Leaving an established hedge fund to join startup hedge fund

hfmonkey85's picture
Rank: Chimp | 9

Hi guys,

My current job is at a large established hedge fund that is well respected and I enjoy showing up to work every day. I've been an analyst here for a few years now but I feel like I'm being underpaid and I'm getting restless. I could be stay here another decade and probably wouldn't make much more but it's safe and I have a great work / life balance.

This new opportunity is at a small hedge fund (<500M AUM) that no one has really heard of in the city but they're desperate for someone with my skillset. They're offering a base that is comparable to my current all-in pay plus very significant carry. Most guys at the firm made 7 figures last year. They have a few years of solid investment performance and AUM is growing fast.

My concern here is job security and career risk (no-name fund, kind of known as cowboys). If this new fund doesn't work out (either implodes or I get fired for not putting up decent numbers), then it might be hard to get back into a buyside role again. I don't live in London / NY (in a secondary market - think Chicago / Boston), so the number of buy-side gigs in my city is limited.

Do you guys think the risk is worth the upside here? I don't have any dependents (yet), my lifestyle is modest and I've saved a lot of money to ride out unemployment... but I'm finding it hard to leave the comfort of my current role. Any advice is much appreciated!

Edit - took out a few details that were potentially revealing of the firms

Comments (32)

Jun 25, 2017

Hard to give advice without knowing specifics. FWIW solid chance I know both the fund you work at and the one you're considering. If you want you can PM me and we'll chat

Jun 25, 2017

I'm a new user and there's a two day waiting period to be able to PM unfortunately. I'll be in touch after.

Jun 25, 2017

you only grow when you're uncomfortable. Push harder on the base if they really are desperate. May also be a great opportunity to start a track record you can leverage later down the road.

Jun 26, 2017
hfmonkey85:

Most guys at the firm made 7 figures last year.

I don't have much to add, but just wondering how you know something like this. If they're as small as you say I doubt there would be much info about them. Did they just tell you that info?

Jun 26, 2017

It was a comment that was made in our discussion (although in hindsight it seemed a bit tacky). Also given the partnership / comp structure, AUM, and their performance last year - it's pretty easy to arrive at a similar conclusion based on some simple math. Perhaps he was in sales mode though...

Jun 26, 2017

I wouldn't call Boston a secondary market for the buyside? In fact, it seems like many of the best buyside gigs are in Boston

    • 1
Jun 26, 2017

Sure, not really the focus of the post here but Boston is good for buyside gigs.

Jun 26, 2017

What exactly is your role at your current firm?

Best Response
Jun 26, 2017

You have enough savings, no kids, a promotion in title, and a salary bump. What's there to consider? If you are really so risk adverse that you stay, there won't be much more upside to your future.

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Jun 27, 2017

Well I tend to overthink things but when you put it in such a succinct manner... this seems like a no-brainer

    • 1
Jun 27, 2017

key thing you have not mentioned is that you essentially make a bet on the founder and his/her ability to drive performance/aum growth of the shop. you know him and the investment approach well? good. you don't? then it is a punt unless you get good insight on his previous career path. start-up shops come and go with founder's abilities.

Jun 27, 2017

From what you've shared I'd say it's worth thinking about seriously. You're also probably overestimating job security in your current seat.

Jun 28, 2017

Honestly, its all matters about how much you believe in yourself. If you confident in yourself and believe you will put up good numbers regardless of the firm then even if the firm implodes you will land on your feet. I think it is worth the risk. To me supreme confidence and betting on yourself is never a way you're going to lose.

My answer is purely based off how I feel everyone should live obviously I do not have the specifics about either situation.

Jun 29, 2017

Chat with your salespeople to get a sense of how good their firm is, or at least their perception by the street. As someone else said, you're ultimately making a bet on their senior team taking this firm to the next level, with you along for the ride if / when you get equity.

If big brokers are dedicating a lot of resources to cover them, you know that they're viewed positively and seen as having strong potential to grow into a big client.

A no-name fund could be good if they have potential. By the time they build a name that same assistant PM position would be way more competitive to secure.

    • 1
Jun 28, 2017

know anything about the LP's?

Jun 28, 2017

Seems like a good risk/reward trade to me. Significant upside potential, bump in title, similar pay to start. Curious if the advice would differ if it was trading at bank to a startup fund instead?

Jun 28, 2017

The advice so far is pretty spot on. I have never worked at a HF, but this seems to me like a pretty great opportunity.

For PE/VC/HFs in general the path to riches seems to be:

  1. Work at a big shop for a while
  2. Get to a point where you've picked up good experience and where you think you can do better
  3. Go somewhere else where you get more responsibility or strike out on your own
  4. Profit (or lose)

Sounds to me like opportunities for advancement at your firm are limited. If you believe in yourself and your ability to invest, this seems like a good opportunity to test your mettle.

    • 2
Jun 28, 2017

Nailed it

Jun 30, 2017

I don't know about HF, but in PE you need to make sure you are experienced enough to have built your own (successful) track record before having any chance of success in fundraising for your own gig. Being the lead partner in a big shop is key, and for this you need many years vs just having "picked up good experience".

Patience and building credibility, believe it or not, is very important if you want to be truly independent. You need to get to a point where LPs (pension funds, insurance, family offices) know you by name and know that you are one of the key money makers at a brand name fund, that way they will follow you with their ticket sizes when you choose to invest on your own.

Source: I'm in PE fundraising and we do many spin-offs / first time funds.

Jun 28, 2017

I'm sure you could always go back to your old company. For inspiration, Mitt Romney joined Bain Capital when he could've stayed at Bain as a consultant and had more career stability. At the time he had student loans to pay and a family to support. He hit it big. If you're ever going to take a risk do it when you're young, it;s harder to do when you're older and have real expenses...

Jun 29, 2017

lol Mitt Romney's family is rich as hell, I don't think student loans or money to support family was a concern for him

Jun 28, 2017

From what I can tell you have no dependents so the advantages are you get more money + better title + bigger role and the downside is you might fail?

Even if you fail, you can easily explain that you transitioned from a prestigious HF to a growing HF for a bigger role and more money. I don't think anyone would question that choice.

Jun 28, 2017

Can you shop the offer to your current firm? Maybe they are willing to do something to retain you.

    • 1
Jun 28, 2017

Hey OP - definitely an offer worth considering, and if you want to get to seven figures, you'll need to take some substantial risks eventually, probably.

That said, keep in mind (and there's statistics out there to back this up), that the vast majority of "top performing" funds fall out of the top quintile of performance within a couple years of ranking in the top quintile of returns - I'm talking something like 90+% of funds.

That's not to say anything other than: be cautious of whether your cowboy bosses are simply having a good year which will be followed by 2 years of lackluster returns, followed by redemptions and salary cuts.

Long-term, I can also say that I think hedge funds as an industry will come to be more dominated by economies of scale. You guys are all trading with the same algorithms, and there's not much in the way of proprietary developments there, from what I can tell. From what I can tell, "edge" in the future will derive from infrastructure and data investments, as well as proprietary deal sourcing. It stands to reason that huge managers with lots of capital to invest in themselves will be able to invest more heavily in, say, the next generation of computers than a sub $1bn shop.

That said, small and nimble can sometimes be the only way to make eye popping returns long run. I'm sure you're familiar with the iron law of costs - i.e. when you're so huge as these megafunds, you are too large to move nimbly, and capitalize on small-but-profitable arbitrage opportunities. The number of opportunities that can sustain 20+% returns dwindles significantly when you have to equitably assign billions and billions in investor capital to those funds.

    • 2
Jun 29, 2017

At the end of the day, there is no right or wrong decision, simply a decision on where you sit on the risk/reward curve.

However, it seems like a great chance to swing the bat with so many of the pieces in place, and I personally think that people should swing the bat more than they do as often times there is huge asymmetry in life that people are to risk averse to extract

Jul 7, 2017

I've been in the industry for a long time now. I don't think the answer is as straightforward as others here are making it out to be. The thing you have to be really sure of is how good they are as investors. If you haven't already, you should get access to all of their investors letters and performance figures so that you can see how they have been driving their returns. Go through their book and ask them about their largest positions. Review their fund docs, ask them about their investor base, and don't let them give you a BS answer on that. If it turns out that the majority of their investors are FOFs, then know that there investors have little staying power and aum will shrink the minute things hit a rough patch. If they are backed by Swensen and other reputable endowments and foundations, their asset base is as stable as it can get for a hf. I can't emphasize this enough. If you have done all of this, then you should have some reasonable degree of confidence that this fund has staying power and invests in things that you believe to be good. If not, don't go. I've turned down offers in the past after doing this work. Assuming everything checks out, then you need to make sure that your role is changing in a way that will position you for the future. Maybe your role as an analyst is limited in some way currently and this provides you with additional scope. That's good. But an analyst to analyst lateral move downstream is not advisable simply because comp is better. If the economy turns next year or after (which we all know it will at some point), that carry won't mean anything. In addition, at a smaller fund, there's less cushion to support the investment team. Then what happens. You will be an analyst at a small no-name hf in a secondary market...not a position I would want to be in even if it meant making more dollars in the interim. But if everything above checks out and this is simply a small fund because they have been under the radar up to this point, then by all means take the offer. You could be onto something special.

    • 9
Jul 8, 2017
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