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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Comments (5)

Most Helpful
  • Prospect in Research - Other
Nov 21, 2021 - 2:07pm

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.

Nov 22, 2021 - 8:50am

One thing to note, you're usually not investing in hedge funds for alpha.

  • Prospect in HF - EquityHedge
Nov 22, 2021 - 11:05am

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?

  • Analyst 2 in HF - EquityHedge
Nov 22, 2021 - 7:00am

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"

  • Associate 2 in PE - LBOs
Nov 22, 2021 - 11:31am

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