Generalist vs Sector Specialist
Which would you prefer to have a career in? What are the pros and cons of each? How do generalists compete in the market against sector specialists?
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Well, I'm just a hopeful undergrad, but my interpretation of the situation seems to be that unless you've got a great capital base with crazy AUM per head and/or really dumb LPs, the time for generalists to make the big paydays that people in finance hope for are kind of over unless you're already established.
Lots of "long-term" investing (this seems to be what generalist investing turns into more often than not) is just hoping you've picked the right sector for the next bull market and not levering up so you can withstand 20%+ drawdowns. This is probably the best strategy for retail investing, but I don't see any reason to pay 2/20 for this -- it really doesn't generate much alpha, so why would some pension fund / insurance company give you any money? Might as well just give some 20 year-old who read The Intelligent Investor a $100k salary and hope he goes long tech iShares and shorts O&G.
Really, how much alpha can you generate when you look at a tech company one day, a retailer the next, utilities the next, etc? Especially short alpha -- seems like you're only going to get good shorts going when there's tremendous fraud. Look how this has turned out for Einhorn. You're just left hoping beta > 1 in bull markets and < 1 in bear markets.
The LP world is a lot bigger than HNWIs who may be fine with such large drawdowns (check out some of Buffett's worst years in the annual shareholder letters), and when it's so easy to replicate sector and factor exposure with ETFs, I think the value that generalists offer is decreasing pretty rapidly.
Of course, this doesn't account for the fact that generalist shops seem to provide much better WLB than MMs (not sure what being a sector specialist is like at an SM), and if you've got the good capital base I mentioned above, you can still make incredible money.
My thoughts have changed a lot on this over the years, mainly due to what I've read on this site. I used to think the MM-style was ridiculously stringent and didn't make much sense, but once you start thinking about it from the LPs' perspective, the case for generalists / market-correlated funds in general becomes a lot weaker.
One thing to note, you're usually not investing in hedge funds for alpha.
Interesting! Just general diversification, then? I'm assuming this is from the HNWI perspective?
I'm the same person who left the parent comment. Just changed my tag.
Also, this depends on the type of fund too, right? I can see how this would make sense for investing in a macro / commodities / special situations fund, but if you're going to a straight L/S, alpha is probably the #1 focus, no?
I think being a generalist is not necessarily optimized for the pension fund that wants bond-like returns every year but is instead optimized for ideas that outperform on a multi-year view. Generalists and others can come to the conclusion that it’s better to be long tech most parts of the cycle, better to be hedge w/ some industrials / O&G when the cycle turns. Most generalists lean towards quality businesses which empirically outperform over time vs “omg let’s go long this shitco b/c it’s too cheap”
Being a generalist is not fun. Imagine a game where the person who completes the most puzzles successfully wins, and all challengers are given the same amount of time to complete the challenge.
Being a generalist is like having 5 completely unfinished puzzles given to you. Each time you are starting from scratch.
Being a sector specialist is like being given 5 puzzles where the edges have already been completed. You can just get to work on the central work because you already have the framework in place.
I went from specialist to generalist and it was a very unpleasant transition.
I sorta disagree with this, being a specialist is like being tricked into thinking that every puzzle has 10000 pieces when in reality you can take a look at a lot of boards and realize each puzzle only has 2-3 key pieces that matter vs noise that specialists may over index
haha what thats the opposite, generalists see 10k pieces for every new sector while specialists know exactly what the 1 - 2 pieces that matter are at any given time
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