How many ideas do you expect your analysts to generate per year?
Curious to ask any of the PMs on here how often they expect their analysts to generate ideas. Preferably looking for non-equity MM PMs as I know those guys tend to work under a pretty tight schedule from quarter-to-quarter and generally have a defined coverage universe so there's not a lot of wiggle room.
For anyone who invests/trades more opportunistically (as opposed to trading around quarterly earnings), how many ideas are you pitching per year? How many does your PM actually add to the book?
For reference, I've seen anything from very frequent (think 2-4x per month) intraday/intraweek ideas to very infrequent (2-4x per year) long-term trades/investments and everything in between. Seems to be a huge spread and I'm not sure what is supposed to be "normal," although I guess what is "normal" will probably be strategy dependent.
You just answered your own question.
depending on the idea, PM expects a diversified book that generates a target pnl with the correct levels of risk. In practice, from the quant side, I've seen anywhere from 2 ideas a year to 12. (Mid-Freq)
On the macro side, RV ideas have a short research cycle while directional macro plays take longer ~ 2-3 months
Thanks for the color. I'm at a more directional fund and I've been averaging a new (fully researched) idea every 1-3 months and had no idea if this was high or low since it seems pretty all over the place. Not every idea requires months of diligence/research and I'll probably get faster and more accurate with experience, but it feels slow compared to what I see other funds doing.
I feel like equities are a bit of a different animal because you can crank out ideas every 4-6 weeks and even if the price isn't currently at an attractive entry given margin of safety considerations, the idea can always be put on the backburner and be entered into later (i.e. the potential life-cycle of an applicable idea is longer and research might not be used immediately but isn't wasted).
But in event-driven, distressed, many credit strategies, macro, etc. I feel like the opportunity set is more discrete and depends to a somewhat greater degree on conditions right now. You have less chances to "get it right" and timing is more important for each idea, perhaps implying that idea generation should be quicker to allow more opportunities "at bat" so to speak.
I guess if the PM can manage around short-term fluctuations and can generate diversified P&L during the year, you only need a few good ideas to work out (while cutting losses short) in order to generate outsized returns.
Not sure if I'm thinking about this correctly - been trying to put myself more into the mindset of a PM to try and position myself for risk-taking roles in the future and this problem was bothering me (thinking out loud here).
Edit: An analogy I was thinking of (someone tell me if I'm off-base here) is that if you think about the components of P&L from an options POV, it seems like it's the PM's job to generate consistent diversified returns which will perform reasonably well in most environments but requires active monitoring and positioning of risk (i.e. a long theta or positive carry profile). Whereas it's the analyst's job to generate the outsized risk/return ideas that have more a long gamma/short theta or negative carry/positive convexity profile. The positive carry/long theta profile of the PM is intended to counterbalance the negative carry/short theta profile of the analyst's ideas so that the overall drift of the book is positive in most or all circumstances, but with asymmetric upside optionality which results from the analyst's ideas. If this is the case, then returns will still be decent in any given year (assuming no big fuck ups) and 3-6 decent ideas per year from the analyst should be enough to add meaningful upside potential to overall P&L, despite the velocity of ideas being somewhat slow.
Note, I'm not strictly talking about just using options for positioning, I'm just describing the payoff structure of various elements of the portfolio in an abstract sense.
Of course this would vary depending on the fund's investible universe - all credit investing is basically inherently negatively convex unless you're using CDS or something. But I think this framework might describe the high-level portfolio construction philosophy of many macro funds?
Man, you write some really good indepth insightful pieces. Well done.
To begin, absolutely the PM job is to manage the "short-term fluctuations, positioning, diversification, path" of the portfolio and how it will achieve the goals. Further, you are correct in the FICC world truly the ideal "would be 3 good ideas a year" cause let's be real majority of the time that is the best IRR on time spent and actual large market moves. But if you read Soros/Dalio and some others (I am sure you have done some). The more important thing is not so much the "frequency of ideas" but the tools at disposal and ability to adapt those tools in realtime. So you are saying you are spending 1-3 months to fully research a new idea, is the toolset you are using and creating every time from scratch and brand new, how does it fit in with other tools the firm currently has and so on. So other firms you are seeing may have a much longer relationship between PM/analyst that have all these tools in place and can turnover ideas much faster.
Somewhat agreence, analyst job is to find "outsized risk/return". But its more the analyst is identifying the potential for "outsized risk/return" . The PM job is to figure out how it fits into overall portfolio, how the path could be, when to size-up/size-down and so on. Many analysts get stuck in this notion of I need to find an idea that always work, no you need to the find the best opportunity being fundamentally correct is just part of the job.
As someone who I take it want to move from analyst to PM path. For your next idea when you are 70% done research etc...as an exercise figure out the tools/research/etc you would need to go completely against the idea after entering the position. So if you want to go long USD/AUD (random example) or whatever, what would need to happen in 3 weeks to go short same trade in your mind while still in 3 months planning to be long USD/AUD...etc.
Distressed / opportunistic credit & equity, probably 3-4 new core positions per year with another 5-10 add-ons / portco M&A / event-driven / DIPs that are quicker turnaround
At my firm (a family office) - Analysts are expected to generate 1 idea per month.
Too varied by strategy and definition of an “idea” - is a theme multiple ideas? If you cover a subsector is each catalyst play an “idea”. I don’t think you can extrapolate any answers on this. The better question is “does you PM have reasonable expectations?” Or “How steep is the learning curve”. The best PMs IMO match your ramp of research responsibility with you ramp of “discretion” over trading.
I think of the ramp more in terms of % if deployed capital in my ideas and degree of discretion over timing and sizing. 10 1% ideas are not “less” responsibility as 2 5% ideas - just a different strategy. It all comes down to trust and structure
That makes a lot of sense - thanks for the response.
Generally speaking, I would consider each "theme" or "catalyst" to be an idea, but an idea can be expressed in multiple ways and possibly via multiple trades or positions at a single time (i.e. betting on reflation or risk-on might look like long cyclicals/financials, short UST, short USD) but all these positions just be various expressions of the same "idea."
The framing of % of portfolio value vs. # of trades is a good way to think about things. I was worried that I wasn't getting enough reps in because my PM seems to work more slowly and put on larger positions, but it seems that's due to his preferred style as opposed to anything else.
Going to take a stab on who you are based on writing style.
If I'm right, I really love your newsletter man.
Removed
Now I wish I knew the name of your newsletter.
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