Path from IB to HF?

So lots of people on this forum and elsewhere say that PE/HF are the main two exits for bankers but if you look at the numbers a tiny fraction of bankers go straight to HF after their two years. What's the reasoning for this? Do bankers enjoy execution work more and don't want HF risk? Is equity research a better starting place for HF? Just curious if many bankers at top groups/ firms don't exit to HF by choice. If not by choice, what's their path to get there? 2 years of PE then HF or B school then HF?

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Comments (5)

Sep 1, 2021 - 4:19pm

Talking out of my ass here but taking a shot from a public market person perspective: PE is a "safer" exit for IB because the transactional experience and modeling skills are super transferable. Career progression (to my understanding) is also more defined in PE

Public market buy-side is declining. HF still pays great at the biggest shops, barrier to entry is very high unless from top group + top firm. And HF is a game of psychology, it's really hard to do well every year because market can move freely against you on last week of December each year. Without a shot at Tiger Cubs, most IBers have to decide between joining a legit enough PE fund versus settling for another sub-$500mm start-up hedge fund that in hindsight has no chance of scaling. The choice is easy at that point. 

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  • Investment Analyst in HF - EquityHedge
Sep 5, 2021 - 9:09pm

agree with some things here but not everything.  I do agree that a ton of people do think like this: "If I can't get a job at a $10B+ Tiger Cub, I don't know a lot of these other names, so I would rather go to an UMM fund because I can find a WSO thread on them and that feels more knowable. I can look on LinkedIn and see 4 previous associates that did 2 years here and then HBS and I would like to keep on that path"  

I don't necessarily agree, however, that this means hedge fund economics are dead or that this thinking is inherently right.  A big psychological part of working at HFs is getting comfortable with unknowns and a lot of SM HFs need to be thought about as closer to pretty lean startups.  They do blow up and start up often - but I think this is structural as much as it is about LPs.  This is my admittedly pretty novice take but from what I have seen - when HFs perform exceptionally well (or even when they don't), the PM often just retires and the fund dies. The next leader then goes out and raises on the back of their individual track record at the last fund and hopefully with seeding from the last guy (this is after all what the Tiger Cubs are.)  It does not seem to me like there are really many, if any, 30+ year HFs like in PE where they name new Managing Partners, the name and history of the fund is important to attracting portfolio companies/working with banks, the partners have raised multiple definite life funds and have carry tied up in illiquid positions, etc. 

On economics, I won't go through all the numbers, but you can do your own math to see how a $500m fund that can run concentrated and with only 4 other people there can still get extremely attractive financially quickly - and often in more liquid currency that you can now start investing for yourself earlier.  The alternative to this after all is that upward promotion in PE gets a lot harder in 2-4+ years, and in 10 years you could have over over half your net worth tied up in carry/golden handcuffs, which can be risky in its own ways too.  Not saying one is inherently right or wrong, but I think doing PE over HFs is less obvious than people make it out to be

Finding the right seat and people/PM is extremely important in HFs though whereas in PE, "the firm" can have a reputation that may be better known and may help more

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  • Investment Analyst in HF - EquityHedge
Sep 5, 2021 - 7:15pm

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