if not more so, for bankers. Once a SS analyst has been around for 10-years, he can get away with saying almost anything he wants about any company/management team, if he's right.
6) I think the BS is the better job. I LOVE what I'm doing. Many of the criticism of the SS are fair, but they need to be presented in the right context.
D&a as pc sales is always the favourite lol
This is what I find most hilarious...I'm not defending the sell-side or anything but it's hilarious that folks pretend like the buyside guys analyzing equities are some sort of stock-picking demi-gods. Most fund managers don't beat the S&P, but they act like their shit don't stink.
Thanks for the input. Not to derail the thread, but try to put yourself into this situation:
1) You cover 20 stocks 2) You only give a shit about ~5 of them at any point 3) You don't want to piss off the management team of the other 15 b/c 1 of them may a stock you care about next month/quarter/year 4) You NEED to give your opinion - often- to drive revenue and you need to do it on all 20...(i.e. you need to give a buy/sell on the 15 you don't follow as closely)
You're bound to say something really silly/wrong.
On your points: 1) Agree. That's why they're bad at stockpicking. 2) True people love to think they're smarter everywhere; this is universally true. Disagree that a smart buysider can't 'know' more than a sellsider - I have very seen sellsiders who have covered names for many years completely miss major facets of the business and major inflection points. 3) Yeah, which is why it's surprising how many calls sellsiders get wrong 4) I haven't seen any of these studies, and I generally am skeptical of statements that say 'studies show'. What buyside models are they referring to? It's not like top funds publish their models for the world to see. I'd be pretty surprised if the sellside models were better than what the guys at Lone Pine put out. And if the short term focus is so important for the sellside and they're always accurate about it, you wouldn't have quarters with massive divergences and stock movements in excess of 10%, since that would imply consensus is usually in the right place. But guess what, it's often not, and that's how you make money. 4b) You'd think that, except when they all end up forecasting the expense item wrong because they look at it in the wrong way, and then the quarter comes in and it was incredibly obvious if you looked at it the right way what was going to happen and they all write about 'wow this number was really a big beat / miss / surprise". Several occasions come to mind, and I haven't been doing this that long. 5) Not actually true. Bankers don't try to project anything, they just rip together sellside analyst models (we used to average them all together in my old group) or take management's numbers are given, so there's actually less of a bias there. 6) Personally, I actually think sellside has a lot of value, otherwise I wouldn't talk to them. I'm not really sure what you're trying to argue though.
Thanks xqtrack and KarateBoy for the breakdowns.
Here's a question on modeling since you've both mentioned differences about doing it. It seems that there are a lot of intangibles which differentiates the good from those who don't it well since there are a lot of modeling courses.
If you were to start your career over or were to mentor a subordinate on modeling, valuing and picking stocks, how would you go about doing so, knowing what you know now. It would be great if you could outline but I'd be appreciative of any advice.
Karate care to share studies comparing models?
With all do respect, what are you getting at?
In practice my approach to models is exactly what xqtrack says "as complicated as necessary". The goal of my comment was simply to say that "good modeling skills" is not a golden ticket to alpha. Furthermore, we focus on understanding asset values so that makes us unique.
In my experience, learning about the next layer of the company's competitive advantage/weakness is more fruitful than adding another layer to the model.
1) We agree.
2) Yep, that's what make the job fun; outsmarting the other person. Sometimes guys who have been around for too long just ride the coattails of their tenure, and don't really care about it anymore.
3) I don't think it's surprising. The job is competitive and when one is trying to predict the future, there's a lot of room for error.
4a) You don't even need to look for "academic studies". It's just a fact that most managers under perform. At the same time most SS-er would too. That's what makes it fun. Can't compare Lone Pine to the "average" on either side. They're phenomenal.
4b) Definitely happens. Especially,when the junior guys do it thoughtlessly. But in my experience, they do it on purpose more often then as a mistake to give a company they're bullish on an opportunity to beat.
5) Whenever I meet with a banker during an IPO, they are pretty bullish on the name. Sell it and forget it is a result of the transaction-oriented framework.
6) I didn't want this to come off as adversarial. It just often see these thread spin into a "let's shit on the sell side" and I wanted to play "devil's advocate".
Thanks for the thoughts. Good discussion. I'm sure some of the younger guys learned a bit from our back and forth.
Let me spend some time on google to try to find it. I'm pretty sure such a study was done.
Awesome post!
Thanks for doing this, lots of great info in here.
What would your recommendation be for someone in S&T trying to get into an fundamental research role at a hedge fund? I definitely understand its a long shot and that it would have to be the long way, but i'm sure its possible. Would it be MBA -> small shop / asset manager -> bigger shop? MBA -> ER -> HF? It's been something that's been bugging me for some time.
Clearly you've made some tremendous sacrifice in terms of your social life and just life "outside-of-work." But how much of your success has come from true hard work vs. privileged background? I'm not trying to judge, criticize, or "attack" you, but just get a sense as to whether it's all been worth it to you, or if you wish you would have just lived a "normal" middle/upper-middle-class life.
Do you wish you would have "experienced" life more in your 20's? Spent your time pursuing something entrepreneurial that could net you great $ at a young ish age? Or do you truly love what you do (which it seems like you genuinely do)?
Thanks! (Coming to a bit of a crossroads myself as to whether my end goal is simply $$$.)
Do you think your target school played a role in getting an HF job? Or your work experience? Any tips for those who want to eventually move to the buy side?
I've recently started at a mutual fund straight out of my masters in finance and it doesn't have a structured training programme. So it's up to me to learn how to build valuation models. Can anyone provide any tips on getting my modelling skills up to scratch? On friday I made a recommendation to my PM, but it was mostly qualitative with a few regressions and a discussion of the financial ratios. I really want to learn how to build a model so I can have a base/bull/bear case so that I can actually discuss potential upside/downside with with my PM. any sites/books that the more experienced guys here can recommend?
Hey, thanks for doing this. Quick thought:
You've mentioned several times that IB skills are better suited for the PE world than for HF, in general, due to the focus on public markets (altho I can understand that one would gain tremendous corp fin skills out of an IB gig). Based off this presumption, I would've thought that ER would provide a stronger background for the transition to HF or AM, but this doesn't seem like the case?
The way you describe your current role, your responsibilities, and your investment process, it seems like having an ER background would almost be the best alternative (other than HF or AM) as you would understand what drives public market sentiment, earnings, and probably have a better understanding of how investors evaluate investment opportunities in the face of overarching economic trends/events.
I'm starting to wonder if the reason you see fewer people with ER backgrounds in HF because they're (i) less qualified or (ii) there's just simply less of them trying to break into the industry compared with the throngs of buy-side hungry post-2yr IB gents.
Any books you would recommend for someone looking to go into a hedge fund?
Hey! I am starting my MS Operations Research in Columbia University, and will be taking up courses in Finance. I wish to join BB IBD or PE. I have two years of pre MS experience in Consulting, focused towards finance, but no direct exposure to IBD. How would you suggest I ensure that I end up in BB IBD or PE?
Wow. OP actually replied to most of the posts here. I have to say I'm really impressed.
I'm an incoming junior Econ and Stats major at a Midwest non-target school. I used to religiously believe in Economics. I came from the currently largest communism country in the world, and I was angry at all the disastrous results caused by wrong economic policies. I believed free market economy is the only way to get us out of this mass. And then I learned Econ in college and read books like Liar's Poker, When Genius Failed and The Big Short, I'm not about that sure anymore.
Theoretically, I think Wall Street (at least HF and PE industry) is based on the judgments about economic fundamentals. Now here's my question: Are Wall Street's huge profits based on financiers' right calls about Business and Economics, or is it because they are the ones who are holding the key to capital and are just charging the rest part of the economy for the monopoly rent? And given I'm an absolute free market advocate and non-American, I'm not doubting Wall Street as a whole for partisan reasons.
As mentioned in above postings, majority of HFs can't beat the market. The Cole of capitalism should be direction of the capitals to the most effective parts of the society, but given what happened during last crisis (Clearly the Bulge Bracket Banks weren't efficient at all) and QE, it could very well be that the reason finance industry is only doing well because Wall Street is charging Main Street by easy credits caused by the Fed.
I like Finance and doing business, but I personally would like to make sure what I'm doing is something useful to the society as a whole. I still want to go into Wall Street if I have a satisfying answer for these questions.
Any advice on how to approach the case studies for interviews?
Learn accounting. And then learn common sense. I'm not kidding, with these two things you will be very well armed, and there are a lot of models that miss accounting basics
Agree it's possible. I think the path you described is one potential way - alternatively, you may just get lucky and find somebody who's willing to take a chance on you. But if not, then yup getting into some form of research will definitely help
Eh, the biggest sacrifice was during my first couple years as a banker (really just my first year; for various staffing / weak market reasons, my 2nd and 3rd years were pretty chill though in terms of hours though I still didn't have much control over my schedule which sucked).
I am very happy with my life as it has gone from a career perspective, but a lot of that was because when I realized I hated my life in banking I thought a lot about what jobs would let me have a life and made sure I went into one that would (one of the reasons I wanted to get out of the deal based world of private equity). I went into this job because I thought I would love it and be happy, while also being successful, not much else.
I definitely have regrets, but most of those aren't related to my career. I don't wish I had lived a 'normal' life in your sense of it, but the flip side of that is I think I would have been perfectly happy if I did; I have friends who do, and the reality is the really good parts of life are pretty much the same beyond a certain point (you hang out with your friends, visit your family, try to form meaningful relationship with somebody, etc). Having enough money so that you can do fun stuff with the people in your life is great, but for most people the amount of money needed to fund that lifestyle isn't actually all that high (it's not for me anyways).
If I had a great entrepreneurial idea I would have done it, but I didn't and I'm not really that guy. If you are, then definitely go for it.
Oh and I forgot you asked how much is hard work vs privilege. I don't know, it's probably some combination of both. I am a decently hard worker (though not as much as some other people), am a pretty smart guy, and my parents weren't rich, though they could send me to good schools etc, so I definitely had some advantages there.
yes / yes. I don't know, I think I've been pretty freely dispensing advice on that topic for most of this thread...
i learned modeling through training and then actually just teaching myself / working for a really crazy boss who used to nit me on everything. So unfortunately not a lot of advice that I can give you here
Yeah there was actually a fairly detailed discussion of this above on the thread. I wrote a lot about why I think ER is less useful, and KarateBoy took the opposing position as to why he thinks it's better starting sellside; obviously we are both colored by our experiences. Regardless of what the 'right' answer is, it is true that there is a bias towards bankers with recruiters so it is typically easier to get hired as a banker than as a junior ER analyst.
Get good grades, do some good extracurrics, network, recruit, rinse and repeat (especially on the last two)
Does CFA matter? Should I go for it? Or in the end its all about how well would I connect with people and answer the questions at the time of interview?
I'm sure this has been covered a dozen times but I'm just now seeing this thread. I'll give the alternative answer since it's the one I believe to be right but most believe to be wrong.
On the outside, banking is what headhunters like because all else equal they are perceived to be generally smarter or more accomplished because banking is the most competitive job and thus you should be able to safely assume you're getting someone who's smart and determined enough to not only get into, but survive an IBD program. The equity research guys generally either do it because they didn't get into banking or because they genuinely love equities and know it's what they want to do. This makes ER a lot more hit or miss. If I had to make a generalization I would say my experience has been that the best and worst analysts I know either came from equity research (or buy side right away), but the most analysts I know came from banking.
And on the inside, banking is what the headhunters look for because bankers are generally more moldable since they tend not to have their own set of experiences in investing that would make them have preconceived notions, biases, etc. in different sectors. They're also much better at taking orders and less likely to question a way of thinking when it's presented to them by a superior. For better or for worse, you know what you're getting when you "order a banker" (as my boss calls it).
I've been trying to reply to most posts. I don't know how useful what I do is for society as a whole. I certainly imagine I am less useful than a doctor. I also don't really agree with a lot of the premises in your post though (sorry, I don't really feel like going into why...I'd just leave it at if you think what you're doing is bad for society, don't do it).
yeah there's a booklist earlier in the thread
Find a buysider and practice pitches with them. Most case studies are usually of the 'analyze this stock in 2 hours' variety.
There's one big issue with the "sell-side accuracy" argument. SS ER inherently has an advantage on this stuff from a quarter-to-quarter basis because there is an infinite feedback loop between management and the sell-side. People can disagree with it but I've been in the room on more than one occasion where the conversation goes something like this: "so consensus has us at $1.42, we figure we will be there by the end of the month, but what can we put up for rebinning if we can't make the number by Thursday? Okay perfect, we can hold off on the new scopes until Monday if that's the case. Any objections? Great meeting guys." Management knows what consensus is and they will do their darndest to hit that number if it's going to be close, so there's a lot of play going on between the sell-side and management. In quarters where things might not go so great for some idiosyncratic reason, management will guide low and you'll see all the sell-side scramble to drop their numbers for next quarter for reasons completely unknown to them other than the fact that management said it. Then management can steer their financials one way or another to hit the number, or they can blow it out with what would have actually been a normal quarter by prior standards, etc. Quarterly numbers are a circle jerk, always will be.
I'd bet buy-side hits key metrics estimates more accurately on an annual basis than sell-side, but probably not quarterly, Mandel and the gang included. And on the topic of sell-siders knowing their industry better, I have to disagree with that, simply because they corner themselves into thinking a certain way about every one of their companies and never change it, because hell, why would they? Certain analysts, buy side or sell side, just care more about the operations and understanding esoteric pieces of the business than others, and those are the guys who end up being able to go toe to toe with actual industry experts/operators.
Agree all around. Great color.
So glad someone else thinks this re: the whole quarterly circle jerk thing... (M&A background covering UK names, so semi-annual reporting only, although SS ER in the UK has its own share of problems).
Had to do a very extensive take home case study for a HF interview, and it was a US name. First time I ever saw this obsession with quarterly results, and I was like... holy shit wtf?? And this was for a hugely seasonal company, with a lot of ebbs and flows between quarters, so nothing is ever like-for-like, ever, but somehow, EVERY single sellsider is estimating the exact same number (for all sorts of different reasons obviously).
Also, what is this fixation with 'easy' and 'difficult' y-o-y comps? I just find it baffling when an analyst is like, "yeah, growth is gonna look really great this quarter because, like, they screwed up big time this time last year, so that's great".
Could you expand on the point below about non-variable expenses? As an example, expenses like D&A will not materially change if units sold increase by 20%? Do you just assume stable growth rate y-o-y? Really appreciate you taking the time to do this Q&A. Cheers.
"For the record, I don't think making your model as detailed as possible is that important. I think it needs to be as detailed as necessary, and a lot of time sellside models gloss over that. My big issue tends to be that oftentimes sellside models miss the processes by which inputs become outputs, which leads to problems (sometimes they miss what the relevant inputs are too). For a very quick example, I can't tell you how many sellside models I see that project non-variable expenses as a % of sales. It's completely insane from an economic standpoint."
Wow, haven't checked this thread in a while. Fantastic discussion between KarateBoy and xqtrack.
I'll definitely echo that starting in SS ER has made the transition to the buyside more difficult. If I had to do it over again, I would have taken the BB IBD offer. The skill-set is less transferable, but recruiting is just so much better.
But somebody needs to kill the rumor that IBD is more selective than ER - it might have been true in the early 2000s, but with headcount reductions post-crisis, getting an ER job is very difficult. Think about what has happened to S&T recruiting.
I don't have a ton of intellectual respect for SS ER. The majority of our reports contain little real analysis, and are instead just marketing tools. There is no good reason to issue summaries of quarterly results. If you own the company or want to own the company, you are going to read all the public info. If you aren't interested in the company, why are you going to read a random ER report on it?
I'm not saying sell-side analysts aren't useful. They tend to know their industries really, really well. I'd rather talk to MS's tobacco analyst than anyone else on the street about the tobacco business. But I'm not going to ask him how he thinks tobacco valuations look versus apparel companies.
Hit the nail on the head here.
And even sell-side analysts are aware of consensus, and will do everything possible to stay close to it. Partially due to aforementioned feedback loop, and partially to minimize career risk.
I've heard the same. One of the few positions I applied to didn't like that I wasn't a complete "clean slate". They want you to have the skills but they also want to teach you how to think and invest. The only problem is if you find a shop which isn't good because that leads to you learning how to do something wrong which is never a good thing...
Let me add to this. I met with a buddy of mine just yesterday who finished his 2-year stink in GS IBD in NY. I think he said his class was 350 analysts - and that same year GS only hired 4 juniors for SS ER.
So guys like me and WCRM gotta work hard to bring pedigree back into SS ER :P
This kind of stuff has me a bit worried. Interning as a sophomore at a large asset manager, but from the comments on this thread I plan to try and hit up buy-side for my junior year SA or take up an IBD stint.
Either way though - I generally do enjoy investing and learning how to think about businesses and all the stuff posters like Kenny Powers, BlackHat, xqtrack talk about. But even as an intern (and perhaps this is a consequence of the place I work at) - I see that different PMs have different styles - some are very good at buying companies below intrinsic value and waiting for the market to recognize that, while others are good at buying fantastic businesses at high prices that have high expectations and continue to exceed those high expectations.
All while this is happening, I've cobbled together what little savings I've got and have begun investing myself - because I've heard from a lot of people this is the best way to learn long term. Part of me worries that maybe the results of this (I understand it's a bull market, rising tide lifts all boats, etc but psychologically we are influenced by our winners/losers) will color the way I personally think about valuing businesses and investing. And perhaps funds will dislike that I'm not a "clean slate".
At the same time, a lot of what I learn in school (corporate finance wise) is generally uninteresting and not very applicable to picking stocks. I love picking stocks and reading 10-Ks, and I go to a good school so it's not like this effort needs to be used networking (though some people will argue this I'm sure). What would be your guys advice on this? Do you believe that good managers can capitalize on both "value" opportunities as well as buying high quality companies at a high price - or do investors invariably gravitate towards one or another? Does this bias even exist in the HF world or is it really just an asset management specific thing? Should I just hunker down and focus on schoolwork/crushing a banking stint?
Appreciate the advice guys, real wealth of information here.
PS. In regards to SS ER - it seems to me a huge part of SS ER is to develop consensus from which the buy side can then take a differentiated view on where they differ from that consensus. Investing books generally say the profit is all in the long term, but much of the buy side seems to try and figure out how they materially differ from consensus next quarter and then score a quarterly earnings surprise and make money. It seems then that SS ER and consensus is pretty important, as it seems to drive the market short term from quarter to quarter. Would love if you guys could comment on whether more long term oriented funds are trying to make the beat quarter to quarter - and whether over the long term quarterly numbers are indicative of a company's performance.
My viewpoint on the above stuff...
Different PMs have different styles, and lots of people make money different ways. I think a lot of PMs are able to do both buying undervalued companies as well as buying companies that will tend to outperform consensus expectations, but in general, people tend to gravitate towards certain styles as their primary go to.
I think if you know you want to do asset management and can get a job in that out of college, there's no reason you should go to banking first.
On the long term vs short term thing - things obviously vary at funds, but I will say that I know people at a lot of funds, and very few of them are 'long term' oriented to the extent they claim to be (with the exception of activists). A lot of long term funds will have longer term theses, but will need to keep track of current trends to make sure paths are smooth. But at the end of the day, everybody (including mutual funds) is marked yearly, and it is very difficult to defend to investors (and hence, to your PM) that it's ok that all your stocks went down 70% this year because 3 years from now they are going to be worth 60% above your buy price so you'll still make a compounded return of 20%. So at most 'longer term funds' (at least places I respect), I'd describe it as having long term theses but then making sure that the short term doesn't get vastly in the way of realizing that longer term gain.
Great stuff - really makes sense in regards to having a long term thesis but validating that via short term results. Most books don't talk about it that way, but I don't see it any other way if you're marked every quarter on your performance.
xqtrack - thanks for this post - quite helpful. I'd love to get your perspective on my situation. I've seen you've commented a bit on ex PE guys at HFs. I've been at a MM PE shop for 2+ years now and was recently promoted to a post-MBA Associate role. However, I've had a bit of a longer path to get to this spot than is typical and am about to turn 29. For a number of reasons, I don't think this is where I want to be long-term. At this point in my career am I kidding myself to think I can make the transition? Is 29 or 30 too old to start as a HF analyst?
No it's not too late, especially because HF analysts can get promoted / paid fairly quickly if you are good.
On the easy and difficult comps thing, I agree it is completely baffling, but yup it definitely matters...
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