Is the Multi Manager HF Experience Worth It?

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It seems like different people have different opinions about equity L/S multi manager HFs as a career path. I have the following questions:

1) Are most people at multi managers happy that they went this path, or jaded about the difficulty to generate alpha, about large bonuses being rare, and feeling that a career at a mutual fund, or in a less-saturated buyside sector, or even on the sell-side would have been just as well or even better-compensated than working at a multi manager?

2) I hear people saying that some people are a good fit for the multi manager investing style, that they are truly good at getting more quarters right than wrong. If everyone at the multi managers get more or less the same access to management, sell-side, big data tools, etc. and are all very skilled at modeling and familiar with their respective sectors, what differentiates the people who consistently do well from others? Is it mostly a matter of accumulating experience over the years and learning from mistakes? Or is it certain other qualities?

3) How can I best prepare myself for this investing style, besides having sharp technical/modeling skills? Should I pick a sector myself and play around with sell-side models to try to predict earnings and see how I do? I only have access to a couple sell-side brokers' research so that may be limiting.

Thanks a lot!

Comments (30)

 
 
Most Helpful
Jan 22, 2020 - 10:32pm

Worked at a multi-manager for some time before quitting to go to a longer-term distressed fund.

1) Most people I know who work at multi-managers are not happy and are constantly stressed out. The job has very little downtime so most people burn out very quickly. That said, I do know people who work at MMs and make a ton of money consistently ($1MM+), but this is not the norm. I would say most analysts make somewhere between their base of ~$150K and $400K, some years they make no bonus while other years they do better and get a bonus.

Would read more about the lifestyle here at Life at a Mult-Manager.

2) To be a good fit at a multi-manager, you need to be comfortable being wrong at least 45% of the time. The best PMs and teams are right on ~54% of their positions (assuming sized equally). Betting on earnings is speculative in nature, so you will guaranteed be wrong a lot and you have to be okay with that. For me, it was really hard to make bets knowing that there is a high chance we could lose money. Part of the reason why I left to join a distressed fund where we try to minimize the risk of any loss on any position.

The big funds have the best access to management teams because they pay the banks the most money in commissions (i.e. Millennium, Citadel, Balyasny, etc.)

The best analysts at MMs learn from their mistakes, know the sentiment on every stock they cover, and constantly talk to IR and management teams every quarter. It is a skill you can learn overtime if you can learn to deal with being wrong 45% of the time.

3) Learn what drives a company/industry's performance over a 6 month time period. Be good at modelling guidance from mgmt teams, then inputing your own assumptions based on external data / your conversations with management teams throughout the quarter, and then comparing where you are different versus consensus estimates. The most money is made when you have a differentiated view on why street consensus estimates are too low or too high.

The worst part is that job security is very low. If you have one bad year, your entire team could be let go. If you look at LinkedIns of people who have worked at MMs, there are many who just hop from one place to the next after a few years. As you can imagine, very hard to plan a life if you don't know if you will have a job the following year.

Few more articles on MMs / hedge funds in general if interested:

 
Jan 23, 2020 - 10:31pm

BuysideHustle thank you for the very informative response. Wanted to ask a few follow-up questions:

1) Does the size of the pod matter as an analyst (i.e. the bigger the better)? Or do the teams managing let's say 1bn still get fired once they breach the loss threshold and the analysts have to find new jobs?
2) How do most analysts build their models? From using the sellside model that they deem to be the best and modifying that, or from building their own models from scratch?
3) If I only have access to a couple sellside brokers' research/models, is it going to be very difficult for me to determine how my view is differentiated from the market's (e.g. on revenue and expense assumptions)?
4) If you are an MBA student and want to find out about internships/job opportunities at these multi-managers, but your school has few alumni at these funds, are you sh*t out of luck?

 
Jan 27, 2020 - 9:34pm

1) Usually bigger teams are more stable given the PMs have a good track record of managing risk and are less likely to blow up. That said, yes there is still a good amount of turnover in $1bn+ pods.

2) if you are given enought time, you build from scratch over the course of a few months. But can easily take a good sellside model and reformat / add key metrics. Some PMs don't care how you build the models while others want you to build from scratch.

3) Need to constantly talk to management teams, read up on factors that impact the industry, learn what drives each company's stock and performance in the short run. Overtime you will start to be able to get differentiated views, but takes time to fully understand your companies.

4) Hard to break directly into MM or HFs in general from MBA unless you had banking / PE / HF experience prior. Best bet is to network your way into a small fund then go from there.

 
Feb 1, 2020 - 4:39am

I'd say you need two qualities for the MM short-term oriented style.

First, you have to be a naturally high energy, early to the office kind of guy. Five hours of sleep is the norm. You relish the adrenaline of earnings season. This prevents burn out.

Second (and to your point on everyone having access to the same information), you really need the intellect, temperament and experience to distinguish the "signal" from the "noise." This is true for success in all non-factor loading strategies, regardless of time frame.

So yeah, mostly my first point. The second point is necessary but not sufficient.

Really, I admire the successful MM guys. IMO, this is kind of the pinnacle of the profession, consistently churning out positive months and quarters, time after time.

 
  • Analyst 3+ in HF - EquityHedge
Feb 1, 2020 - 5:17am

I would've put more emphasis on the second point. I know people pull late nighters but come to the office at 10. They still have an edge.

All trading is distinguishing signal / noise. I think biggest issue is that quite a bit of strategies that L/S MM analysts using are actually factor loadings (maybe not the well known ones like MOM,VAL etc) but definitely they are systematic which is why when they get discovered quants start pushing them out. But the analysts that can find the true stock specific risk and bet correctly are the ones that have a definable edge.

 
Feb 1, 2020 - 8:47pm

Agree with both of your points. You need to live for this job. You cannot be successful without living and breathing your companies.

You also need a LOT of luck. Can't count the number of great analysts that have been blown out from bad decisions that were made 10x worse by bad luck.

 
Feb 9, 2020 - 10:54pm

It's harder to justify it nowadays at the PM level. If you look at the resume of failed PMs many of them bounce from one MM to another until they can't spin their previous firing anymore. Then they work for a lower ranked HF, then they try to raise money from first loss platforms, and finally they quit the industry altogether. Most people quit at earlier stages before the last desperate step though. PMs above the age of 50 are basically unicorns in this industry.

The kind of strategy which performs the best at MM funds is a high sharpe low PnL kind of strategy created by pasting together 4-5 independent low sharpe alphas. At the book level, you should be neutral to every major risk factor. Since the payout ratios are very high, you can trade for many years while supporting your cost structure. Even if you can last 5 years in a single seat it would have been worth it. At 10 years you'll be a very rich methusalah in the industry.

Keep in mind the median PM lasts maybe 9 months. A lot of these are fundy equity traders who can't adapt to the MM structure. They either never had edge to begin with and relied on their long bias to keep in business, or they took massive amounts of risk and hit drawdowns very quickly. My personal experience is that PMs who were trained under another MM and have low personal risk tolerance perform best at these platforms. Traders who are imported from a single manager, or who need to be taking the maximum risk at all times get blown out quickly because they don't understand the economics of the business.

Hope this helps

 
  • Analyst 3+ in HF - EquityHedge
Feb 9, 2020 - 11:50pm

sounds more like quant when you mention combining low sharpe signals. They definitely should be independent but not low sharpe. High sharpe low PnL (its very hard to have high sharpe AND high absolute returns) is the way to go. But its very hard to find these. It might take 12-18mths to find one of these and you need like you said at least 4-5 to form an independent book. As for lasting 5 years, yep. I've known people that have lasted >5yrs and now they've effectively retired. Just be aware that a lot of MMs have distribution scheme where your cut of the PnL is split over something like 4 years to prevent you from up and leaving. So you won't see the bulk of your high comp until you hit your 4th year at the platform.

I'd love to hear from fundamental PMs that have had lasting success at MMs and how they deal with neutralizing all the risk factors.

 
Feb 22, 2020 - 3:18am

I don't know what you mean by low. My definition of low is something which can't be worth running standalone as a book. If I glue together four independent 0.75 sharpe strategies, that's a 1.5 sharpe book. Probably no platform initially hires a PM with track record sharpe < 1.

My guess is that most successful PMs on the platform are trading a true 1-2 sharpe strategy once you adjust for survival bias. I've heard a lot of PMs who claim a 2+ sharpe ratio before they come to the platform and lose money in year 1. Of course, if you followed the math they would have a 4% chance of this happening, so either there's some survivorship bias or they're just lying about their performance haha.

 
Feb 10, 2020 - 12:26am

wheyproteinisolate:

It's harder to justify it nowadays at the PM level. If you look at the resume of failed PMs many of them bounce from one MM to another until they can't spin their previous firing anymore. Then they work for a lower ranked HF, then they try to raise money from first loss platforms, and finally they quit the industry altogether. Most people quit at earlier stages before the last desperate step though. PMs above the age of 50 are basically unicorns in this industry.

The kind of strategy which performs the best at MM funds is a high sharpe low PnL kind of strategy created by pasting together 4-5 independent low sharpe alphas. At the book level, you should be neutral to every major risk factor. Since the payout ratios are very high, you can trade for many years while supporting your cost structure. Even if you can last 5 years in a single seat it would have been worth it. At 10 years you'll be a very rich methusalah in the industry.

Keep in mind the median PM lasts maybe 9 months. A lot of these are fundy equity traders who can't adapt to the MM structure. They either never had edge to begin with and relied on their long bias to keep in business, or they took massive amounts of risk and hit drawdowns very quickly. My personal experience is that PMs who were trained under another MM and have low personal risk tolerance perform best at these platforms. Traders who are imported from a single manager, or who need to be taking the maximum risk at all times get blown out quickly because they don't understand the economics of the business.

Hope this helps

This is a fantastic post. I cannot add much more that others have not said but to say if you are in a MM hope it is with a good PM/team to take some pressure off of you. You will learn a ton and probably more than in other roles. It may be a short (albeit intense) journey though!

As for how to get in, typically there are two paths that I know of. You know the PM and he gets you in. The other one is that you get to know the talent people and then they flip you around to PMs who interview you. Different PMs will want different things.

Good Luck

I used to do Asia-Pacific PE (kind of like FoF). Now I do something else but happy to try and answer questions on that stuff.
 
Feb 10, 2020 - 10:37am

One issue I've seen especially on the quant side is that the really successful groups already have their team together, and don't want to hire anyone at this point. Their strategies are at capacity and new hires would just eat into the bonus pool for the existing people. The PMs hiring now are either new ones who are much more likely to fail, or people who have been around for a while but need new alphas because their existing ones no longer work.

 
Aug 2, 2020 - 8:26am

That's a great thread, thanks for sharing guys.
I am currently working at a sector-specific MM PE fund in London (after your typical ~2 years in a BB) and may get an offer from a top MM HF. The work seems super intense, but also very very interesting (albeit most of the time short lived) and the team good.
What concerns me the most is that by running through ex-employees on LinkedIn, talking with a couple of friends in longer term HF or VP levels in private markets (PE/PD) or even IBD, it seems to me that going back from quarterly earnings (despite the fundamental analysis approach) is extremely difficult if not impossible.
This is on top of the structural difficulties of HF (in terms of AuM and fees compression), even though I believe that MM HF have a solid rationale as an asset class for LPs and other investors (more than your typical long only fund bench-marked against the S&P 500).
Moreover, the cost of opportunity to leave PE I think is high in a way for me as: i) I enjoy the work; ii) hours are not bad; iii) team is fine even though it is not the very best place in terms of growth. And whether I would be good at and I would actually like a MM HF is not a given until I try so more risk involved.
Clearly in life and especially when young, through networking and hustling one can always go back to previous industry or get opportunities, but in finance there is an undeniably strong path dependency, in particular apparently joining a MM HF.
Do you have any evidence or consideration on whether my take on moving away from MM HF is wrong and that actually is possible to go back to PE or longer-term shops? At the moment my risk aversion with regards to myself is pushing me towards ending the process, but I would hate to do it for the wrong reasons.
Cheers!

 
Aug 2, 2020 - 11:31am
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