M&A exit opp: Hedge Fund

Hi,

I am currently considering going into m&a and am curious about the m&a exit opps in hedge funds.
All over the place you can read that after about 3y in m&a you either go into PE or join a hedge fund. Now, in what way does the activity and work at a hedge fund differ from being at a PE firm?

The answer might be obvious but i just couldn't get any info on this.

Thanks in advance for your comments.

 
Best Response

*Blanket disclaimer: There are exceptions to everything I'm about to say, but generally I believe these things to be true.

In a nutshell:

PE --> transaction-based (and therefore is more related to M&A) HF --> portfolio-based (and therefore is more related to trading and equity/credit research)

Both analyze companies, but they do so in different ways:

1) HFs typically work in liquid markets, while PE firms generally work with private markets. How this affects the work: PE firms sign NDAs to obtain material nonpublic information (MNPI) in order to perform as much due diligence as possible on a target company. This is similar to what happens is M&A. HFs are dealing with public markets, and therefore cannot be privy to this information (and definitely cannot trade on it) so they generally have less information about a company, and therefore the work is more like a research analyst, who will not be allowed to receive/act on MNPI. 2) Private equity firms invest more money in fewer companies than hedge funds do (i.e. their positions are more concentrated). PE firms intend to own a company for several years before selling it, while HFs generally aim to own a security for 6-18 months. HFs use portfolio theory to construct a diversified pool of investments that will outperform a target benchmark on a risk-adjusted basis (hence the trading angle). PE firms don't manage investments in this way. Instead they try to either buy a valuable company that is being mismanaged/not realizing its full value, or they buy a bunch of little companies that are related to one another and bolt them together. Both PE strategies end with the intention of selling the company to another buyer in 3-5 years (again, M&A related).

All that being said, I think M&A is a great place to start for either because you learn how to model, and it looks great on the resume. It's harder to say what the path is to "HFs" in general because there are so many different types of funds with different strategies. PE firms, while they invest in different sectors and different size companies, they are all pretty much doing the same thing. M&A is probably most relevant to a fund with a strategy in distressed investments or deep value. It would not be relevant for a global macro fund.

 

This, basically

NYorker:
*Blanket disclaimer: There are exceptions to everything I'm about to say, but generally I believe these things to be true.

In a nutshell:

PE --> transaction-based (and therefore is more related to M&A) HF --> portfolio-based (and therefore is more related to trading and equity/credit research)

Both analyze companies, but they do so in different ways:

1) HFs typically work in liquid markets, while PE firms generally work with private markets. How this affects the work: PE firms sign NDAs to obtain material nonpublic information (MNPI) in order to perform as much due diligence as possible on a target company. This is similar to what happens is M&A. HFs are dealing with public markets, and therefore cannot be privy to this information (and definitely cannot trade on it) so they generally have less information about a company, and therefore the work is more like a research analyst, who will not be allowed to receive/act on MNPI. 2) Private equity firms invest more money in fewer companies than hedge funds do (i.e. their positions are more concentrated). PE firms intend to own a company for several years before selling it, while HFs generally aim to own a security for 6-18 months. HFs use portfolio theory to construct a diversified pool of investments that will outperform a target benchmark on a risk-adjusted basis (hence the trading angle). PE firms don't manage investments in this way. Instead they try to either buy a valuable company that is being mismanaged/not realizing its full value, or they buy a bunch of little companies that are related to one another and bolt them together. Both PE strategies end with the intention of selling the company to another buyer in 3-5 years (again, M&A related).

All that being said, I think M&A is a great place to start for either because you learn how to model, and it looks great on the resume. It's harder to say what the path is to "HFs" in general because there are so many different types of funds with different strategies. PE firms, while they invest in different sectors and different size companies, they are all pretty much doing the same thing. M&A is probably most relevant to a fund with a strategy in distressed investments or deep value. It would not be relevant for a global macro fund.

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Thanks a lot for your quick and detailed reply!

So basically, a PE firm buys the entire company directly whereas the HF buys stocks of the company in the market.

Is that the essential difference?

Thus with an m&a background, i would be doing valuations of companies to see whether their market prices reflect their supposed value. That would basically be equity research , no?

 

Kenny Powers posted this a while ago...

Common backgrounds in my experience: Value/Long-short: Largely banking, equity/credit research Distressed: Banking (esp. restructuring), sometimes lawyers Global Macro: Traders, macro research, economists Commodities: Traders Convertible Arb: Traders, Mathematicians HFT/Algo: Mostly software engineers/math/stats people Structured Credit: Bankers (largely structuring), trader

Edit: Just as a side note, from posts on WSO, it seems that it is easier to do IBD -> PE -> HF than IBD -> HF -> PE

 
Millhouse:
Kenny Powers posted this a while ago...

Common backgrounds in my experience: Value/Long-short: Largely banking, equity/credit research Distressed: Banking (esp. restructuring), sometimes lawyers Global Macro: Traders, macro research, economists Commodities: Traders Convertible Arb: Traders, Mathematicians HFT/Algo: Mostly software engineers/math/stats people Structured Credit: Bankers (largely structuring), trader

Edit: Just as a side note, from posts on WSO, it seems that it is easier to do IBD -> PE -> HF than IBD -> HF -> PE

Totally based on my (limited) personal experience, though-your mileage may vary.
There have been many great comebacks throughout history. Jesus was dead but then came back as an all-powerful God-Zombie.
 

@status_quo:

as i do not have a finance background i just asked for a confirmation. but maybe you can help me finding an answer to my questions above?

 

Dude, stop trying to set a life path. whether you do m&a or research, you will have to end up on the buy side. research will most likely give you opportunities in hf's , but m&a should give you opportunities in both. at the end of the day, pe or hf, the bottom line is making money and i know hf's do a lot of private market transactions (pipe's), so don't think you will only be equipped for the public markets. This is more so in special situations funds (event driven, merger arb, distressed)

 
Millhouse:
Are you saying that the special situations funds are more or less in the public markets?

This all depends. I believe a place like GS invests privately in special situations like buying a bundle of golf courses in Japan, etc. As far as at a hedge fund, special situations can mean anything from restructurings, spin-offs, risk arb, merger securities, and any type of catalyst that has come into play or will come into play.

-- "Those who say don't know, and those who know don't say."
 
nutsaboutWS:
Millhouse:
Are you saying that the special situations funds are more or less in the public markets?

This all depends. I believe a place like GS invests privately in special situations like buying a bundle of golf courses in Japan, etc. As far as at a hedge fund, special situations can mean anything from restructurings, spin-offs, risk arb, merger securities, and any type of catalyst that has come into play or will come into play.

This is a good example of the kind of cross-over that can happen between private equity, mezzanine/private debt, and public credit markets. It's also why most of the biggest PE and debt shops have multiple vehicles with different legal structures/mandates so that they can be flexible to pursue loan-to-own, distressed recaps, etc. It's tough to generate strong returns while running a lot of money if you can't be flexible.

The same is true of what are traditionally considered value-oriented long-short equity shops-places like Greenlight and Third Point were in plenty of distressed debt/credit market situations during 2008-2010.

There have been many great comebacks throughout history. Jesus was dead but then came back as an all-powerful God-Zombie.
 

Thanks guys. thats what i was looking for. NYorker got it right. I just wanted some info on m&a after-life.

Both PE and HF are attractive. It seems though that work at a HF is more diverse and dynamic, "deal"-wise, according to what nutsaboutws and nyorker said.

What about global macro HF? what type of trading have those guys done before?

and are the hours in HF less than in m&a/PE?

 
PRue:
What about global macro HF? what type of trading have those guys done before?
Rates, currencies, and commodities are pretty common.
PRue:
and are the hours in HF less than in m&a/PE?
Totally depends on the hedge fund (and on the PE shop, as well), though I don't know many HF analysts who work as much as a PE associate on a live deal.
There have been many great comebacks throughout history. Jesus was dead but then came back as an all-powerful God-Zombie.
 

You need to be very detail-oriented – a lot of what we do relies upon the details of both process and analysis. In a lot of jobs it doesn’t matter if the details aren’t perfect, but here if the details aren’t right it can jeopardise an entire deal.

http://3d-rendering-services.uk
 

I don't think that there is a set way that one can show you, as there might be with PE. I've seen a guy go directly to a HF after 3 years in M&A and I have seen a guy go to a HF with just 1 year BB IBD and 2 Years Megafund PE. So it from my understanding it all boils down to roughly three points:

  1. Cultural fit - given that HFs tend to be very small (and I would even argue that you want to be at a small shop), cultural fit is the most important criterium.

  2. Interest in the markets - You need to find some way to get the interviewer to believe that you have a real interest in the markets. Given that you work in M&A, you might have an interest but this will obviously be questioned, as you work primarily with corporate clients and not much with the market itself.

  3. Have solid investment ideas and a strategy - You should have some good ideas as far as investments go, preferably when you read the daily financial or world news. In addition, being able to talk about an investment strategy that you are interested in would probably benefit you as well, which I mention primarily to get back to your question regarding books: Books by Graham, Soros etc might be a good read if you have the time. Other than that, read the books mentioned here on WSO in the recommended book section. I particularly liked More Money than God.

Hope this helps

I'm talking about liquid. Rich enough to have your own jet. Rich enough not to waste time. Fifty, a hundred million dollars, buddy. A player. Or nothing. See my Blog & AMA
 
Matrick:
I don't think that there is a set way that one can show you, as there might be with PE. I've seen a guy go directly to a HF after 3 years in M&A and I have seen a guy go to a HF with just 1 year BB IBD and 2 Years Megafund PE. So it from my understanding it all boils down to roughly three points:
  1. Cultural fit - given that HFs tend to be very small (and I would even argue that you want to be at a small shop), cultural fit is the most important criterium.

Why would you argue that being at a small shop is better? Less resources, way more risk. 3-5 men operations are risky.

 

I've personally never worked at a HF, but from the people I know, the majority works for small shops (either having switched from large brand name funds or having gone another route), and from what I have heard, all of them make more money now at a small fund (same position in the "hierarchy") and have more responsibility. Given that most of the people on this board tend to be in their 20s, I would argue that this is a better way for some of that age to gather experience than to work for a bigger firm, where you might not have as much responsibility.

I'm talking about liquid. Rich enough to have your own jet. Rich enough not to waste time. Fifty, a hundred million dollars, buddy. A player. Or nothing. See my Blog & AMA
 

CFA is definitely worth pursuing if you want to get on the buy side. The designation is significantly more valued there than the sell side.

"The power of accurate observation is commonly called cynicism by those who have not got it." - George Bernard Shaw
 

Don't think you're trying hard enough, to be honest. A mate of mine who didn't even want L/S, or even HF, got an interview at a fund (not Tier 1 bank either).

"After you work on Wall Street it’s a choice, would you rather work at McDonalds or on the sell-side? I would choose McDonalds over the sell-side.” - David Tepper
 

I see positions on Bloomberg all the time for HFs in London. E.g. Right now looking at event driven analyst position posted today

People demand freedom of speech as a compensation for freedom of thought which they seldom use.
 
Anihilist:

I see positions on Bloomberg all the time for HFs in London. E.g. Right now looking at event driven analyst position posted today

where on Bloomberg exactly, could you post a link? hearing about this for the first time.

thanks

 

eFinancial usually has several HF positions.

[quote]The HBS guys have MAD SWAGGER. They frequently wear their class jackets to boston bars, strutting and acting like they own the joint. They just ooze success, confidence, swagger, basically attributes of alpha males.[/quote]
 

I read a thread on here a while back about HF recruiting (search for it, haven't got a link) where a HF professional talked about where/which groups (product vs. coverage etc) they like to hire from. My impression is that if you're from a solid industry coverage group (and especially given you have industry specific M&A) you should be a viable candidate.

 

You might get more hits for something like a merger arb shop, but as I understand it, analysts fresh out of an analyst program still don't know squat. As long as you have a solid handle on corporate finance and can pitch a stock / build a case intelligently, it shouldn't be a problem.

Also - many of the BB's have product groups that are so large you end up being silo'd into industries verticals. I don't think it's that uncommon and I don't imagine they have too much trouble recruiting.

 

Prefacing by saying I personally did not make the move as an associate, it's certainly doable. I'd reach out to (to the extent you're comfortable) headhunters, your personal network, folks on the buyside at funds you may have interacted with on deals or projects, Etc. I think for you the bar will be materially higher since I assume you'd be looking to go in at a more senior level. Key will be demonstrating ability to think like an investor and price risk. Your easiest bet will be long short nat res oriented equity funds. Good luck.

 

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