M&A exit opp: Hedge Fund

PRue's picture
Rank: Chimp | banana points 15

Hi,

I am currently considering going into m&a and am curious about the m&a exit opps in hedge funds.
All over the place you can read that after about 3y in m&a you either go into PE or join a hedge fund. Now, in what way does the activity and work at a hedge fund differ from being at a PE firm?

The answer might be obvious but i just couldn't get any info on this.

Thanks in advance for your comments.

Comments (60)

Best Response
Apr 26, 2011

*Blanket disclaimer: There are exceptions to everything I'm about to say, but generally I believe these things to be true.

In a nutshell:

PE --> transaction-based (and therefore is more related to M&A)
HF --> portfolio-based (and therefore is more related to trading and equity/credit research)

Both analyze companies, but they do so in different ways:

1) HFs typically work in liquid markets, while PE firms generally work with private markets.
How this affects the work: PE firms sign NDAs to obtain material nonpublic information (MNPI) in order to perform as much due diligence as possible on a target company. This is similar to what happens is M&A. HFs are dealing with public markets, and therefore cannot be privy to this information (and definitely cannot trade on it) so they generally have less information about a company, and therefore the work is more like a research analyst, who will not be allowed to receive/act on MNPI.
2) Private equity firms invest more money in fewer companies than hedge funds do (i.e. their positions are more concentrated). PE firms intend to own a company for several years before selling it, while HFs generally aim to own a security for 6-18 months. HFs use portfolio theory to construct a diversified pool of investments that will outperform a target benchmark on a risk-adjusted basis (hence the trading angle). PE firms don't manage investments in this way. Instead they try to either buy a valuable company that is being mismanaged/not realizing its full value, or they buy a bunch of little companies that are related to one another and bolt them together. Both PE strategies end with the intention of selling the company to another buyer in 3-5 years (again, M&A related).

All that being said, I think M&A is a great place to start for either because you learn how to model, and it looks great on the resume. It's harder to say what the path is to "HFs" in general because there are so many different types of funds with different strategies. PE firms, while they invest in different sectors and different size companies, they are all pretty much doing the same thing. M&A is probably most relevant to a fund with a strategy in distressed investments or deep value. It would not be relevant for a global macro fund.

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Apr 26, 2011

This, basically

NYorker:

*Blanket disclaimer: There are exceptions to everything I'm about to say, but generally I believe these things to be true.

In a nutshell:

PE --> transaction-based (and therefore is more related to M&A)
HF --> portfolio-based (and therefore is more related to trading and equity/credit research)

Both analyze companies, but they do so in different ways:

1) HFs typically work in liquid markets, while PE firms generally work with private markets.
How this affects the work: PE firms sign NDAs to obtain material nonpublic information (MNPI) in order to perform as much due diligence as possible on a target company. This is similar to what happens is M&A. HFs are dealing with public markets, and therefore cannot be privy to this information (and definitely cannot trade on it) so they generally have less information about a company, and therefore the work is more like a research analyst, who will not be allowed to receive/act on MNPI.
2) Private equity firms invest more money in fewer companies than hedge funds do (i.e. their positions are more concentrated). PE firms intend to own a company for several years before selling it, while HFs generally aim to own a security for 6-18 months. HFs use portfolio theory to construct a diversified pool of investments that will outperform a target benchmark on a risk-adjusted basis (hence the trading angle). PE firms don't manage investments in this way. Instead they try to either buy a valuable company that is being mismanaged/not realizing its full value, or they buy a bunch of little companies that are related to one another and bolt them together. Both PE strategies end with the intention of selling the company to another buyer in 3-5 years (again, M&A related).

All that being said, I think M&A is a great place to start for either because you learn how to model, and it looks great on the resume. It's harder to say what the path is to "HFs" in general because there are so many different types of funds with different strategies. PE firms, while they invest in different sectors and different size companies, they are all pretty much doing the same thing. M&A is probably most relevant to a fund with a strategy in distressed investments or deep value. It would not be relevant for a global macro fund.

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Apr 26, 2011

Thanks a lot for your quick and detailed reply!

So basically, a PE firm buys the entire company directly whereas the HF buys stocks of the company in the market.

Is that the essential difference?

Thus with an m&a background, i would be doing valuations of companies to see whether their market prices reflect their supposed value. That would basically be equity research , no?

Apr 26, 2011

For a risk arbitrage HF, I know that M&A is a good path, but is there any other ? (ER, risk arbitrage desk or other).

Apr 26, 2011

Kenny Powers posted this a while ago...

Common backgrounds in my experience:
Value/Long-short: Largely banking, equity/credit research
Distressed: Banking (esp. restructuring), sometimes lawyers
Global Macro: Traders, macro research, economists
Commodities: Traders
Convertible Arb: Traders, Mathematicians
HFT/Algo: Mostly software engineers/math/stats people
Structured Credit: Bankers (largely structuring), trader

Edit: Just as a side note, from posts on WSO, it seems that it is easier to do IBD -> PE -> HF than IBD -> HF -> PE

Apr 26, 2011
Millhouse:

Kenny Powers posted this a while ago...

Common backgrounds in my experience:
Value/Long-short: Largely banking, equity/credit research
Distressed: Banking (esp. restructuring), sometimes lawyers
Global Macro: Traders, macro research, economists
Commodities: Traders
Convertible Arb: Traders, Mathematicians
HFT/Algo: Mostly software engineers/math/stats people
Structured Credit: Bankers (largely structuring), trader

Edit: Just as a side note, from posts on WSO, it seems that it is easier to do IBD -> PE -> HF than IBD -> HF -> PE

Totally based on my (limited) personal experience, though-your mileage may vary.

There have been many great comebacks throughout history. Jesus was dead but then came back as an all-powerful God-Zombie.

Apr 26, 2011

@status_quo:

as i do not have a finance background i just asked for a confirmation. but maybe you can help me finding an answer to my questions above?

Apr 26, 2011

Dude, stop trying to set a life path. whether you do m&a or research, you will have to end up on the buy side. research will most likely give you opportunities in hf's , but m&a should give you opportunities in both. at the end of the day, pe or hf, the bottom line is making money and i know hf's do a lot of private market transactions (pipe's), so don't think you will only be equipped for the public markets. This is more so in special situations funds (event driven, merger arb, distressed)

Apr 26, 2011
non-target:

Dude, stop trying to set a life path.

I think he's just trying to educate himself.

Apr 26, 2011

Are you saying that the special situations funds are more or less in the public markets?

Apr 26, 2011
Millhouse:

Are you saying that the special situations funds are more or less in the public markets?

This all depends. I believe a place like GS invests privately in special situations like buying a bundle of golf courses in Japan, etc. As far as at a hedge fund, special situations can mean anything from restructurings, spin-offs, risk arb, merger securities, and any type of catalyst that has come into play or will come into play.

--
"Those who say don't know, and those who know don't say."

Apr 26, 2011
nutsaboutWS:
Millhouse:

Are you saying that the special situations funds are more or less in the public markets?

This all depends. I believe a place like GS invests privately in special situations like buying a bundle of golf courses in Japan, etc. As far as at a hedge fund, special situations can mean anything from restructurings, spin-offs, risk arb, merger securities, and any type of catalyst that has come into play or will come into play.

This is a good example of the kind of cross-over that can happen between private equity, mezzanine/private debt, and public credit markets. It's also why most of the biggest PE and debt shops have multiple vehicles with different legal structures/mandates so that they can be flexible to pursue loan-to-own, distressed recaps, etc. It's tough to generate strong returns while running a lot of money if you can't be flexible.

The same is true of what are traditionally considered value-oriented long-short equity shops-places like Greenlight and Third Point were in plenty of distressed debt/credit market situations during 2008-2010.

There have been many great comebacks throughout history. Jesus was dead but then came back as an all-powerful God-Zombie.

Apr 26, 2011

Or she... don't want to assume...

Apr 26, 2011

All about liquidity in hedge funds. Hedge funds invest in the public market as said above, and MOST own <5% of shares in a security. A hedge fund would buy 5mm shares of Ford and a private equity firm would buy the entire company taking it private.

--
"Those who say don't know, and those who know don't say."

Apr 26, 2011

Thanks guys. thats what i was looking for. NYorker got it right. I just wanted some info on m&a after-life.

Both PE and HF are attractive. It seems though that work at a HF is more diverse and dynamic, "deal"-wise, according to what nutsaboutws and nyorker said.

What about global macro HF? what type of trading have those guys done before?

and are the hours in HF less than in m&a/PE?

Apr 26, 2011
PRue:

What about global macro HF? what type of trading have those guys done before?

Rates, currencies, and commodities are pretty common.

PRue:

and are the hours in HF less than in m&a/PE?

Totally depends on the hedge fund (and on the PE shop, as well), though I don't know many HF analysts who work as much as a PE associate on a live deal.

There have been many great comebacks throughout history. Jesus was dead but then came back as an all-powerful God-Zombie.

Apr 26, 2011

http://www.permal.com/strategies/Default.aspx
play the videos in this link. this should give you an idea about the strategies and i think you should be able to assess the skill set necessary. notice some strategies have nothing to do with banking or equity and credit research.

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Aug 30, 2011

.

Most people do things to add days to their life. I do things to add life to my days.

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Aug 30, 2011

bump

"because I want, to fit, in"

Aug 30, 2011

Also very interested in an answer to this question

Aug 30, 2011

What is Skills to develop in M&A for HF could you please describe?

I never refuse anyone who comes to me and ask to Do My Dissertation For Me because I have gathered a vast knowledge by working as a writer.

Aug 30, 2011

You need to be very detail-oriented - a lot of what we do relies upon the details of both process and analysis. In a lot of jobs it doesn't matter if the details aren't perfect, but here if the details aren't right it can jeopardise an entire deal.

Aug 30, 2011

I am more than aware that not all HF's will be available to M&A analysts (quant funds etc), it will be more L/S and special situations etc etc.

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Aug 30, 2011

Getting the complete knowledge about the topic and taking help from MOOCs websites, I believe that you will be able to develop skills in M&A for HF.

Aug 30, 2011

I don't know it. I will ask my colleagues in custom paper writing service (familyessay org) this question.

Aug 30, 2011

I don't think that there is a set way that one can show you, as there might be with PE. I've seen a guy go directly to a HF after 3 years in M&A and I have seen a guy go to a HF with just 1 year BB IBD and 2 Years Megafund PE. So it from my understanding it all boils down to roughly three points:

  1. Cultural fit - given that HFs tend to be very small (and I would even argue that you want to be at a small shop), cultural fit is the most important criterium.
  2. Interest in the markets - You need to find some way to get the interviewer to believe that you have a real interest in the markets. Given that you work in M&A, you might have an interest but this will obviously be questioned, as you work primarily with corporate clients and not much with the market itself.
  3. Have solid investment ideas and a strategy - You should have some good ideas as far as investments go, preferably when you read the daily financial or world news. In addition, being able to talk about an investment strategy that you are interested in would probably benefit you as well, which I mention primarily to get back to your question regarding books: Books by Graham, Soros etc might be a good read if you have the time. Other than that, read the books mentioned here on WSO in the recommended book section. I particularly liked More Money than God.

Hope this helps

I'm talking about liquid. Rich enough to have your own jet. Rich enough not to waste time. Fifty, a hundred million dollars, buddy. A player. Or nothing.

See my Blog & AMA

Aug 30, 2011
Matrick:

I don't think that there is a set way that one can show you, as there might be with PE. I've seen a guy go directly to a HF after 3 years in M&A and I have seen a guy go to a HF with just 1 year BB IBD and 2 Years Megafund PE. So it from my understanding it all boils down to roughly three points:

  1. Cultural fit - given that HFs tend to be very small (and I would even argue that you want to be at a small shop), cultural fit is the most important criterium.

Why would you argue that being at a small shop is better? Less resources, way more risk. 3-5 men operations are risky.

Aug 30, 2011

I've personally never worked at a HF, but from the people I know, the majority works for small shops (either having switched from large brand name funds or having gone another route), and from what I have heard, all of them make more money now at a small fund (same position in the "hierarchy") and have more responsibility. Given that most of the people on this board tend to be in their 20s, I would argue that this is a better way for some of that age to gather experience than to work for a bigger firm, where you might not have as much responsibility.

I'm talking about liquid. Rich enough to have your own jet. Rich enough not to waste time. Fifty, a hundred million dollars, buddy. A player. Or nothing.

See my Blog & AMA

Aug 30, 2011

CFA is definitely worth pursuing if you want to get on the buy side. The designation is significantly more valued there than the sell side.

"The power of accurate observation is commonly called cynicism by those who have not got it." - George Bernard Shaw

Aug 30, 2011

Don't think you're trying hard enough, to be honest. A mate of mine who didn't even want L/S, or even HF, got an interview at a fund (not Tier 1 bank either).

"After you work on Wall Street it's a choice, would you rather work at McDonalds or on the sell-side? I would choose McDonalds over the sell-side." - David Tepper

Aug 30, 2011

Depends on the name and stategy I assume - was it L/S or event-driven and not a start-upish shop?

Aug 30, 2011

I see positions on Bloomberg all the time for HFs in London. E.g. Right now looking at event driven analyst position posted today

People demand freedom of speech as a compensation for freedom of thought which they seldom use.

Aug 30, 2011
Anihilist:

I see positions on Bloomberg all the time for HFs in London. E.g. Right now looking at event driven analyst position posted today

where on Bloomberg exactly, could you post a link?
hearing about this for the first time.

thanks

Aug 30, 2011

Sorry, I should've clarified that it was on a Terminal. Not the website

People demand freedom of speech as a compensation for freedom of thought which they seldom use.

Aug 30, 2011
Anihilist:

Sorry, I should've clarified that it was on a Terminal. Not the website

ahh my fault, should've thought of terminal
for a sec i thought that bloomberg website has somewhere job ads

Aug 30, 2011

There are a few spots, not many though, much rarer than in the us indeed. Just hit up headhunters really or check efinancialcareers

Aug 30, 2011

eFinancial usually has several HF positions.

The HBS guys have MAD SWAGGER. They frequently wear their class jackets to boston bars, strutting and acting like they own the joint. They just ooze success, confidence, swagger, basically attributes of alpha males.

Aug 30, 2011

How legitimate are the funds you can find on there?

I'm talking about liquid. Rich enough to have your own jet. Rich enough not to waste time. Fifty, a hundred million dollars, buddy. A player. Or nothing.

See my Blog & AMA

Aug 30, 2011

AFAIK they are as legit as anywhere else since efin postings come from HHs, not directly from funds (not that you would know anyway how legit they are given the gatekeeper in play).

Aug 30, 2011

Good point, I wasn't aware of that. Thanks.

I'm talking about liquid. Rich enough to have your own jet. Rich enough not to waste time. Fifty, a hundred million dollars, buddy. A player. Or nothing.

See my Blog & AMA

Aug 30, 2011
TheFamousTrader:

AFAIK they are as legit as anywhere else since efin postings come from HHs, not directly from funds (not that you would know anyway how legit they are given the gatekeeper in play).

This. I wouldn't trust much about the pay, it can swing either way... But applicants will need buyside experience majority of the time.

The HBS guys have MAD SWAGGER. They frequently wear their class jackets to boston bars, strutting and acting like they own the joint. They just ooze success, confidence, swagger, basically attributes of alpha males.

Aug 30, 2011

...make that a loot of buy side experience, like 3-7 years often times.

I'm talking about liquid. Rich enough to have your own jet. Rich enough not to waste time. Fifty, a hundred million dollars, buddy. A player. Or nothing.

See my Blog & AMA

Aug 30, 2011

"Operational Due Dilligence Specialist" in London pays 80,000 GBP /year. It is essential that you have relevant experience within the Hedge Fund sector." So without HF experience...not likely.

Aug 30, 2011
Aug 30, 2011
Aug 30, 2011
Aug 30, 2011

thanks guys - any alternative (job) routes that can also lead to desired role?

Aug 30, 2011

I read a thread on here a while back about HF recruiting (search for it, haven't got a link) where a HF professional talked about where/which groups (product vs. coverage etc) they like to hire from. My impression is that if you're from a solid industry coverage group (and especially given you have industry specific M&A) you should be a viable candidate.

Aug 30, 2011

//www.wallstreetoasis.com/forums/IBD-product-coverag...

Thanks, guessing that is the one you're talking about.

Aug 30, 2011

Nope, not that one. It was an AMA with someone from a HF, I'm almost certain.

Aug 30, 2011

You might get more hits for something like a merger arb shop, but as I understand it, analysts fresh out of an analyst program still don't know squat. As long as you have a solid handle on corporate finance and can pitch a stock / build a case intelligently, it shouldn't be a problem.

Also - many of the BB's have product groups that are so large you end up being silo'd into industries verticals. I don't think it's that uncommon and I don't imagine they have too much trouble recruiting.

Aug 30, 2011

Prefacing by saying I personally did not make the move as an associate, it's certainly doable. I'd reach out to (to the extent you're comfortable) headhunters, your personal network, folks on the buyside at funds you may have interacted with on deals or projects, Etc. I think for you the bar will be materially higher since I assume you'd be looking to go in at a more senior level. Key will be demonstrating ability to think like an investor and price risk. Your easiest bet will be long short nat res oriented equity funds. Good luck.

Aug 30, 2011

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Aug 30, 2011

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.