In reality, what does the "process", "IP" of a PM or experience senior analyst at MM look like?
There are some posts on "Examples of SM/MM L/S Ideas", "What does a model look like at a L/S hedge fund? What is the diligence process like?" recently, which sparked some really good discussion. I am wondering if someone can give some examples of what the "repeatable process" or "IP" of MM PM look like in reality? What % of PM at MM really have a "repeatable process"? What is considered as the "IP" of a PM at MM? Can a MM really figure out if a PM has a "repeatable process" when they decide to hire him/she?
I heard many pod PMs don't have a process, but rely on anecdotes, copy other PM's ideas, ideas gathered by sell-siders etc.
Having worked at multiple blue chip MMs, this is sadly very true
I am only speaking from personal experience, but you'll be surprised how little modeling is done... mostly focused on storytelling and how allocations fit in the fund, so it kind of turns into a "risk mgmt" type of job at times
Yup. I’ve seen my PM add a sizable (5% of book) position after one 15 minute phone call.
I think the best person to answer this question with insight into the MM HF space/structure would be sonibubu or MMPM.
Hopefully they can chip in, super helpful posts from both of them always
Did an internship at a LO with a PM that was a PM at MLP for a few years and told me left for a more relaxing life and to return to his home country after many years in London (i.e., he was not fired)
His "process" was not really anything special, but reading fillings, building a model, reading some industry reports/GLG calls, talking to sell side and sometimes also IR/management. While I do understand this is a process to get to know a business and possibly well suited for LOs with long holding periods, I can't see how this is considered IP or a special repeatable process for an MM. You can look at things in as much depth as you like but at the end of the day you're doing the same thing everyone else is doing
Obviously sector-specific but in my experience there are 3 high-level operating principles / assumptions.
1. Quarterly earnings: you want the next quarterly announcement to beat sell-side (and buy-side shadow estimates) on the relevant metrics that investors are debating most hotly (comps, gross margins, whatever) that will swing the stock either way. This is what the super-detailed models are for, and why you'll hear pod analysts at group meetings ask stuff like "is labor % of sales next quarter going to be up 10bps or 20bps". Triangulate this using alternative data, etc.
2. Valuation: over short time frames, valuation multiples are assumed to mean-revert to their trailing averages, so bets will often fade any divergences from historical multiple ranges (obviously, assuming nothing fundamental is behind it)
3. Industry trends: is brick and mortar structurally screwed because of e-commerce, etc. extra points for something that is benefiting from a tailwind like this
Now imagine doing that for a coverage universe of 50, 100, 200 companies. You should be able to find enough relative value bets to smooth your return profile, assuming your team is big enough / you are working them hard enough. Surprisingly, not all PMs implement even this cookie-cutter part of the process in a disciplined way (some are more "creative"). I don't see why everyone else can't do this.
But after the cookie-cutter part, the PM then has to balance sub-sector and factor exposures. PM is sort of a risk manager of all these relative value bets and the job is to balance them so the aggregate mark-to-market output never pokes below your stop limit. Since each relative value bet should have positive expected value, the game is to survive long enough so you realize that expected value. One example could be using options to express a bet depending on your view of the distribution of outcomes, or short term hedging past an upcoming event you don't have a strong view on, even though you like the position longer term.
What exactly goes through the mind of a PM in how they think about balancing those bets, others can probably opine better. I think this is where more of the "art" comes in, and possibly the secret sauce / differentiator between PMs.
Extremely solid post.
Good PMs run a tight process as mentioned above. They have industry and factor views and will direct analysts on what to pay attention to when reviewing companies. That is the style/art-asking the right types of questions that will drive your view or thesis. The PM needs to be very plugged into the macro side of things (economic outlook, volatility, multiples view, industry outlook, etc.) to coordinate well with the analyst (who should be very micro focused).
A PMs job at the end of the day is to manage adverse selection and risk exposure.
Thanks for the color. Going back to (what I imagine is) the spirit of OP's question - how do you persuade biz dev that your "style/art" component (industry, factor views, right questions to ask, macro views, adverse selection filter) is good or unique? I would assume good historical performance / smooth return profile is necessary, but not in itself sufficient.
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