HF PM AMA

Martinghoul's picture
Rank: Neanderthal | 3,640

There appears to be some demand for an HF AMA, so here goes... I believe this will be a communal effort with several people contributing, including myself.

Briefly about me: I have been in the mkt for almost 15 years, always specializing in global rates. Currently, a PM in a reasonably large macro fund (~$9bn AUM). Previous to that, I was a PM working for a macro/rates group within a very large multistrat. Happy to elaborate further on my background in the Q&A proper.

Comments (196)

Sep 13, 2016

Thanks for doing this. For an analyst early on in their career, which would you deem more important if the goal is to eventually manage a book: working for a good PM (in terms of both having an edge and mentoring) or the firm (brand name and AUM)?

Sep 13, 2016

I would say my personal view of this is skewed in favor of the former. Working for the right person during the formative years of your career is incredibly important. So I'd say that in my scale of relative significance it's 70:30 for the former.

    • 3
Sep 13, 2016

what drew you to rates?

I seem to remember you're in london. how, if at all, do you think brexit will affect you?

do you get to express your own viewpoint with your trades or does your investment committee kinda dictate the positioning the fund wants and you implement? I'm more familiar with the mechanics of L/S, market neutral, relative value, etc., not as much macro.

thanks!

    • 1
Sep 13, 2016

When I started, I didn't have a choice, as I was hired to join a rates desk.

I am, in fact, in London. Brexit is a complicated issue. Currently, nothing is known and everything is totally uncertain, Therefore, it's safe to say that, as things stand, Brexit means nothing for the moment. Obviously, that doesn't mean that it cannot be extremely significant under some particular scenarios. That said, on this particular subject, I am generally inclined to believe that, Brexit or no Brexit, things are going to mostly remain the same, simply because London is just so damn convenient, inside or outside the EU.

All my trades are always based solely on my own viewpoints.

    • 5
Sep 13, 2016

thanks man. what's the future hold? do you see yourself staying a PM for a while or once you hit your "number" will you sail off into the sunset? I can't imagine being a rates PM is good for your blood pressure...

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Sep 13, 2016

Do you think it is more helpful to be a junior at a HF (TA type role) or S&T / ER at one of the BBs to learn / progress in the industry?

How far would you agree that the HF model is set up to make one person a billionaire as opposed to everyone equally well compensated?

Sep 13, 2016

While I would always answer these questions with "It depends", let me elaborate a little bit, so that you can get some sense of the logic.

IMHO, in the past, I would have said that, at least in my space, BB/S&T is the best possible start, in an overwhelming majority of cases. The simple reason for this is that banks, as a rule, used to have pretty well-established and mostly viable structures in place to turn graduates into junior risk-takers. Most HFs, obviously, never bothered with such structures, partly because banks were doing all the work for them. Obviously, with all the developments since the crisis, things have been changing and the answer to your question would be a lot trickier now. End result: whereas in the past I would have suggested BB S&T as a better risk-adjusted route 80% of the time, nowadays it's probably 50:50.

Regarding your 2nd question... I broadly agree that HFs, to a lesser or greater extent, are designed to enrich the guy at the top. I am not sure, tbh, that this is all that different to business more generally. I would say, however, that the HF industry has some examples of this being taken to rather egregious extremes. In the fullness of time, all these things will resolve themselves, though; it just takes a long time, since the industry is relatively inefficient.

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Sep 13, 2016

This thread will be immensely helpful in better understanding the buy-side through the lens of a PM, which seems to be everyone's aspiration (myself included) so thank you for doing this.

Knowing what you know now about the business and the process/experience of going from junior to PM, what advice would you give to someone looking to make the jump in the near future that would aid in creating a long-lasting, tenured career? I don't want to be distracted by short-term gain (more $$ etc.) and get left behind/booted shortly after the jump, I am aiming for long-term career development in an industry I truly find intriguing and challenging.

Thanks again!

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Sep 13, 2016

I enjoy doing this, so you're welcome...

Bits of advice/wisdom that would help you make this into a career, based on my experience, in no particular order:
1) Love the job. Seriously and I am not being coy about this: there's simply no point doing this if you don't enjoy the process and/or it's extremely stressful for you.
2) Be careful about your mentors. I appreciate that a lot of this has to do with the luck of the draw, but you should do all the amount of due diligence possible when you make decisions about your moves.
3) Be patient. You will inevitably go through periods when you're bored, not very motivated and occasionally frustrated. You have to figure out ways to survive these "lean times" somehow, so that you don't end up making stupid decisions for all the wrong reasons.

Obviously, this is above and beyond the basics, such as work hard, blah-blah... Best of luck!

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Sep 13, 2016

Thanks for the insight and advice, much appreciated and very helpful!

Sep 13, 2016

thanks for getting this up!

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Sep 13, 2016

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Sep 13, 2016

1) TBH, in my particular corner of the mkt, I am yet to see technology offer me much incremental value. The state of the industry's IT infrastructure is sorta woeful and I have only seen marginal and slow improvements. That said, there have been some developments, but maybe I am just not seeing all of them, since I operate on a somewhat different timescale (e.g. I don't really see any of the "machine" stuff). Still, to be frank, given all the hype, I would have expected to see more.

2) Like I mentioned before, advances in technology haven't really had an impact. Policy (I assume you're referring to regulatory developments etc) obviously had a massive impact.

3) I think he's done some very stupid things (fwd guidance is one of them, the infamous Mansion House speech is another, etc). Hence I am not really a great fan of his. Could be worse, I suppose.

4) Lotsa good pubs, so hard to pick. As to restaurants, again, too many to choose from. I don't have a particular favorite.

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Sep 13, 2016

What are the hours you work? As an analyst, then associate, then VP, and PM(not sure if these terms apply in Hedge Fund)?

Sep 13, 2016

Yeah, the terms don't quite apply directly, but I suppose there is some sort of an equivalent progression....

I worked a lot when I started (80+ hours), but that has gently and gradually tailed off over time. The main thing that has evolved is not so much the number of hours, but the flexibility in deploying them. I can still, if I feel that I need to, work 12hrs every day and come in on the weekends, but it will be my own decision. You get this flexibility, in my experience, in your "late analyst" stage, where you no longer have anything to prove to someone else. Hopefully, this answers your question, even though I realise that I haven't given you very precise numbers,

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Sep 13, 2016

I'm sorry if my ignorance lead to this :)

Absolute truths don't exist... celebrated opinions do.

Sep 13, 2016

Did you go straight to HF out of undergrad or did you start in AM/ER/IBD and then go to HF?

Sep 13, 2016

Neither...

I had an actual honest job for a while :) (engineer). Then I went to do an MBA and ended up at a fund by accident. Pure dumb luck, but there you have it.

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Sep 14, 2016

What was the initial rationale for pursuing an MBA? & what type of engineering did you study?

Good thread, and thanks for your posts on here and Wilmott

Sep 28, 2016

Could you share the story on how you got in by accident? Sounds entertaining!

Sep 13, 2016

Setup:
Avg BB Rates liquid products (UST, swaps, agencies, mortgages, etc...) trading desk has min P&L budget of 50-100mm (budget = expected trading profit to cover salaries of trading, sales, research, IT, operations, risk, compliance, rent, mgmt, plus actual return to the bank on capital in the form of true net profits). Think of all the people employed by Morgan Stanley...all those salaries get paid by a) trading b) trading commissions & asset fees from PWM c) advisory fees from IB. Thats A LOT of cost base to cover before the bank makes any profit for shareholders.

(smaller firms have smaller budgets..but the top 10 BB's will avg this expectation for a Liquid Trading desk)

There have been many layoffs across the BB rates trading desks over the years since 2008. Typically, these occur for one of 3 reasons.

1) the desk is not making enough money vs mgmt expectation
2) the desk takes more risk/balance sheet than mgmt wants to allow...and so they boot the desk for new faces, with a mandate to operate more lean.
3) politics, etc...

Question:
For junior-mid level traders coming off these BB desks who never really made a name for themselves with the buyside...a combo of not being there long enough / not making enough money trading....how can these traders get a shot to manage a trading book on the buyside?

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Sep 13, 2016

It's tough and I know that people have struggled a lot... Some of them have found homes on the buyside, while others haven't, and it's not always merit based (my personal experience/subjective view). In fact, similar things have been happening to junior guys on the buyside more recently. A lot of people that I know of tried to get back in, but eventually gave up and went on to do other things.

I don't really know exactly what to tell you, other than to try as hard as you can to find something, even if it involves a cut/career regression. If there is still nothing, move on and do something else. I know it's extremely hard, but it's like a trade: a stop is a stop.

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Sep 14, 2016

Are there PM's / traders at your fund that day-trade (lets call it medium-frequency) the vanilla products (treasury futures, S&P eminis, crude oil futures, major FX pairs, etc..) ?

Sep 13, 2016

Thanks for doing this.

I wanted to hear your opinion on why the USA gdp growth is lagging. USA has had great job reports / growing wages - what do you think is driving the lack of growth? Thanks!

Sep 13, 2016

US growth is lagging what exactly? What do you think US GDP growth should be?

As to "great" job reports / wages, it's all relative, again. "Great" as compared to what?

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Sep 15, 2016

That's a big issue I have with the current economy, certain reports are being made to be amazing (which leads to a little tease of the possibility of raising rates). I wouldn't be surprised if the data is being tweaked a little bit to make things look better. EIA's handling of data has been disappointing recently.

Absolute truths don't exist... celebrated opinions do.

Oct 28, 2016

Had to chuckle at this BC I say this line a lot.

You're probably a little to 5 yrs older than me and are paths are similar as well (engineer, academia, "luck"), but while going through this thread on a sleepy Fri, I'd like to say this: everything you've said is spot on regardless of product. I'm an equity market neutral PM and passion for the game, approach, perspective and skills you've described are absolute musts. Good to see this site isn't made up solely of college students and god bless for answering these ?s bc I sure as shit wouldn't.

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Sep 13, 2016

Did you go to a target school?

Sep 13, 2016

I don't think so... I am not even sure what schools are "target", TBH.

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Sep 13, 2016
  1. What is the best thing you ever did to further yourself in your career?
  2. Favorite books/learning source/website
Sep 13, 2016
  1. As I mentioned briefly in a previous post... I went through a pretty painful period of extreme frustration, when I was a junior guy on the desk and my new boss wasn't quite ready to give me what I wanted at the time. I felt that I was stalling, that I deserved more responsibility and that I was being treated unfairly. While this was somewhat the case, a lot of it was due to my unrealistic expectations. Thank god that I succeeded in stuffing my wounded ego where the sun don't shine and stuck around. The resulting years were the best times of my professional life.

So my advice: make an effort to recognise when you're motivated by emotion/ego, so that you can try to compensate or defer the actual decisions.

  1. I follow a bunch of random blogs. Books are more difficult and, to be honest, I don't have specific favourites, since they vary by subject.
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Sep 14, 2016

Thanks for doing this. Care to share which blogs you follow?

Sep 13, 2016

What are the qualities you've noticed that make top junior traders/analysts?

Sep 13, 2016

I may have mentioned in an older thread. Humility is massively underrated and is extremely important, IMHO.

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Sep 13, 2016

Thank you for doing this, very helpful for us.

background: I am a junior employee on the buy-side (Asset Management) in a rotational-esque program, where I work with different teams. Thus far I have spent time doing both equity and fixed income research. Do you have any advice on how to a) get more responsibility and b) get to the point where senior managers find value in you and are willing to provide some mentorship? I have been at this for 1.5 years, being the earliest guy on the desk every morning and staying as late as anyone. But it still feels like I'm not being noticed. I want to have more responsibility, add value to my groups, and try to find senior analysts/PM's willing to teach along the way. It gets frustrating to be putting forth so much effort but feeling as though it's noticed. It starts to get that burnt out feeling after a while.

I know it's very situational, but any suggestions you have would be helpful. Thank you for any input you might have.

Sep 13, 2016

That should say: feeling as though its unnoticed*

Sep 14, 2016

I think you should find what I've previously written here useful:
http://www.wallstreetoasis.com/forums/analyst-use-...

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Sep 13, 2016

Thank you for doing this. It's almost a free lunch considering the de minimis cost of firing up WSO

Thoughts on celebrity managers calling the top? Seems we don't go a day without someone talking overvaluation. Some more vocal than others but off the cuff: Gundlach, Dalio, Soros, Icahn, Gross, Rodgers, etc. etc.

And, do you let that factor into your risk positioning? Or do you treat it as noise

Sep 14, 2016

It's just noise... Moreover, it's noise of the more annoying and unproductive kind.

The problem, fundamentally, is that opinions like these are cheap and everyone's got one. You could argue that some, e.g. Dalio, may have a pretty robust process by which they arrive at their conclusions, but we don't get to see that. The issue with this type of presentation is that macro risk-taking is like a sausage factory. The final product is largely irrelevant. What matters is mostly the ingredients, the production process and, to a lesser extent, how you eat it.

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Sep 13, 2016

How is your comp determined? Is it more of a discretionary bonus, or is it based off a % of how much you generate?

What kind of performance does the fund expect from you as a portfolio manager? Do you need to be up every year? quarter? month? How long of a down period would they tolerate before you start feeling the pressure?

Sep 15, 2016

Once you're a PM of pretty much any level of seniority, your compensation is likely to be formulaic. As far as I am aware, that's almost universally the case across the industry.

The question of expectations is difficult to answer, since this would vary pretty wildly. In some cases, a PM would have an absolute "hurdle" return to exceed, while in others they have a certain level of risk that they have to be running. In most cases, a PM might also have an informal "budget", which is their PNL target for the year. It would be exceedingly rare for people to expect a PM to be up every quarter/month.

As to how long a down period is tolerated, in most cases it's not the duration that matters, but the magnitude of the drawdown (again, in most cases, this is formulaic). Obviously, if a PM is consistently not doing all that well, people will start questioning their viability and may eventually decide to give the seat to a more deserving candidate. That, however, is a reasonably ad hoc process.

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Sep 13, 2016

SBs all around. Nice job Martinghoul.

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Sep 13, 2016

God, this is obnoxiously direct - and probably asking for more than you're willing to reveal - but I'd love to hear your opinion on any of the following:
Do you only trade rates; if not, when do you delve into other asset classes? When do you delve into global macro - and not just your usual RV/liquidity provision strategy? What's your investment time horizon? How do you scale trades? What's your risk management system?
Very much appreciated Martinghoul!

Sep 14, 2016

I don't mind...

I have dabbled in things that can be thought of as "related", e.g. commodities (energy) and FX. Most of the time, the only reason I would delve into those is to hedge.

As to macro, like I alluded to, everything I do has an element of macro to it, to a lesser or greater extent. For me to get my macro hat on, I just need to do more of whatever trade in my portfolio that leans in that particular direction.

My investment horizon a priori is forever (where applicable, obviously).

Scaling trades is an art rather than a science, even though you could try and formalise the process somewhat. Ultimately, it's based on the nature of the opportunity, the capacity of the mkt, liquidity, level of conviction, etc etc etc.

My risk management systems have more or less always been home-grown, rather than off-the-shelf. I have limited experience with a couple of reasonably well-known packages, but it's nothing to write home about.

    • 3
Sep 13, 2016

Seriously great input on all of the above answers.

Toothpaste before or after you wet your toothbrush in the sink?

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Sep 14, 2016

highly underrated question

Sep 14, 2016

Getting to the real meat of the insight. Hard-hitting questions.

    • 1
Sep 15, 2016

Tuff one... I think I am one of those who swings both ways, so to speak.

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Sep 14, 2016

Thank you for doing this! I am finishing school in a few months, and currently looking for jobs in the hedge fund industry. From the perspective of someone on the outside, it seems that funds are increasingly looking for candidates with stronger and stronger quantitative backgrounds. In your opinion, is this a trend that will continue in the future, and if so, would you encourage someone in my position to just do my best to break in the industry and learn the trade by doing, or would it be a smart idea to invest 4-5 years in doing a PhD to improve my chances of succeeding in the industry and eventually making it to PM?

Array

Sep 14, 2016

TBH, this is a difficult question for me to answer, since I suspect I might be biased. I generally think that a lot of the quant stuff that goes on at the moment is pure unadulterated hype. Of course, it could be that I am too old-school and am missing the big theme, but I am inclined to treat the current trendy thing mostly as a fad.

As to whether it's worth doing a PhD to be successful in the industry, I really don't think so. You should do it if you enjoy the process. Otherwise, you're investing a lot more than 4 - 5 years of your life.

    • 3
Sep 18, 2016

count me as another old school guy who is underwhelmed by the progress made in quant strategies at least in my part of the world (macro)...aside from HFT which I know little about, I see most of the quant macro strategies as being more about marketing then anything else. I saw similar stuff in 2006 when quant was similarly in vogue only to see much of the macro quant world blow up in the crisis.

    • 3
Sep 14, 2016

So is your fund highly data heavy in its approach -- i.e., are you feeding massive amounts of data into computers from economies all over the world? Or are things mainly done based on your own qualitative interpretations of a scenario and/or more of a "small data" approach (e.g., month-to-month/quarter-to-quarter data points)?

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Sep 15, 2016

It's sort of a blend of the two...

Normally, economists are able to filter and aggregate data into what people normally describe as "coincident indices" or "leading indicators". That's a process which is normally data-heavy, whose goal is to achieve what people in statistics normally call "dimensionality reduction". There are lots of people doing it, on both the buyside and the sellside.

The results produced by the above procedure, possibly in combination with some particularly relevant raw data, will serve as inputs into the decision-making process. Obviously, it's but one particular type of input and there are invariably lots of others.

    • 1
Sep 14, 2016

Great thread, thanks for doing this.

Could you expand more on the core aspects of your method that can't ever be automated via computer algorithms? I know you mentioned that scaling trades is more of an art, discretionary input needed for trades, and multiple ways to express trades in the rates market, etc... but I'm still not sure as to the ultimate barriers to automation in your space, given enough data and computational sophistication. For instance on the fundamental equity side, PMs might argue that the human element prevents automation, like an analyst being able to talk to a CEO as well as trying to analyze his body language (and that too with only his eyes, and not some computer equipment or other gizmos). To the point of creativity being required to express views, I'd think that if the view and timing is correct there shouldn't be too large of a delta in P&L for different expressions of that view, given the same sizing, hedges, etc.

I'd also be curious to hear more about your thoughts on the general differences between off-the-shelf risk management packages vs home grown systems, if you can expand more on that.

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    • 1
Sep 15, 2016

Given enough data and computational sophistication, I, as well as the equity PMs you mention, could undoubtedly be replaced by machines. I wouldn't suggest that this can't ever happen. However, I do believe that the analog human brain is particularly good at certain things, which are hard to reproduce digitally. I suppose I would say that at the heart of my methodology is pattern recognition, which is one of the things we humans are better at (for now). As to the creativity point, I disagree with you there. The "delta" you describe is often where the edge actually resides. More top-down macro types would be the ones who would argue along your lines, but not me.

Regarding the risk-mgmt systems, like I said, I don't have that much experience with the third-party ones. I generally find that, in most cases, if a fund is looking to be serious about trading rates, it eventually ends up with its own, home-grown tools, since off-the-shelf tools never do everything just right and, most importantly, are often very difficult and painful to integrate. So, as always, it's a matter of cost/benefit analysis.

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Sep 15, 2016

Thanks for doing this - it's very helpful and interesting.

What information do you always have on your screens to watch for opportunities? i.e. do you have a particular screen set up with different instruments on a watchlist? How much does sell side research tend to alter your opinion?

Sep 15, 2016

Apart from all the usual big-picture macro bits and pieces (e.g. equity indices, bonds, commods), which allow me to quickly get a sense of what's going on, I have a whole bunch of my own monitors to watch particular trades that I am either running or otherwise interested in.

I used to get some value out of sellside research, but nowadays, for a variety of reasons, it's very rare to find something useful.

Sep 15, 2016

What is your fund's
1. soft benefits
2. travel policy
3. bonus pool/carry structure (esp interested since you're a PM with definable capital as opposed to A/AS where things are more subjective - I'm assume you don't have equity in the GP as a PM, just in your own fund.)

    • 1
Sep 15, 2016
  1. This varies wildly across shops... While my current place is reasonably lean and mean with very few perks (mostly as a matter of principle) my previous employer was, in contrast, quite generous.
  2. Same as above, really, although I am not sure what aspect of travel policy interests you. In general, I don't have to travel a lot.
  3. Apart from the formulaic nature of compensation and the management fee which always goes to the Grand Fromage (for good reasons), almost every other aspect can vary. Some funds will invest your deferred comp into the "master" vehicle, regardless of your wishes; others actually allow you to voluntarily allocate at least some of your bonus into your strategy. Yet some others actually allow neither.
    • 1
Sep 15, 2016
  1. What is your current YTD return on your performance?
  2. If you don't mind me asking, what is the payscale at your firm around? estimates?
Sep 16, 2016
  1. Up small (ca 5%, give or take), so nothing particularly dramatic to write home about.
  2. While I cannot reveal my specific number, the industry average "cut" is between 10 and 20%. Obviously, there are many other aspects to compensation, which can vary quite a bit.
Sep 15, 2016

Setup:
A couple years ago, i read an article by James Altucher about the time he cold-emailed Steven Cohen @ SAC, and got the chance to send him trade ideas via instant messenger (or email..same thing), in a sortof interview via realtime paper trades.

Altucher got frustrated / scared about looking bad after a couple ideas that were losers, and so he abandoned the process early, before Cohen had the chance to cut him off. In the article, Altucher says Cohen even said to him "where are you?...don't give up...keep going...rough patches happen" (or something to that effect)

But Altucher just didn't have the stomach for it. (hey, prop trading is hard)

[edit - here is the article:] http://www.jamesaltucher.com/2011/02/how-stevie-co...
Question:
Does this happen anymore? And if so, how does an outside guy (ok, me) go about getting into that kind of interview with a HF manager? Convince a guy who is actively trading / watching markets....to receive your trade ideas in realtime (via gchat or email), and evaluate you as a trader.

In my mind, this is kinda how every trader should be evaluated...since this is really what the job is all about...but i never hear about this process playing out.

thoughts?

Sep 16, 2016

I honestly have never heard of such a thing happening. I don't even know if it's possible and how this would work in practice.

I suppose, one, somewhat different, way of doing this is essentially what Macro Man has done over the years. Publish your ideas, build up a readership, earn some cachet and then your audience will come to you. In fact, there are certain parallels between that and what other people in the industry have been doing.

Sep 16, 2016

Thanks for all this.
I have been working in a equity long short hedge fund in Asia for 2 years. The fund is a local one but is top performing in Asia. I have an increasing feeling that I like studying macro than individual companies. I would like to do a master degree to rebrand myself to get a shot in the macro field. Do you think traditional business school, i.e. MBA, would be helpful? I am quite confident I can enter S16 or the lower M7 MBA. Or do you think a MSc in Economics or Master of Finance would be better? I got my undergraduate in statistics in a top Asian college, so I don't really have lot of economics training except the intermediate micro/macro I took as electives. Thanks.

Sep 16, 2016

Helpful in terms of content and understanding of macro theory or helpful in terms of getting a job in a macro field? I would strongly suggest that an MBA may help with the latter, but it sure as hell won't help with the former.

The other degrees could, in theory, help with both, but it's always going to be tricky. You should think long and hard about such a decision, as it involves all sort of risks.

Sep 17, 2016

Do you trade STIRs curve? Eurodollar vs treasuries or something like this in other markets? What's the average duration of your most tradeable rates?

Sep 17, 2016

Thank you for taking the time to do a Q&A. I currently work in a Middle Office role but want to transition out of operations into an analytical role. My interests are trading, research, and portfolio management with the long-term goal of being a portfolio manager. I will be graduating from my part-time MBA program in June of 2017. Do you have any advice for me in my quest to transition into a more analytical role? I feel like not having direct experience in those types of roles may be hurting me in my search. Thank you for your time.

Sep 17, 2016

In general, transitions such as the one you're hoping to make have become harder.

In my experience, it's more realistic to try doing this within your organisation, where you may have some informal contact with the analysts/PMs. Your goal should be to try to get to a point where people think you are useful.

In one of my previous posts here I referenced what I suggested to someone in a different thread. I think you should find it useful, in spite of the context being a little different.

Sep 18, 2016

Since you've mentioned that you trade rates RV....what are your thoughts on the US Treasury 10yr-US (20yr)-30yr fly
(PCA DV01 weighted: 30k-90k-70k) ?

US (20yr bond future...essentially the Feb2036 bond) has been cheapening the last month in the 30yr bond selloff (market assumption is that speculation of BOJ curve steepening will flow to foreign markets, so that drove large long end selling flows...and the preferred hedge to these flows is the classic bond future...which has caused this cheapening).

I'm personally waiting for the BOJ to pass and see what they actually say/do before i touch this thing for anything more than an intraday scalp. Thoughts? Do you intra-day-trade these types of structures?

Sep 19, 2016

Firstly, I am not a big fan of weighted flies, as a rule. I appreciate their usefulness, but generally avoid actually putting them on as trades.

That said, I have been short the classic contracts in this sorta fly (using TY/UXY/WN) and I am happy to remain that way for now, since it still looks expensive to me.

I don't trade this intraday. This has been a structural trade for me and one of my core positions.

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Sep 19, 2016

hhmm..interesting...that's the 7yr-10yr-25yr fly...not exactly the same thing tho they are correlated....there is even opportunity to move between the 2 different structures at times (i'm just noticing this http://i.imgur.com/pw1Hq7V.jpg )

UXY ultra 10yr only has 2 securities in the basket, and the may 2026 old 10yr has a 100% delivery prob...so i guess its actually the 7-9.5-25 fly..but whatev...

That's such a big jump in duration from the 7/10 leg to the 10/25 leg...my gut feel was that the 50/50 fly should be overweighted to track the 10/30 curve. However, when i reduce the 25yr leg by 10%, i get a less interesting picture

Divergence between this fly and the 10-US-30 fly seem to have been good to fade tho. I guess it makes sense..the on-the-run 10yr note and the classic bond future are the 2 long end hedge vehicles for flow traders..tho holding a short in the 10yr would get expensive around the 10yr auctions with repo.

    • 1
Sep 18, 2016
  1. Are you the Martinghoul from Wilmott with the often cryptic answers? if so, thanks a lot :)
  2. What do you think of long only illiquid strategies? PE, distressed investing, buying high yieldingNPLs etc.?
  3. How do you value the additional compensation you require for illiquidity?
  4. How strongly do you believe in efficient markets?
  5. What do you think HF fees will look like say 20 years from now?
  6. How long do your analysts spend on idea generation v/s support work?
  7. If you were hiring analysts where would you typically look?

Really appreciate the effort, thanks for taking the time.

Sep 19, 2016
  1. I am same, but I am puzzled by the "cryptic" characterization.
  2. Makes sense, since "illiquidity premium" is well worth harvesting. That said, the devil is always in the details with these things and much depends on the specifics.
  3. This is undoubtedly an art rather than a science. One way of doing it is through comprehensive stress-testing of your portfolio. Then there's a variety of historical precedent to examine.
  4. I think I have discussed my views in another thread. I believe that mkts are sorta kinda efficient, most of the time. That said, they are also quite woefully inefficient a lot of times.
  5. This is tricky. I do think fees will trend modestly lower for the industry as a whole. People will probably come up with creative ways of making the costs more sensible for the investor (e.g. Convexity). But I don't foresee any revolutionary changes.
  6. Depends on seniority. The more senior an analyst gets the more time they get to spend working on idea generation. In a steady state, I'd say it's 80:20 for a reasonably senior analyst. Obviously, a lot of stuff factors into this, e.g. the functionality and robustness of the risk/PNL systems, etc.
  7. At the moment, still mostly the sell side. However, as I have alluded to previously, that has been changing recently. We look on the buy side more and more these days.
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Sep 19, 2016

I probably should have phrased #1 better, but I meant your responses don't give everything away and encourage some homework, which is great! Reminds me of this great maths teacher I once had.

Your points on (il)liquidity are very interesting, my world is very target IRR driven which sometimes puzzles me, people often mistake compensation for illiquidity as 'alpha'.

Again thanks a lot for the responses and your presence here and on Wilmott, so helpful.

Sep 18, 2016

Are you invested in your own funds? Do you recommend doing so? I guess it's a trade-off of being more motivated at work because it's your own money, vs. being over-levered to you job.

Sep 19, 2016

Currently, I am not invested. In my previous job, I was. In both cases, the decision isn't/wasn't mine to make.

If you're given the choice, I would argue that you should think about the choice just as you would consider any other investment. Specifically, it's a question of what return you're likely to get, the costs involved and the diversification (or lack thereof) that it would introduce to your portfolio. I don't believe that you should invest simply because you're likely to be more motivated or some such thing.

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Oct 28, 2016

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Sep 19, 2016

BoJ is very tricky... They are genuinely stuck between the rock and the hard place and, obviously, it's all become very political. Market is getting very excited about it and it's hard to gauge at this point what the expectations are, especially given the variety of options available. So my personal preference is to accept that this week's decision is an "unknown unknown". Then let the chips fall where they may and hopefully some opportunities will pop up.

Not sure what I would do specifically in front of the decision, but I would always be inclined to be long USDJPY. I guess that would mean sell puts, although a) this is based on my long-term views; and b) I don't sell vol.

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Oct 28, 2016

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Sep 19, 2016

If my goal is to become a PM of $1-2b hedge fund, would you recommend the route of rising up my ranks up at an elite boutique (I am already in one but junior role) and make the switch, or join a smaller hedge fund ~$100-200m and start off from there?

Thanks for doing the AMA.

Sep 19, 2016

While I am not sure what an "elite boutique" you might be referring to is, it's always easier to do whatever you wanna do from the inside. As a rule, this means that the fewer "hops" you have to make, the more optimal your path is likely to be.

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Sep 19, 2016

What can an undergrad do to stand out and land a gig at your fund?

Sep 19, 2016

My fund doesn't really do undergrad recruitment... My previous shop dabbled, but even there, with significantly more resources, we couldn't quite make it work.

In general, do well in school, i.e. get good grades. That's the most important thing. If possible, do interesting stuff that goes above and beyond. Different people will have different preferences, but you want to have done stuff which will make you "special". That's the main thing, really: figure out what it is that makes you special. Why should people want you and the other guy/gal?

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Sep 19, 2016

Out of curiosity, could you expand on why it never quite worked with undergrads in your case?

Sep 21, 2016

Thanks for sharing.

Sep 21, 2016

How do you identify uneconomic flows from genuine macro developments? Any particular examples?

Sep 21, 2016

It's difficult and occasionally the two are inextricably linked. In the infamous words of Potter Stewart "I know it when I see it". Take the example mentioned earlier in the thread. The inflows into the sector of the UST curve arnd the classic futures contract could be classified, IMHO, as somewhat uneconomic.

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Sep 22, 2016

What desks at BBs and BBs do you hire from for Junior PMs/Analysts who will eventually become PMs?

Sep 23, 2016

Well, most of the time it's the desks who make markets in the products that we trade. So rates of all stripes, FX, etc. Obviously, in the past, when bank prop desks were still around, those would definitely be targets, as would be CVA desks, occasionally. As to which banks, it would be pretty much any and all of 'em.

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Sep 23, 2016

does/has your fund hired prop traders from small prop trading firms?
(not as execution traders, but as PM's with a medium-high frequency strategy)

Sep 23, 2016

Not to my knowledge... I have never even seen a candidate with such a background.

Sep 27, 2016

i suppose the next logical question is...would your firm consider such a candidate (interview/hiring a trader from a prop trading firm)? And if so, what would you expect out of such a candidate?

Sep 24, 2016

I am currently a sophomore at a semi-target going to work at an hf this summer. After that my plan is to go into banking, then exit to hf.

Seeing I have plenty of time ahead of me, do you have any suggestions as to how I should proceed? ...skills I should pick up, a different path to hf, etc.

Any advice is greatly appreciated, thanks!

Sep 26, 2016

Study well, seek a wide range of experiences, read interesting stuff, be curious... Don't do stupid sh1t. That's about it, I'd say.

I think your way is perfectly reasonable.

Sep 25, 2016

Thanks for doing this.

In terms of skillset you look for in a junior coming into your fund, do you place much of a premium on experience trading macro options (swaptions/fx options) over delta one derivatives and spot?

Sep 26, 2016

It depends on whether we're looking for specific skills in a candidate. In general, experience with options isn't ever a bad thing, unless it's accompanied by hubris (more common than you'd think).

So in most cases, I'd say that basic understanding of options is a requirement, while extensive experience trading them is probably more of a useful "cherry on the top".

Sep 28, 2016

Hey man, thanks so much for doing this, definitely learning a lot from this thread. I recently graduated undergrad and am at one of the large AM shops. I spent a lot of time looking and thinking about macro in undergrad and am currently in a Portfolio/Research Analyst (most junior role) working on fixed income portfolios. Definitely a great training ground and learning a lot but, moving to a macro fund as an analyst would be the dream further down the line. However, I'm pretty confused as to what the process of interviewing/breaking in is like. From my understanding it seems pretty unstructured and is primarily done through headhunters/connections. Maybe you can provide me with some insight into what the process is like and what level of experience/skills are needed before I make that jump?

Sep 29, 2016

The process is definitely unstructured and, indeed, it does normally occur through headhunters and/or your own network. A good headhunter who knows the "lay of the land" is a pretty useful resource, regardless.

As to the level of experience, it's kinda tricky... In general, you really should be reasonably certain that you've exhausted all the in-house growth possibilities first, before seriously considering a move. This is especially true now (and probably going fwd), with the HF industry in flux and in a bit of pain.

Sep 30, 2016

can you please understank me this post.

Oct 19, 2016

Thanks for doing this.

Curious to know what your opinion is on securities lending. Do you think it is a good place to start as a recent graduate looking to eventually break into a HF?

Oct 28, 2016

It's not a bad place to start, since, like I've always said, these functions are normally where the rubber meets the road. There is no better way, IMHO, to understand the real gory operational details and such understanding is very useful. Obviously, there is a flip side, since these roles also can pigeon-hole you somewhat. However, in my view, they're still well worth the risk.

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Oct 31, 2016

What would make a sell side trader stand out to a HF? I quote cross currency basis to a number of HFs, but apart from keeping my bid/offer tight, and expressing quite an aggressive skew depending on my view of the market and my existing risk, what would a HF notice? We VERY rarely meet HF clients on the trading side so very hard to build any relationship unless you are the sell side desk head. Any advice for how to stand out?

To what extent do 'junior' PM roles exist (accessible, say, for a VP level trader!) which would allow me to learn from a senior PM? Would it be better to wait until I make director, before making the jump to go for a more autonomous PM role?
I saw you mentioned exhausting all development opportunities before moving to a fund, however, I expect to have development ops as long as I have a Bbg terminal, research and colleagues across a trading floor to chat to. I am eager to move, as I feel stifled by the short investment horizon and lack of risk warehousing on the sell side these days, but I will bide my time if there is value in waiting to reach greater seniority.

Thanks for such a comprehensive thread.

Nov 1, 2016

It won't necessarily be tight bid/offer, that's for sure. I am surprised, to be honest, that you don't get to meet HF clients, since I, for one, often talk to traders of all levels directly. Ultimately, you really want to be an expert on your corner of the mkt, demonstrate that you have ideas and strategies that are transferable to the buy side and can quantify your risk-taking capabilities.

The "junior" PM roles do exist. If you're eager to move, you should definitely start exploring the possibilities available, regardless of seniority (as the opportunities might be different at different points in your career). However, as I have mentioned before, I would just urge you to be very careful, honest and diligent in assessing all the pros and cons of a potential opportunity. Don't let your frustrations cloud your judgement.

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Feb 23, 2017
Martinghoul:

It won't necessarily be tight bid/offer, that's for sure. I am surprised, to be honest, that you don't get to meet HF clients, since I, for one, often talk to traders of all levels directly. Ultimately, you really want to be an expert on your corner of the mkt, demonstrate that you have ideas and strategies that are transferable to the buy side and can quantify your risk-taking capabilities.

The "junior" PM roles do exist. If you're eager to move, you should definitely start exploring the possibilities available, regardless of seniority (as the opportunities might be different at different points in your career). However, as I have mentioned before, I would just urge you to be very careful, honest and diligent in assessing all the pros and cons of a potential opportunity. Don't let your frustrations cloud your judgement.

do you have an email address (could be a secondary gmail) that traders could use to send you trade ideas...to build up a type of track record?

Feb 22, 2017

Thanks man. What's the future hold? Do you see yourself staying a PM for a while or once you hit your number Will you sail off into the sunset? I can't imagine being a rates PM is good for your blood pressure..

Feb 25, 2017

Unrelated to the subject of being a rates pm but does your shop also execute an equity strategy and if so is it also RV?

Feb 28, 2017

My old shop used to be the biggest and the baddest in the equity space. My new shop doesn't really do single name equities and confines itself to indices.

Mar 9, 2017

This is so insightful, thank you so much! Do you think that in order to truly understand this kind of liquidity providing you need to do a couple of years in Rates Trading at a Bulge Bracket bank in order to get a very in-depth understanding of flows?

Mar 15, 2017

Great AMA, man. Sorry I'm a bit late to the party, but I just found this thread. So I'm a 1st year investment banking analyst at a top middle market bank (think Wells, Jefferies), and I'm looking to move to a hedge fund after my two years. With regards to making the move, should I directly contact headhunters and hedge funds to express my interest? I'm looking to move to funds larger than $1B AUM (that's all I'm looking at sizewise), and I'm interested in a couple different strategies: Value, Distressed and Activism. I know this is very broad, and I will certainly narrow it down later, but honestly would be happy working on any of these strategies at a good fund above $1B AUM where I can maximize learning. What are your recommendations to moving to a fund such as this? And other than a 3.5+ GPA and the other basic stuff, what can I do to really differentiate myself as a candidate? (If it helps, a couple names I'm looking at are Magnetar, Baupost, Greenlight but definitely would be happy at funds smaller than these). Thanks!

Mar 16, 2017

I think you should give yourself some time and be patient, given that it's your 1st year... Obviously, it's good to have a loose goal, but I'd recommend that you don't get too married to any particular idea/direction. As you gain experience and learn more about the industry, you might discover that your preferences change.

As to differentiating yourself as a candidate down the line, your most obvious value will reside in your domain expertise, which you would have gained over the years. Again, give yourself time and opportunity to develop, don't rush things and you'll have a very good sense of what you need to do when the time comes.

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Mar 17, 2017

Thank you for doing this.

Is there any chance a fund like yours would consider a candidate with experience in credit analysis and no experience in trading? What about credit analysis experience and trading experience with own retail account?

Mar 17, 2017

Yes, for an analyst role, for sure... No trading experience would be necessary, at least initially.

How you subsequently develop is a more interesting question, but at least partly it will be up to you.

Mar 17, 2017

Thank you, appreciate the answer!

Mar 18, 2017

Martin,
Thanks for doing this. Two questions:

1)What's your take on the risk of a redemption run continuing after the Buffet Letter?

I was networking with a few different funds back in January and February and they seemed confident that they would have the growth to require another analyst in the next three months or so, but none of their theses seem en vogue given the runner the market has done.

2) Given the abundance of market information out there, do you see perpetual diminishing returns in many non-quant strategies that would cause you to suggest people looking to break in to stay in PE or other alts investing in illiquid assets?

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Mar 19, 2017

1) I don't see the current difficulties the industry faces as anything structural. IMHO, there was a lot of "lazy" money out there which didn't warrant the fees charged. That was bound to correct and it's sensible that this correction has occurred and continues even now. I believe that the funds which have been able to deliver on their promise to investors will continue to be in demand. Given the structure of finance, I believe a hedge fund is a viable vehicle, but, obviously, I am biased. That said, I also believe that pressure on fees will continue.

2) While I might see the progression you're alluding to in theory, in practice we're infinitely far from anything of the sort. So, personally, I don't see this becoming a meaningful concern for a long time to come.

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Mar 20, 2017

How difficult of a jump would it for an individual to go from Middle Office/Back Office (pricing & valuations) in an Asset Management to Front Office Hedge Fund?
You do mention obtaining all the experience possible, but there is only so much possible to be mastered in a role similar to mine.
I plan on staying in this role for no longer than 2 years and currently finished my 1st year. Currently am working towards completing my CFA.

Mar 21, 2017

It's difficult, no doubt about it... It's become even more difficult in recent years, after the various scandals.

I would say that there are, broadly, two ways, which I would classify as realistic:
1) Firstly, move internally, which I have mentioned previously. That's the first step, which one can then build on.
2) Secondly, leave the job to do an MBA or something of the sort.

Mar 21, 2017

Thanks for doing this and really appreciate your advice!

In response to your advice:

1.) I work at an institutional Asset Manager for one of the largest Insurance companies and a lot of the investing is very top down approach, therefore it is very boring. I do similar analysis as our front office for our support as it is very benchmark heavy/industry heavy.

2.)Just out of curiosity, why are MBA's beneficial to get into HF FO? Is it from a prestige, networking and recruiting standpoint? I really am looking into recruiting season for MBA within the next couple years as one of my outs, certainly going to Bschool at some point just a matter of when.

Apr 4, 2017

What items on a resume most impress you, and help propel the candidate to securing an interview spot? (Ex. SeekingAlpha, Personal Portfolio, etc.)

Apr 5, 2017

I don't think anything related to trading would impress me. Academic achievement above and beyond what's required certainly would. In fact, one of the most impressive candidates I ever had the pleasure of interviewing (he declined the offer, incidentally), wrote papers and did research in his spare time, while working on a dealing desk at a large bank.

Apr 11, 2017

Inconsequential to the subject of being a rates pm however does your shop additionally execute a value procedure and if so is it likewise RV?

Apr 11, 2017

You mean "value" in the context of single-name equity? If so, my current place doesn't, whereas my previous place did something like it.

Apr 11, 2017

What's Majedie's reputation like on the street?

Observe. Learn. Share.

Apr 11, 2017

Never heard of them, sorry...

Apr 11, 2017

Hah that's OK, was just curious. Thanks for the reply.

Observe. Learn. Share.

Apr 12, 2017

I just recently went to a "Private Equity Global Outlook" event at my college. The man was an exec at Blackstone and said that although he thought private equity outlook was positive from a global/emerging markets perspective, he also stated that now is the time to start knocking on the doors of HF's. Which surprised me. Thoughts on this and the outlook for hedge funds in the near future?

Apr 13, 2017

It's a somewhat challenging time for the industry, but I view it with a "glass half-full" lens. Specifically, a lot of the froth that has accumulated, especially since the crisis, is being dealt with. The stuff that remains is likely to be genuinely higher quality. Maybe that's what the Blackstone feller was referring to.

I think in all the discussions of how the fees affect returns (certainly, an important discussion to have), you have to not lose sight of the main thing. Net returns matter and some people are able to provide superior risk-adjusted returns after fees. Such managers are valuable and should be able to command higher fees. If I'm not mistaken, this is a point recently made by the peeps at the Yale endowment.

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Apr 15, 2017

Good. I believe that your knowledge will help us to get things best for HF AMA. Your contribution will be a great source of learning for the record.

May 17, 2017

Thanks for doing this OP. I used to work for a small trading firm in commodities and hated it.... like next level hated it, but not because of the trading part, the firm had a terrible reputation and couldn't even get physical deals done. I felt like I got robbed of an awesome experience in actual trading. I have since then Joined the military as a fighter pilot. If someone ever wanted to get into the hedgefund world later in life, how do they view someone with a background like this? I know they used to love ex military in trading because they had the personality, but now it feels like a lot of it is shifting towards more stem majors only. Would it be better to do an MBA and try to recruit in, or do some other form of masters program? Would it be possible to get in directly after service?

May 18, 2017

TBH, I don't really think there's any preference for a non-military vs military background. I suppose military experiences are supposed to instill certain attractive personality traits, but this is such a generalization. It's all about the individual.

I think an MBA is probably a more realistic route in, but I don't see why you shouldn't be able to try right after service.

Most importantly, I urge you to think about what you want to do and why.

May 18, 2017

I come from a non target, so getting into hedge fund right away would be hard. I'm just not sure if MBA is the route, or if something like a masters in mathematics would work out better.

May 17, 2017

Thanks for doing the AMA OP, I understand that this thread has quiet'ed down recently but would appreciate your opinion on the follow:

How should I go about doing the due diligence on a potential future boss to see if he's a mentor I could learn much from?

There isn't much information found by googling the manager, except for some basic disclosures on his fund's website. The fund is global L/S equity with a focus on UK. Net-of-fees annualised return was ~7% for the past 5 years, which is not beating the equity index benchmark. The fund is seeing some inflows, of the size ~$200mm in the past few months. But except for these info, nothing much came to light by a simple google exercise...

May 18, 2017

The only way to do the due diligence in this setting is to talk to people in the mkt who know the guy. Ideally, his peers, people who used to work for him, headhunters who have interacted with him, counterparties, etc etc.

May 18, 2017

Thank you for the input!

May 17, 2017

TL; DR (revising for end of term uni exams - will read properly after exams)

What is your professional background? IB > HF?

also any technical skills (eg excel, coding, matlab etc) that you wish you could have learned in undergrad? I am a 1st year at a UK target so have a wide range of modules I can choose from - so i'd like to pick some useful ones.

May 18, 2017

Not IB, as I have mentioned previously.

I learned coding in undergrad, so it's a very useful skill indeed. I regret not doing more economics, but, sadly, I was young and stupid and economics bored me to death (one of the reasons was that it wasn't real math). I'd say that this is all that comes to mind.

May 18, 2017
<span itemprop=name>Martinghoul</span>:

Not IB, as I have mentioned previously.

I learned coding in undergrad, so it's a very useful skill indeed. I regret not doing more economics, but, sadly, I was young and stupid and economics bored me to death (one of the reasons was that it wasn't real math). I'd say that this is all that comes to mind.

I'm quite the opposite of you. I did economics, coding bores me to death and I regret doing economics.

May 18, 2017

Slightly more personal, but at what point in your career did you find work/family/personal life balance to be a considerable issue, if at all?

What things have you done/continue to do to prevent burnout?

Thank you!

May 18, 2017

Luckily, the period that I went through which imbalanced work vs life was at a moment when I was in a position to make the necessary sacrifices. So it was never such a massive deal for me, luckily. Broadly speaking, I can see how this can be difficult and is mostly a matter of timing. The other very important thing is - and I can't stress this enough - you have to enjoy the job you're doing. I have already mentioned it earlier in this thread.

For me, the main method of dealing with burnout is finding a way to turn off/tune out the mkt. At the risk of sounding glib here, it's all about life outside of work. Family, exercise, hobbies, posting on WSO :), are my personal ways of tuning out. I haven't tried meditation, but it sounds pretty good as well.

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May 18, 2017

Hi, thanks for doing this. I am a fresh graduate working in a small L/S fund. Most of my work for now is non-investment related. Think of operation and database. Given the small size, I am working with the PM closely. Will definitely have the chance to do research and investment later.

What advice can you give me about my career. Particularly, how can I scale what I am doing now to move to a macro fund?

May 18, 2017

Just out of curiosity, why do you want to move to a macro fund?

May 18, 2017

Not necessarily wanting to. But since I am young and you are doing AMA, then why not ask for more advice from experienced guys like you and get more options to consider? It is getting harder to survive or succeed in L/S since it the easiest to do.

May 18, 2017

I only have one question:

Are you the same Martinghoul in the NuclearPhynance and Wilmott forums or is the shared moniker a coincidence?

May 18, 2017

I think I've already mentioned earlier in this thread that "there can be only one"...

Jun 2, 2017

Do you have traders working under you?

If so, are these just execution traders or traders that have a certain amount of capital allocated to them to make trades of their own?

For the latter, how would their comp be decided? Do they get a percentage of PNL (of their trades) as a bonus?

Thanks

Jun 2, 2017

At the moment, no... Previously, yes, I used to.

When I did, these traders evolved. Initially, they would work predominantly as analysts and execution people. Eventually, they would get to run some risk within my book. When they mature further, they get to be full-fledged junior PMs within my team.

As to comp, that also evolved from 100% discretionary when they are an analyst/trader to fully formulaic when they're a PM.

Jun 2, 2017

Thanks for that.

If you don't mind me asking, what percentage could these junior PM's expect from their individual gains?

Jun 7, 2017
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Jun 7, 2017
Oct 1, 2019
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just google it...you're welcome