LO vs HF - risk adjusted career returns
This may start a controversy, but here’s how I think about it. If you go to an LO with a ton of capital, yeah you might go to a place that underperforms the benchmark a little over time (hopefully has lower vol to market off of lol). You’ll prob still get paid decently and have way more career stability than a hedge fund. If the decision earned 200-250K (avg) through 5-7 year stint (before it gets hard to advance) vs. every year having a 20-40%+ chance of getting blown out at a MM / underperforming single manager, why do people shit on LO as a career path?
Some like the public markets but aren’t necessarily “outliers of outliers” such that they could consistently perform at some of these brutal HFs to work at. Curious to hear thoughts on LO as a career path / if I am just totally off on how I’m thinking about things.
At a reasonable scale LO snr analysts can make $1m and with little stress and high job stability (won’t get fired unless firm starts going bust). These seats are rare but on a risk adjusted basis far far superior to some sub scale HF or churn and burn MM
These seats you mentioned do exists but are decreasing in numbers very fast to my knowledge. It's also harder and harder to get to a seat like this vs before. I know a guy who left a struggling but good pedigreed SM HF to go to a pretty good LO. He has around >10 years of buyside experience and is now clipping basically mid-high 6 figures like a coupon. I think a guy like him before would make 1mm but now prob 500-600k. It's still a sweet gig tho. And according to him the work-life balance for raising a family and stress level is exponentially better than his old job.
Correct - these seats are extremely rare. That's why the average age of investment professionals at HFs are very young while the average age at well-respected, long-tenured LOs are very high. The coupon clipping nature of a 75-100bps flat mgmt. fee supports the "intense research but I'm done by 5p" mentality that many seek by the time they are at that age in their life and they certainly don't give it up until they significantly underperform leading to asset collapses (SEQUX going from $15bn+ to $4bn comes to mind) or the equity fees eventually compress to a level that requires restructuring the organization (i.e. 150bps 10 yrs ago is now 50-60bps and they don't have other parts of the business with a growing AUM pool)
After a few years at the analyst level you will be paid far more than 250k at a reputable shop assuming you have been performing . Don't really have to worry about advancing since most just want to be an analyst/senior analyst. That said you will be let go if you consistently underperform, but we're probably talking 2 or more years.
On a risk adjusted/expected value basis, LO comp is far better than MM.
What you are saying isn’t that controversial. On a risk adjusted basis, yes LO comp is nice, can be very nice. I have a few friends who went down this route, and those that get to PM have an extremely comfortable life.
The things you are missing (or at least other things to consider):
1) MM vs SM (or large systematic/quaint place) is pretty different. At some of the larger places, that are structured almost like AM shops (aqr, 2 sigma, etc), the same cutthroat rules don’t apply. That isn’t to say it isn’t stressful, and that you need to perform, but you don’t have the MM type “cut in 6-12m if you have a drawdown” type rule. So you have a bit more stability and usually higher comp than LO.
2) betting on yourself: a lot of people on the HF side don’t necessarily use the lens you are describing, mostly because people don’t think they are average. They (guess I can include myself somewhat in this category) want the opportunity to bet on themselves because they think they are better than average and will get paid. The reason people go into that field is because they think they have an edge and will make the big $$$.
An unfortunate understanding on this forum is people don't realize the name of the game in this industry is longetivity. Ten times out of ten I'd pick a place where I still have a job and a cushy but not outrageous salary by age 40 then my late 20s earning "sick $1mm paydays" with high volatility.
The primary culprit of why the latter sucks is hedge fund analysts have little career mobility outside of jumping from fund to fund. It's a pretty hard reset once you get to the point of being pushed out of the industry and finding something else to do.
Do long only analysts have more options when it comes to exit opps? I mean it would make sense just because a name like Fidelity is much more widely recognized than most HFS, but I’m not in the industry yet, so I’m rlly curious about this.
perhaps slightly, I don't think there's as many data points of Fidelity sr. analyst leaving vs. the dozens of Citadel guys getting blown out and looking for something else to do. You'll notice that long only shops often have analysts/PMs who are 10-20 years older than the counter parts at HFs so they typically stay put and don't leave until they retire.
Extremely well put, couldn't agree more
aren't long only firms also facing pressure?
Timeline to a LO firm extinction > timeline to your job extinction at HF is my thought process
The LO vs HF career discussion is a popular one from both sides of the aisle over the years. In my opinion, it really depends on the firm and PM much more than the investment vehicle.
There are plenty of HFs out that churn/burn analysts w/ the PM raking in as much money as possible and LPs not caring about a 100% analyst turnover. These HF PMs always defer bonuses a bit longer each year and consider analysts window dressing.
Also, there are LOs out there that pay at the bottom of the range of comparable finance seats, offer a highly political environment and use various excuses such as "lifestyle" and "stability" to justify a consistently low payout.
If I were advising someone looking at the buy side, I'd suggest focusing on firm quality (low employee turnover %, aligned incentives) and PM (good investor / good manager), rather than the investment vehicle type.
Just curious, at a junior level, like an analyst after ib (or the rare one out of ug), would a big hf or long only AM give more exit ops? I know that many AM people stay for their career, BUT say u don’t, and u decide u want to go into another part of finance, what’s the difference in exit opps going to be? Also, isn’t a lot of Lon only AM becoming quant/passive investing?
LOs are definitely losing assets to passive asset management. HFs are also being hit.
There's a few trends in the space you want to ride, the rise of the MMs (a big part of it is their risk mgt and focus on a low vol return) and the remaining strength of niche active investment strategies (i.e. funds like Baker Bros aren't worried about the rise of passive).
For a junior looking to leave IB I would suggest 1) any group (pod at a MM or LO) that has a niche strategy that allows you to focus, the days of the generalist investor are way over. Focus on strategies that algos can't replicate. 2) A group that has low employee turnover. There are pods that have very high employee turnover and low turnover, relatively speaking. 3) A PM who's a good investor and a decent person/manager. You can work for the most brilliant investor but if he treats you like crap and fires you as soon as you don't shine his correctly, it won't help your career.
What you don't want is to be that junior IB guy who jumps to a MM then sees his pod blown out after a year, jumps to another MM and has the same thing happen. I have friends who went through this and they're struggling to find anything now. You also don't want to be that generalist analyst at a low end LO that after a year or two gets cut due to AUM decline with no marketable skill set. Not all LOs are alike.
With those optimistic words, good luck! If you find the right seat (rare in both HFs/LOs), this can be a dream job.
Interested in what strategies at MM’s algos can’t replace?
As a first year in sellside equity research, I imagine I’ll most likely be considered for pods that cover the same/a similar sector. I have some flexibility at my BB to join a different team now, would you recommend one sector over another to best position me to move to a MM HF? What teams are relatively more stable/interesting/lucrative atm and going forward (if any at all)?
What happens if you are a generalist analyst post banking who gets blown out after a couple of years? Curious where these people end up besides business school
I think the city where you would be working and living in should also be considered. Most of the best HFs are in the greater NYC area. Many of the best LOs are in places like Boston and Baltimore. For example, working at T Rowe Price is a fantastic job. But life in Baltimore is very different from life in NYC, especially for single people in their 20s/30s.
Curious how you all factor this into the LO vs HF debate.
Have also thought about this and agree that T Rowe is probably fantastic but Baltimore a huge turnoff. I think most people would actually like Boston after spending their early 20’s working in NYC. It’s a great city, so I consider that a plus.
Yeah plenty of long-only shops are not in NYC. If you are not set on living in NYC, LO can be a better option and consider cost of living in these cities to be another part of the risk-adjusted calculus. Outside of NYC is Capital Group, Fidelity, Wellington, Janus, American Century, T Rowe, Waddell & Reed, Federated, Principal, Nuveen, Diamond Hill, boutiques in every city...........
Echo this. For those interested/on the way to having a family this is probably an additional selling point
Which are the most notable LO in NYC? Seems like most of the ones I’ve seen are outside of NY particularly in the Boston area.
I don't think it's ridiculous at all. I don't know that many people at LO, but the few that I do joined out of bschool and are still there after a long time. I feel that is pretty rare in finance. More recently, I can point to three people within my personal network who joined LO from HF. Two were from MM and one was from a well respected SM.
How did your friends like the switch from MM to LO? I would think the shift in investment horizon would be a big shock, but sounds like it can be done?
They love it and couldn't be happier. I am closer to one than the other. When he was at MM, he was constantly stressed about losing his job, either because his team does poorly or he personally does poorly. He said that it wasn't something that concerned him as much when he was in his 20s. But after he got married and had a kid, the uncertainty of his job created massive amounts of stress for him because he now has a family to support. So when he moved over to LO, it was the first time in his life when he said that he could actually see himself build a long-term career at one place. In terms of the work itself, he said that LO lifestyle is a lot easier than MM. He thinks that long-term investing is a lot "softer" and more theoretical but he is happy that he does not have to churn through names every quarter. He focus on a handful of names in his subsector which his fund is invested in and really try to understand the businesses at a much deeper level. So it is a lot of "maintenance" work. He then can spend a lot of time looking for new names that he likes.
On the MM to LO shift - what level were your friends at at the MM? What were the adjustments that they had to go through in terms of comp, lifestyle, location, strategy, office/team politics, etc.? How did they pitch themselves in the transition?
Is it common for people from HF to LO? It seems that these changes are not common.
I would just add that comp today for senior LO guys is irrelevant for guys starting out today. I remember when sell-side analysts (back in the 90's during the tech bubble) got paid 7 figures. I doubt very many sell-side guys are getting anywhere near 7-figures today and with Mifid-2 things are only getting worse. LO comp is based more on rank and title than ability or performance and movement up the chain is a slow process. I would say that if you are a good investor you will leave a lot of money on the table at a LO. If you are a mediocre investor who likes hierarchy, is risk-averse, and wants a steady work/life balance than you will like the LO space. The smart guys work out which camp they fall into early on in their careers and make the jump.
Lots of SS analysts in tech and biotech are making 7 figures FYI
What do you define as "lots"? I would guess there are maybe fewer than ~20 SS analysts making 7 figs today, if even that.
How do the NY-based LOs compare to the Capital/TRowe/Fido/D&C tier? In terms of comp, career potential, etc.
How would a top LO (think Fidelity, Wellington, Capital) compare to a SM from a comp perspective?
meaningfully lower at all levels, but also way lower hours and stress/responsibility. it's very bureaucratic and seniority based
It’s the same as this thread calls out. Less stress, fewer hours, more stable, but less comp. At top SM if you are good you will have significantly higher comp, and the performance upside is meaningful. On a relatively bad year (I.e. low returns) at a HF the pay will be similar to a bit higher than a LO place, but when you perform that variability kicks in and gets you much higher.
There are obviously the LO superstars, but they are at the low 8 figure range, a superstar at a HF is multiples of that (and the LO superstar is a few people). At the “mid/senior” level the HF job is a lot more variable but the good (not amazing) people will be well into the 7 figures.
I think you under-estimate how many people at LOs are making 8 figures... there a lot of PMs at big asset managers, and a number of them have basically a lock on an 8 figure payday every year. And with respect to fund founders, the Johnsons are probably far richer than the richest hedge fund managers; their wealth is intriguingly underreported. There are plenty of other asset management billionaires who don't make waves either...
That being said, I agree that your typical LO analyst at a mid-tier firm definitely makes less than the typical hedge fund analyst at a mid-tier hedge fund.
Working at a hedge fund is hypercompetitive. Some people like that--I know that I do. Some people enjoy a less competitive environment where they can plan and build over a different time horizon. That's fine too. If you like working at a HF you will not like working at a LO and vice versa.
I would wager the average LO analyst is a lot of happier (with their life holistically) than the average HF analyst. In fact, in my view it would not even be close. Note this is only on the analyst level, not PM/ senior partner.
My 2c. risk adjusted HF is always >>> LO provided that you are in the top 25% of the industry. But PAIN adjusted if you have a wife and kids LO >>> HF, regardless of where you sit in the industry.
here’s what I mean. Your payout at a citadel if you don’t get fired is frankly just amazing. Even if it is unlikely, it basically makes this a really great expected value if you actually are risk neutral (as opposed to risk averse). Even if you get fired, frankly your lost income is likely to be small so taking roles at a place like that are generally very high expectancy.
BUT, recruiting makes me feel like a crazy person. It sort of consumes me when I have to do it. If I had to be a father while that was going on, it would be horrible unless my wife did not work (but she likely will). To continue to pursue opportunity in a risk neutral way after you start a family requires you to have an insanely supportive spouse who does not work much (unlikely to be me). Either that or you have to be someone that can manage their life really well under the considerable stress of recruiting for a new job (def not me lol). Or you have to not have kids or be ok with being just not a great father (ideally I would like to avoid this).
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