Green flags that your PM might be successful later on

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Hello Everyone,

I'm a current undergrad considering an offer from a small (<500M AUM) long oriented fundamental hedge fund that has been around for just over 4 years. I interned there previously as an experience builder before trying to secure an IB SA offer for the next summer. I really enjoyed my time there, got to work on everything I had hoped for once they saw I was capable, and had a really good feeling about my PM (who was the founder). When they told me they would consider taking me post-grad, I was kind of shell-shocked as I was not expecting a buy side shop (albeit small), to be willing to take on an undergrad.

I have a really good feeling about the firm but I know the dangers of smaller younger funds and worry about the exit opps I would have open should redemptions kill the place in 2-3 years. At the same time, getting in early stage (AUM is ramping) could garner me some nice upside. I know there are a lot of other components that go into my decision making here, so my question is more focused: What are some green flags that would tip you off an individual PM could be successful besides just their past performance? (historical out-performance is nice but I'm not betting my career on just 7-8 years of solid returns in a decade-long bull-run lacking a major paradigm shift, especially now). I don't have much experience with high level investors and fund managers, but what traits/experience takeaways have you guys seen as indicators to longevity later on for people who have managed money?

At a fund this small, a LOT of the future success is dependent on the PM, it's really a one-man show with some support in the background. So it's imperative for me that I judge this guy right.

Thanks for reading through! Any input would be helpful.

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Comments (7)

 
  • Associate 2 in CorpDev
Sep 25, 2019 - 12:41pm

You sound like a smart guy especially for an undergrad. Agree with what other posters have shared here - but to answer your main question - the way I see it, MM banks offer reasonable exit options but I wouldn’t pick them over the fund given that’s where you want to end up anyway. Thing is, you’d likely be recruiting for similar ranked funds coming out of your MM 2 year stint - so I’d keep them warm on cont with interviews. If you get an EB, go for that, it’s a world of difference.

Congrats on the MM and fund offer, I know it’s an uphill battle from non target, should be proud mate.

 
Sep 23, 2019 - 11:06pm

You sound like a pretty smart person so I think deep down you know this is probably your best bet even if he doesn't display the 10 oddities that some of the random 20bn+ single manager founders display (anything from reading a book a day to aspergers).

If you really believe in the firm process, think the strategy is differentiated in any respect to typical long only mutual funds and you're given significant responsibility as a junior, it seems like a no brainer to take this.

I would also echo that you should compare this in a relative vacuum to your other realistic alternatives

 
Most Helpful
Sep 24, 2019 - 2:19pm

The most important green flag is basically the analogue to the most important red flag. That is, the ability to stick to a process/investment even when that process appears to be performing poorly. This doesn't necessarily mean be stubborn and never re-evaluate your thinking/investment process. But PMs that change their mind a lot or sell an investment that is underperforming but have good reason to think it will come back tend to get blown out.

Every investment strategy has periods of underperformance. How a PM handles that underperformance both in terms of the investment strategy and communication with clients is vital. A PM should generally have strong conviction in their strategy and not be swayed by the day to day or month to month movements in the markets. If they didn't believe that their strategy works over a full economic cycle or they can't handle the ebbs and flows then they should not have ever gotten into this business.

It's great that the fund has had good performance recently but as you wisely mentioned it is more important how managers handle underperformance because it isn't a matter of if but when that happens.

Probably a good proxy for this for a fundamental manager is how they handled underperforming individual investments. If they cut their losses and got out of the position, why did they do so? Was there a disciplined process they went through that lead them to the conclusion that their thesis was not correct or did they sell merely out of an emotional reaction to the investment performing poorly?

 
Sep 30, 2019 - 10:28am

This is a complicated issue. You're right that a PM definitely needs to have the discipline to stick to a process when there is a temporary drawdown. However, many funds are running strategies that have underperformed for many years, and one can identify exactly why they no longer work (and why they worked decades ago), but the funds stick to them anyway. Institutional clients also don't want to see changes to a long running process. I think the real driver is that both the fund PMs and institutional clients are ultimately more concerned with their own careers than the fund performance. If everyone involved sticks to what they have always done, it's easier to justify that decision to their boards.

 
Sep 30, 2019 - 7:51pm
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