PE vs HF L/S equity - which one is harder to excel in?

Hi all,

I am coming from PE background (associate now after 5 years experience) and am considering my options to continue with PE or move into HF L/S (2-3 years long holding period and ~1 year short selling positions)

I like investing and breaking business models apart and understand what makes them tick. My experience has been all in private market side and I am thinking whether to move in public market.

I'd like to get opinions from people who have made the transition, whether it's harder to make money and be a star investment professional in a fund in private vs public market? My sense is that it's harder to make money in public market because everyone has the same access to the same public company info vs in private market you have the advantage of access to insider company info that you invest in. HF seems to pay more if you do well (bonus tied to your P&L) but it doesn't seem easy to pick a stock either.

Another reason why I am considering HF is because I don't see myself making it to a senior role in a PE fund (tier 1). It seems that either you reach associate level and then move out or you move up. Whereas in public market, the hierarchy seems less and structure seems flatter so I guess if you do well you have more room to progress/earn more?

Feel free to comment, happy to swap ideas. I haven't been in the public market so obviously my opinions may be skewed and not in depth.

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Comments (13)

Best Response
Jun 8, 2017

I've only done public markets but my 2c:

Honestly, I'd choose whichever one you think you'd enjoy more. Its easier to have a stable career in PE but you're more likely to get really lucky and strike it big early in HF.

PE has higher barrier to entry. You can't just get $25M and do P/E. You need to be able to do deals (involves finance but also legal, etc) and have access (to businesses, etc). Scale also matters more - a $50M PE fund is simply not doing the same things a $5B one is.

HF is low barrier to entry - get $25M and you can do essentially the same thing a $5B fund is doing, albeit with fewer resources. All you need to excel is obsessive passion and a little bit of creativity.

These simple facts lead to the industry and career progressions being completely different.

IN a sense its easier to excel at junior levels in PE because you just need to do the work - build the models, etc. Other ppl make the decisions and there is less luck involved. Plenty of people are fired/ funds close down b/c positions blew up for reasons they couldn't have anticipated.

If you are skilled/lucky enough to make it in HF its easier to get to a decision making role (i.e. be managing money and making a portion of PnL) and potentially make bank. However, at this point the competition does not let up at all - and the competition is EVERYONE (remember, there is no segregation b/w $100M middle-market funds and $2B large cap funds - anyone can do essentially anything). Once you are mid/high level you are also still competing against much less experienced ppl that can still do essentiallyt he same thing your'e doing (you don't get to take advantage of 'special relationships' to source/ complete deals unlike in PE). This means you have very little job security period.

Jul 8, 2017

I agree with dazedmonk. He gave a great answer. I've been in the public markets only. My observations are that public markets are just much more stressful than private markets. I worry about my PnL every day, and I get a lot of pressure from the top. The market does not stop and the pressure to perform is pretty relentless. In PE, there is an ebb and flow which is better. I think you really have to have a passion for this to do this well over the long run. The other aspect is that there is a lot more job stability in PE. There is actually a career path. There is less hierarchy in HF and you can move up faster but then what. You have two bad years and then you are out of a job. You have to ask yourself...what makes you think you can do a better job at this than me or the next person? It's a zero sum game. On one name, I later found out Einhorn was on the other side buying as we were selling. Only one of us can be right. The other aspect of all of this is that the job can be pretty isolating. If you enjoy meeting people, working on teams, this is not for you. Lastly, there aren't a lot of useful skills as a failed hf analyst or pm. That's kind of scary in my opinion. In PE, at least you can go work in corporate or at a portfolio company because you have more useful skills as a deal maker.

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Jun 8, 2017

The lack of 'useful' skills thing is brutal and underappreciated. If you try to leave the industry you are just a smart guy who knows financial/business analysis (and hopefully has some money in the bank). Lots more competition for potential jobs than if you had specific legal skills or knew how to make CIMs and close M&A deals (M&A banker/PE stuff).

Basically, the job is high risk/high reward and the reward side is constantly being competed down. I would honestly leave the industry if I didn't really really enjoy doing it - I cannot overstate enough how important that is, especially when things move against you.

Jul 9, 2017

What jobs/careers do you see offering useful skills?

Lawyers? Doctors? Accountants?

It seems like these days, all "skills" are commodified

Jul 8, 2017

Finance as an industry is good. However, what dazedmonkey and I were saying is that there are few exit opportunities if your HF career does not work out. The reason for that is that stock picking is not a particulalry transferrable skill set outside of the industry. Yes, I can analyze businesses -- and this is a useful skill, don't get me wrong -- but once you have been doing this long enough and are mid-career, you can't just go to Google or Facebook afterwards and work in their businees development group (I'm sure there are exceptions). However, our point is that there are other jobs in finance, such as PE or investment banking, that provide more exit opportunities if things don't work out no matter what level you fall off the ladder at -- and there is a lot of value in that which people don't really appreciate.

    • 1
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Jul 9, 2017

Are IB/PE skillsets really that much better? Maybe they are branded better but it seems like they all involve soft skills, analytical ability, and business sense

Jun 8, 2017

Lawyers, Doctors, Accountants - yes, all of these require specific credentials / schooling to be involved in. You also have specialized knowledge that other people do not have. In terms of IB/PE I would say the M&A skillset in particular is useful. Knowing the process, how to put together teams of consultants, accountants, lawyers, etc to get a deal done is extremely useful.

This isn't a matter of what is better ( I have 0 interest in PE), just what is more transferable. Companies need lawyers, accountants, and M&A bankers for specific purposes. Only asset managers need professional stock pickers. When you're not hedge funding you are, thus, just a (hopefully) smart guy that is good at understanding businesses. You will be competing with a lot of other smart guys (including some accountants, lawyers, bankers) if you want some kind of corporate job.

Jul 9, 2017

Would you include strategy consultants in the accountant, lawyer, doctor group as well?

Jun 8, 2017

No

Jul 13, 2017

Case in point why the Asset Management industry requires so much "specialization" for something that is particularly niche, not say you can't spin hedge funding spills to other careers but very niche skill-set none the less

Jul 9, 2017

Would this analysis on hedge funds not apply to activist fund? You learn management etc like at a PE fund

Jul 17, 2017

I only have public market experience but to me the attractive aspect of PE or VC investing is you have more control over your investments. With the public markets you can invest in what appears to be a great company but once you buy in you're at the mercy of both the public's perception and sentiment as well as management's skill and abilities. When you take a private equity stake, you can bring in your own guys who share your vision for the company and you have more control over the direction of the investment. Your private market stakes also aren't gonna get blown up by a public panic over a bad quarter or Amazon entering your company's market. I still love the public markets but if I go back and get an MBA I fully intend on exploring private market investment opportunities for the reasons I listed.

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Jul 19, 2017