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Comments (59)

Funniest
Oct 4, 2020 - 12:55pm

Looking forward to these sweeping generalizations. I'll start:

PE: Risk averse lemmings being shuttled through a system of "success" defined by someone else, with very little in the way of true hobbies beyond semi-luxury travel, some athletic pursuit, and sports/drinking on weekends

HF: Nerds

Oct 5, 2020 - 9:49am

Love your PE description....nothing more to add there.

On HF, there are nerds, and it's probably the best place for nerds in finance. However, I've also found HFs to be the most diverse across finance. It ranges from frat bros to hard-core socially ackward nerds. Even nerd frat-bro hybrid creatures. I've seen it all.

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Oct 5, 2020 - 2:49pm

Aye, you play darts?

"Full speed ahead, damn the torpedoes." -U.S. Navy General Farragut
Oct 29, 2020 - 5:37am

Wow this is rich haha so true. Always get the guy who slips that he's flying business to mexico or whatever nearby country which doesn't require a fuckload of money for business. 

Nov 22, 2020 - 7:22pm

Associate 1 in PE - LBOs

Looking forward to these sweeping generalizations. I'll start:

PE: Risk averse lemmings being shuttled through a system of "success" defined by someone else, with very little in the way of true hobbies beyond semi-luxury travel, some athletic pursuit, and sports/drinking on weekends

HF: Nerds

What else is there in terms of hobbies though?

Controversial
Oct 5, 2020 - 1:50am

For me the decision was more based on impacting the real world. I felt that HF work was more taking bets on already-public companies, with little ability to influence the business. PE (growth capital) allowed me to play like a later-stage-VC and influence the company, provide advice and assistance, influence the outcome directly, and make a real world impact in sectors I care about (food, sustainability and healthcare). Hedge fund work seemed interesting but it just wouldn't have had the real world impact.

Oct 6, 2020 - 7:28pm

BTW I love how much MS you guys are throwing here.  It actually makes me laugh and warms my little monkey heart. I love how WSO is losing its mind that not all PE or HF people fit into some cookie-cutter world view that we're either risk-averse pussies or excel-jockeying nerds (your HF analyst definition).  Crazy how someone might have a nuanced decision making process, right? LOL.   

Oct 8, 2020 - 12:47am

LOL. I have no illusions about it. It's the entrepreneurs that are driving all the value. They are the heroes of the story. But since I can't code or engineer, I'd rather be along for the ride and try to be helpful. Investors are just cheerleaders and facilitators, at best.

Buuuuuutttttt I'd rather do it in the real world. I'd rather look at making capital decisions that can affect if a medical device gets made, or a cleantech company get funded. Plus I can have collaborative work with the companies to help them along. True story: I got seconded full time into a solar company for 12 months to be assistant to the company president to help them build out their international business and get their IPO done. That was pretty fun. I didn't think a HF career would have given me that same sort of experience. As for being full of myself- Nah, I know I'm just a HELPER to companies. But I do enjoy getting close to the teams and businesses and making sure that they get helped.

As to your second point, helping a MILF get plowed in the Hamptons is a form of social contribution. It's double bottom line if ever there was one.

Oct 29, 2020 - 5:38am

One of the most rational explanations from you who has actually worked in PE. Would advise the monkeys looking at this to heed his perspective

Oct 5, 2020 - 5:27pm

My sweeping and super well thought out generalizations:

PE:  very intelligent, very polished, boring, plain, risk averse, will be rich for minimal risk plus time, generally nice people but over-inflated sense of self worth

HF:  super sharp, have an edge, sometimes maybe a little rough around the edges, sometimes as polished as said PE guy, some nerds w/ no hobbies, some cool w/ normal hobbies, cynical and pessimistic most the time but not all the time, smarter than you - they think, selfish & sometimes heartless, will be richer than said PE guy - maybe  

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Oct 6, 2020 - 9:37am

It just doesn't matter.  Disregard all these posts (especially mine).  At some point you will earn that none of this sh*t matters and in the end you were better off simply doing whatever is nearest to the intersection of what you enjoy + what you're good at.  

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  • Analyst 1 in IB - Ind
Oct 6, 2020 - 12:04am

cynical and pessimistic most the time but not all the time, smarter than you - they think, selfish & sometimes heartless, will be richer than said PE guy - maybe  

Lmao I know someone interested in HFs that fits this exact description

Works hard but very intense and has a cynical view on all aspects of life. Willing to sacrifice his prime years and slave for money.

Oct 5, 2020 - 11:19pm

PE: Types who like to focus on one big project ad nauseam, 'cause once you invested in something, it's hard to get out sooooo you better know it inside and out. The types that like to get their hands dirty understanding every little part of the widget factory. The delayed gratification types, PE takes a longer time for things to work out.

HF: The ADD types, who can't focus on only one thing for too long. These types shift between ideas/companies and are never really happy with any of them (winners are never big enough). Ppl who are always a bit nervous as you continuously get a status check via your P&L. More focused on mark to market downside as you don't control the process/market ("markets can stay irrational longer than you can stay solvent"  Keynes).  

Most Helpful
Oct 6, 2020 - 9:16am

Ditto on risk tolerance.

I think the Malcom Gladwell strong link/weak link paradigm, while not perfect, is pretty on point for HF vs. PE.  To synopsize, a weak-link game is one where the weakest-link drives the outcome of the game.  This is a game where the goal is to minimize unforced errors.  Conversely, a strong-link game is one where the strongest-link drives the outcome.  This is a game where the goal is to take risk and try to score on every single possession even at risk of not scoring at all or exposing yourself to be score upon.

A good example would be soccer (weak-link), where the game is incredibly slow moving and the aim is to not make any stupid mistakes that allows the other team to score/get the ball away from you when you're about to score.  The weakest link, i.e., the guy frequently making mistakes and either allowing the other team to score or precluding you from scoring.  This is one reason why soccer games are so low scoring.  Basketball (strong-link) on the other hand, is a game where a single player can carry the entire team on his back, Kobe/Jordan etc. can score 50-70 points in a single game.  Very high scoring game.  There's a ton of shots on goal, so taking a risky tact and not score has a smaller proportional bearing on the overall game, than in say soccer where there's maybe a handful of shots on goal.

Back to PE vs. HF.  PE is the prototypical weak-link game.  The goal is to not make mistakes.  The best fund performance isn't driven (in most cases) by a slew of grand slam investments, but rather its driven by minimizing zeros and money losing investment.  HFs on the other hand you have a ton of shots on goal.  You can deploy 5-10% of your fund in an investment, be wrong, cut bait, and get another shot on goal.  You can have a single investment professional that drives huge returns attribution.  Therefore the payoff culture also incentivizes single player star mentalities because a single play can indeed impact the outcome of the game.

Also keep in mind that in a HF environment diligence disclosures are very limited, so again you need to be comfortable with risk and making decisions with limited and imperfect information.  HF math is almost always back of the envelope.  PE on the other hand you are analyzing every single grain of data you get to make sure you're not missing anything, or actually to minimize the risk at a later date of having missed something.

On an unrelated note, I would say that the PE skillset tends to be more well-rounded.  You need to be able to build relationships with a range of different people (your own team, the organizational powers that be within your firm, bankers/advisors, management teams, executives, etc) and be able to effectively manage and leverage people in ways you don't have to at a HF.  So you do tend to see a dynamic where people that are more rough around the edges with poor people skills self select into HF world, and people that are bit a more polished and well-adjusted (socially) self-select into PE.  This isn't true for every single person, obviously, but just something I've observed.

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  • Investment Analyst in HF - Other
Oct 6, 2020 - 9:04pm

Agree on everything but the last point. HF guys, beginning from a much more junior level, prob spend more time with c-suite executives (CEO, CFO), sellside, experts, etc. than PE guys and have to be skilled at building rapport and extracting information. Common misconception.

Oct 6, 2020 - 9:57pm

I like that concept, but I feel like at a HF, if you want to succeed LONG TERM you need to focus more on not losing money as opposed to making money (which would be more of the weak link paradigm you mention). If your strategy involves taking big risks that can give huge payouts you will inevitably blow up and lose your job. The guys who are taking small, calculated bets and consistently making money are the ones who last in the business and have careers of 15+ years. 

Oct 7, 2020 - 3:02pm

Ryan Finance

So I like soccer, I love doing one project for a long time, I love doing due diligence and having all the information I need, I'm risk averse, I'm a huge nerd, I'm not super polished/extroverted...

So I'm a bit of PE and a bit of HF. A career in AM maybe? Hmm...

Super concentrated HF that takes concentrated positions could be an option here. Think H partners.

Oct 14, 2020 - 4:27pm

This is well written but disagree on the weak-link, strong-link conclusion regarding PE vs. Hedge Funds.

One reason I disagree is Hedge Funds can have their capital pulled much more quickly than PE funds can, which are locked in at roughly 5 year, fund-to-next-fund increments. For HF's, one big weak link can crater a fund within a year or two, and that must be a consideration as HF people invest.

Additionally, I have seen PE funds literally return their entire fund with a good single deal. Perhaps this is more common in mid-market and below than the megafund level, but the volatility in returns is high. Very few funds make 2.0x-2.5x MOIC on every single deal they do. It often, for example would look like a 1.0x, then a 2.2x, then a zero, then a 5.0x, and then a 3.0x. It varies a ton.

I have also seen PE funds in a scenario where they have a choice on time allocation between (i) trying to save a bad investment and (ii) doubling down on a good one, doing add-ons, etc. In every scenario I've seen, they chosen to allocate towards the good one. 

I think your analogy would be more accurate when comparing VC to PE/HF. VC is definitely carried by the winners, while PE/HF are relatively comparable place (losers can really hurt, but you can still get a 5x MOIC and carry yourself to a good spot).

Oct 6, 2020 - 10:14am

General consensus seems to be that: PE is more process-driven and involves a lot of people managing (including the bankers and lawyers and accountants that are helping on a given deal) and mostly making sure that the deal goes through assuming no material issues identified in diligence; HF has a stronger "substantive" component in that it's more about trying to find a home run investment rather than focusing on the procedural aspects of getting a deal through the finish line. VC seems to be a mix of both except it seems to lean more to the HF side of the spectrum. 

  • Principal in PE - LBOs
Oct 6, 2020 - 11:37am

I would caveat that IMO what you're doing at a l/s equity HF isn't really 'investing' in the traditional sense.  It's more about playing this very niche game focused only on what makes a given stock "work".  Different market environments reward different styles of game play, it has less to do with traditional investing and more to do with being dialed into what sort of risk the current version of the market is looking to gobble up or regurgitate.

  • Investment Analyst in HF - Other
Oct 6, 2020 - 9:08pm

?? it would depend on the style of the fund. There are hedge funds out there that probably do more work on a company than most average to good PE funds, ie private equity approach to public markets. 

  • Analyst 1 in IB-M&A
Oct 8, 2020 - 9:27pm

I have found that I think differently than many senior decision-makers in the industry do because I have had very different life experiences than are common for people with that educational and professional pedigree. That difference in thought pattern makes me look at the same opportunities through a different lens; it also lets me identify different opportunities than the herd.

On which side are these skills and personality more beneficial? Public or private?

Oct 9, 2020 - 8:49am

That difference in thought pattern makes me look at the same opportunities through a different lens; it also lets me identify different opportunities than the herd.

You're talking about having a unique POV that helps you generate Alpha here. This is exactly the way "stereotypical" HF managers view themselves. If you were a "stereotypical" PE guy you wouldn't be talking about Alpha in the same way. You'd be talking about wanting to close deals and run deep diligence, and also be trying to cover up your over-achiever personality and need for external validation (criticizing myself here as I'm in PE). It seems like you believe you have a differentiated POV - go test that hypothesis in HF. I can't tell you which strategy will suit you best based off such limited information, but I do think your personality fits HF better. 

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Oct 11, 2020 - 10:28am

I would start by humbling yourself a little bit.

It says you're an analyst 1, so you're like 3-6 months out of school, how much exposure could have possibly had to said senior decision makers or the decisions said senior decision makers are making... much less durational context to prove out how your divergent perspectives bear out?  Or even the fact that you're assessing the efficacy of their decision making on the right basis?  i.e., do you even know what game they playing: are they optimizing for intellectual honesty, for commercial efficacy (getting a deal done no matter what), internal political gamesmanship?

Having spent 15 years as a professional investor, I've come across people from all walks of life, people from blue blood multi-generational family money, European aristocrats, children of immigrants from war torn or deeply impoverished parts of the world, good old boys from the deep south of the US, etc.  And the fact of the matter is that at this level there is very little incremental fidelity gained from a novel perspective/life experience.

The key drivers of outcomes in the investing world are commercial/business acumen, social skills/network/relationship capital, analytical horsepower, and an ability to understand human behavior and how it is impacted by the markets -- not necessarily in that order.

Successful outcomes are a multi-variate equation.  As Howard Marks says, its some combination of luck, hard work, and skill.  That skill is a combination of innate, consciously learned, and unconsciously learned (environmental).  I would caution against under-weighting the luck and hard work components.  And second, I would caution against thinking that in a highly competitive and highly efficient game, that there is some aspect of your specific experience variable that has some step function uniqueness never before seen.

At the very least it will save you some embarrassment and preserve some dignity.  I can't tell you how many times early in my career I thought I made some big revelation that would be highly value additive, and I soon thereafter (not so gracefully) learned it was the most basic and rudimentary elements.  In fact, I still do this from time to time.

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  • Works at Citigroup
Oct 10, 2020 - 9:49am

One of the stupidest posts on WSO this year.  I'm guessing it's a bunch of undergrads or high schoolers here speaking to stereotypes that they picked up on from Billions and Silicon Valley.  "PE folks are risk averse well-dressed people and HF people are risk-embracing nerds."  Gimme a break. Come back and give substantive comments once you hit senior year my man.

  • Consultant in Consulting
Oct 10, 2020 - 6:31pm

See, I like this kind of stuff and find it useful. Don't have to believe all, or most, of what people are writing, but these are people who have no skin in the game who appear to be giving their honest assessment of -- in general -- what kind of personality tends to be attracted to/thrive in each arena.  

  • Analyst 1 in IB - Ind
Oct 10, 2020 - 8:12pm

Second this. As someone that'll be going through on-cycle recruiting soon these responses really help elicit the more nuanced cultural aspects about PE/HF you might miss when going through the recruiting process. 

Oct 10, 2020 - 12:39pm

The one word to describe (at least some) people in HF that I have not seen here is "creative." How to structure trades, always trying to find an angle/asset class/strategy that can be arb-ed (ie. trying to find an edge) or generate some kind of differentiated return. Some of the stuff one hears or sees on the trading floor or when talking to these folks is fascinating. At my shop, the question would always be (very aggressively) "is there a trade here? Maybe? Ok, great. How do we express it, and can we get it on?" HFs are far from perfect, but I would argue there is potentially also a lot more meritocracy and potential diversity (ethnic, gender etc). If you can get in front of some guy and convince him you can make him money, there will be someone who will take you in. In theory you could be a three-eyed Martian with 3 toes, but if you can convince some dude that you can add value and NOW/soon then you can probably get in.

Now getting in front of that guy isn't easy. But from my (significant) experience of hustling around, that even when saying no, plenty of these types genuinely respect hustle and some will even refer you to their buddies/wish you well... PE not the same case. Of course, actually staying in a hedge fund seat once you are in is another matter...

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.
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  • Consultant in Consulting
Oct 10, 2020 - 6:19pm

Great insight into getting into the HF world -- convincing someone you can add value... hustling... and the distinction between getting in and staying in. Thanks.  

Oct 14, 2020 - 2:25pm

Jamoldo

The one word to describe (at least some) people in HF that I have not seen here is "creative." How to structure trades, always trying to find an angle/asset class/strategy that can be arb-ed (ie. trying to find an edge) or generate some kind of differentiated return. Some of the stuff one hears or sees on the trading floor or when talking to these folks is fascinating. At my shop, the question would always be (very aggressively) "is there a trade here? Maybe? Ok, great. How do we express it, and can we get it on?" HFs are far from perfect, but I would argue there is potentially also a lot more meritocracy and potential diversity (ethnic, gender etc). If you can get in front of some guy and convince him you can make him money, there will be someone who will take you in. In theory you could be a three-eyed Martian with 3 toes, but if you can convince some dude that you can add value and NOW/soon then you can probably get in.

Now getting in front of that guy isn't easy. But from my (significant) experience of hustling around, that even when saying no, plenty of these types genuinely respect hustle and some will even refer you to their buddies/wish you well... PE not the same case. Of course, actually staying in a hedge fund seat once you are in is another matter...

I don't think "creative" is the right word. Perhaps more "opportunistic." There's plenty of creativity in PE, particularly when it comes to structuring and tactics, which simply does not come into play for many HFs.

But overall this is a silly thread. Apollo PE is very different from, say, Madison Dearborn. The guy at Renaissance is going to be very different from someone at Pershing Square, who is going to be very different from someone at Aurelius.

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