Gray Fox Q&A

MMmonkey:

What has caused you to stay at your firm? Have you had thoughts of leaving? What could cause you to leave? What's your long-term game plan? The number of analyst seats seem to dwindle the older you get, so I'm curious how you have thought about the issue.

-I respect the people who i work for, they have treated me well, and I believe in the investment process -Everyone thinks about leaving at some point, I've never acted on it.
-If Ted Weschler needed an analyst or I woke up one morning with the ability to play on the PGA Tour, I'd be gone. In reality, I would probably leave if management became more focused on other endeavors or there was serious style drift. Don't see that happening. -Long term game plan is to do the best I can at the office, invest my own money well, and be prepared for any opportunities that come down the pike. At the mid-senior level (I'm solidly in the mid camp) the decision really boils down to trying to run money vs. becoming a senior analyst with more security. Will address options for running money in separate post.

anonymousbro:

the CFA helps you do____? What kind of background does it take to get real looks from a HF?

Thanks for doing this.

The CFA is a signaling device. 90% of the curriculum has no direct bearing on the investment process. Its a good general overview of related information, but the parts I found most useful were the accounting chapters related to quality of earnings. The L2 chapters on economic earnings and normalized FCF were useful as well. I don't regret taking the tests and paying the $250 annual fee.

Most PMs in the hedge fund space honestly don't care that much about the CFA. I don't think my boss knows I did the program. The mutual fund space has a dogmatic fixation on CFA though, its borderline expected at Fidelity/Wellington/Putnam etc. Headhunters like seeing it as well, and they are often the gatekeepers for hedge fund jobs.

The best way to get real looks for HF jobs is to do a two year banking stint. The majority of large hedge funds that regularly recruit analysts do so via banking classes. For people who did not do banking, my best advice is to have a really, really good write-up to send as a resume. A decent amount of HF jobs are sourced through HBS, Columbia, Wharton, Stanford, etc but a top flight MBA is by no means a guarantee.

Deo et Patriae:

Are you Frank Jaeger?

I'm like you, I have no name.

DickFuld:

Does your firm allow interns to make investment decisions?

Why not? All hands on deck. Gotta soak up all the alpha

Stryfe:

Best tips for breaking into HF from undergrad? What do you think the hurdle for the quality of an undergrads own write-ups/process should be for that?

I would advise the majority of people to go someplace with a formal training program out of undergrad. If your heart is set on buy-side, apply to Fidelity/Wellington/BlackRock that do actual analyst programs. Some of the large funds are starting to hire people out of undergrad (Point72), but that is separate topic.

The hurdle rate for write-up quality is going to be even higher for somebody out of undergrad vs. somebody who has tangential work experience for 2-3 years. There are a lot of job postings for smaller funds for people with 2-3 years experience that ask for a write-up, the work experience can probably be trumped by a great idea.

I would also note that an initial write-up should be no more than two pages, with the option of attaching a much longer fleshed out thesis.

reib_analyst:

2 questions regarding recruiting:

1. How do you view guys coming from "nontraditional" banking groups like real estate or FIG vs. more traditional groups like TMT/HC/C&R?

2. Does having a great gmat score help at all if GPA/SAT are already very solid?

-My firm is probably not the best example given that the sample size is too small. Based on conversations with friends at other firms, the bias towards the “preftigious” banking groups is more heavy in PE recruiting rather than HF recruiting. A lot of sector focused jobs are available for FIG, Real Estate, natural resources. It may be harder to get the generalist role at a fund, but there are FIG teams at every multi-manager and most large single manager funds.

-If you already have a top flight GPA/SAT score I wouldn’t take the GMAT just to help with HF recruiting. A good GPA is kind of a given and two standardized tests in the 99th percentile are not better than one test score in the 99th percentile.

LayeredCake:

If you've worked with developers at HFs, can you shed some light on their career or your experience with them?

Sorry I can't offer too much advice on this topic, but I would say that if you just google "hedge fund analyst jobs", a ton of them are coding/quant related.

Gray Fox I'll just piggy back on his so you only have to answer twice. Related to his a) what I am specifically wondering about is do you need a technical background? The cliche thing you hear about HF is that everyone has their PHD in rocket science, and they can calculate all the financial formulas in their head. If that is indeed what they're looking for, what kind of supplemental background is okay?

delete

Zatopek:

1) How are ER guys viewed when it comes to recruiting?

2) How much, if at all, do you rely on ER when forming a view?

3) How do you generate ideas + do you get to actively research your ideas or is all the work done on PM's picks?

4) day in the life would be great

5) best and worst thing about the job

Thanks for doing this.

Also interested in your answer to these.

Zatopek:

1) How are ER guys viewed when it comes to recruiting?

2) How much, if at all, do you rely on ER when forming a view?

3) How do you generate ideas + do you get to actively research your ideas or is all the work done on PM's picks?

4) day in the life would be great

5) best and worst thing about the job

Thanks for doing this.

Definitely interested in this too

NESCAC:

Great stuff, I'll just go ahead and bombard you with questions off the top of my head. HF's have never been for me (I'm a deal-junkie), but always had some curiosity..

What's the size of your fund? How responsible are you for sourcing ideas? How do you come up with potential targets? Would you consider your fund to be highly levered? How receptive is the PM to things you say? Do you think sharpe ratio is a useful metric? And if you didn't work at a HF, then what could you see yourself potentially doing instead?

Might have gotten a bit carried away...sorry.

These are all very good questions, I'm going to pass on some of them to preserve anonymity.

-Sharpe ratio is probably more useful when the risk free rate is greater than zero. There are the obvious pitfalls that any finance text covers. I bet Tepper's sharpe ratio isn't that great because of the vol, but the vast majority of that is skewed in one direction. Tangentially related, Seth Klarman has said before that he does not know how to calculate Beta. I don't know if I believe that, but its instructive.

-Shorting in any form is leverage, even if gross exposure is below 100%. Pretty much all single manager L/S funds are going to run at lower gross and higher net leverage than multi-managers.

-The more thoughtful and intelligent my comments are, the more likely my boss is to listen to them. The opportunity cost of a successful hedge fund managers time is mind-boggling - don't waste it. Initial impressions go a long way. I proofread, critiqued, and attacked at every angle any email or piece of analysis I sent to my boss my first couple years. I thought if there was a way I could say things more efficiently, how they would respond, and what my follow up would be to any possible question.

-If I wasn't an investor, I would be an outdoors guide. If I was older and married, I would teach and coach. I know that isn't a useful answer, but I have zero desire to do F500 corporate finance, commercial banking, etc. I've been at a small fund for 5 years and it would be tough to go someplace bureaucratic like a big PE firm (and I doubt they would even want me). I guess I should caveat that with there are some very good long-only managers where I would be happy working (Sequoia) and that being at a place like Capital Group gives a ton of mgmt access and research firepower.

The Real Gordon Gekko:

I just started on the buyside from UG, when is too soon (or is there no such thing) to go for the CFA? Also, thoughts on CAIA instead/before going for the CFA?

If you are going to to do it, I would do it ASAP. The opportunity cost of your time is only going to go up, and if you are considering business school it makes the most sense to knock out CFA ahead of time.

For direct investing CAIA is useless. I looked into the program briefly, almost none of the material is relevant. More of a designation for FoF or investment consulting. I don't think I've ever met an analyst or PM in my space that has done CAIA.

wanttobreakin111:

How stable would you rate your job as, given that you're decently senior now?

Is it impossible to get into HFs, say, as a post MBA IB associate (just like everything else, lol)?

How big is your fund? How big are the biggest funds (in terms of investment professionals, excluding BO/admin)

Are analysts only crunching models or are they also paid for ideas?

Is there a 2 and out program for juniors like in PE and banking (especially for big HFs like clearbridge), or is it easier to stay for long periods of time/get on partner track? What was your career advancement like.

Any plans afterwards, or do you plan to stay? What are your exit opps?

-I'm very much at a mid level, not senior. I do feel like my job is stable, largely because that is the environment the owners try to foster. There are a lot of funds with a cutthroat environment, I'm not at one of them. The multi-manager model lends itself more to the "contribute value and get paid or you're out of here" environment.

-Depends on the fund and the analyst. There is kind of a natural transition from doing work that is assigned via a PM to idea generation. Generating ideas is kind of a 24/7 job. People that want to take the next step are always thinking about what makes a good business and how much to pay for it. I read the journal, the economist, VIC, SZ and all of the other common sources, but every time I go to a restaurant, store, etc I'm thinking about who owns the place and is it a good business? My point is that even if you are a model monkey, its on you to think of ideas and its a 24/7 job.

-Depends on the fund, a lot of the more formal programs at large funds do a two year then MBA thing, but thats not that common. Picking a HF involves a lot more career risk than a PE fund, its harder to switch and the implied time commitment is much longer.

-No plans to leave, I'm grateful for my seat. Exit opps for a job like this are much more narrow than PE. I know how to think about businesses, have a strong understanding of financial concepts, etc but at the end of the day Security Analysis isn't the most tranferrable skill set.

A general comment on entering the space: I think active management as a whole will be structurally challenged for the next 10-15 years. Price discovery is an important part of functioning capital markets, but there are way too many people trying to pick stocks. For every Seth Klarman there are ten guys closet indexing and getting paid way too much money. The move to ETFs is real. The 1% fee structure is under a lot of pressure, to ask for 2/20 is getting even tougher. If you are legitimately passionate about investing it can be a rewarding career, but there will be incrementally fewer seats available each year. The idea of the HF space being "the most prestigous" and offering the best chance to get rich has led people into the business for the wrong reasons.

Dece:

Hi, what do you think of starting out at a hedge fund like GLG? Do you think it is a good platform (rivalling BB IBD) and how is GLG viewed by the industry?

Sorry, not really familiar with GLG and can't comment/offer any advice.

floppity:

Thanks for doing this. Appreciate your comments through the years as they have been very value-add for the most part. For the most part they have also been in-line with how I think too (not sure if this is a good thing).

My only question is how do you meet more people in the industry and stay connected? For better or worse, I do eventually want to have a network of people in the industry that I can email/call up and discuss ideas. Most general "finance" networking events I've been to tend to have very few people at what I guess are called FO roles at a HF or MF. Most of my contacts in the industry that I can just talk to are by chance (friend of friend I meet at bbq, etc.). My firm is also in the startup stage and we aren't concentrated enough in any sector to really warrant traveling to NYC for an industry event.

I don't have a traditional background such as IB and worked at a small firm prior to my current role (and thus no real finance network from first post-college stint). The people I have worked with / interned with are generally at AM/HF but there were very few of them to begin with. Not that I'm complaining, but just providing some background on why this problem exists for me in the first place and why I'm trying to work with the hand I've been dealt.

Thanks!

I don't by any means have a giant network but I would suggest the following ideas

-Local CFA events. Most people will have terribly boring personalities and depressing jobs, some people will actually be intelligent and good sounding boards. -Check out the website Corner of Berkshire and Fairfax. People there seem to organize regular meet ups in NYC, Boston, and Toronto. I have not been to any of them yet but would love to go at some point. I think the MO is that 2-3 guys pitch idea, everybody else asks questions, and then people drink beer. -Check your alumni network. I went to a small liberal arts college, but I was shocked to find how many people have similar jobs in my area. -I don't know how far NYC is from you, but the Columbia CSIMA conference in February has speakers nearly as good as Ira Sohn at less than a tenth of the cost. There are several idea dinners with industry professionals the same night.

Carter89:

Thanks for doing this. I was wondering whether you have ever had to negotiate or push for more comp at your fund than the partners were offering and if so, how you approached those discussions.

In theory, an analyst has some leverage if the shop is lean (either naturally or due to departures) and running a lot of capital with decent returns. But practically, it seems like most PMs will pay just enough to keep the analyst there and it's challenging to negotiate more because the only real leverage the analyst has is to walk (and I almost think that once you threaten that.. you've reached the point of no return.)

Even if the analyst has graduated from a relatively fixed starting comp to verbally-agreed on % of PnL (i.e., more performance-based), the percentage may still be quite low. Interested in your thoughts on this.

I’ve never negotiated on comp. To be honest I think the cumulative time I’ve spent on comp-related discussions with the my boss is about 5 minutes. Whether the news is good or bad, when the number is communicated the way to go is to say thank you and not show any emotion. Obvious disappointment makes you seem ungrateful, getting giddy makes you seem young and signals that they might be overpaying you. Take some time to process the information and make a rational plan if you feel like there needs to be a discussion.

I will say this though: tread carefully. I’ve heard a lot more stories about these conversations going south than ones where things work out well. Nine times out of ten the analyst has less leverage than they think they possess.

I would do some homework to see where you should realistically be (consult the Glocap report, try to find a discrete headhunter, ping your network), and if there is a material gap go out and get an offer in January/February. With an offer in your back pocket you can push a lot harder (while still being respectful) and see what happens.

fortheppl:

What are your thoughts on activist investing?

-The media makes activism seem like a much bigger deal than it actually is in real life. Activists are $150bn of $3 trillion in hedge fund AUM. They get 50%+ of the media exposure and are 5% of the assets. In terms of actively managed money, the percentage is even smaller. -It can be a useful tool, but we are probably hitting a tipping point where the money flowing into activist strategies is greater than the actual need for activism. -Companies are much more efficiently run than they were 20-25 years ago. Boards are more independent, every capital allocation decision is scrutinized, and all of Corporate America has been restructuring since 2008. Read Barbarians at the Gate and contrast that with people at Heinz needing special permission to print in color.

Finally, in the words of a legend “____ Sucks”

jankynoname:

Thanks for doing this. Wonder if you could comment on any fundamental L/S shops or individual PMs that you respect? Are they the big names that we would all be aware of, or are there some mid-sized under the radar funds that do things really well in terms of the soundness of their research process, patience with ideas, opportunity for analysts to drive P&l etc...

I'll throw a few names out there that are excellent and not the famous responses like Baupost, Third Point, Viking, etc

Brave Warrior Tesuji Hound Partners

The fund I work at generally doesn't respond to unsolicited pitches, as we're fairly institutional in our hiring process, so I won't opine on whether it's ok to send stuff for a different strategy. That said there are plenty of stressed/distressed credit situations that are SEC-filers right now, particularly in energy and commodities but also in plenty of other sectors as well.