Performance of the best PM’s at MM’s?

Just some questions on equity L/S MM's, would really appreciate it if anyone can offer some insight as I know very little atm.

1) What is the average allocation per pod at a top MM?
2) Is the amount allocated already levered? E.g. if a PM is allocated $250m, can that be levered up 4x to $1bn? Or, is the allocation already levered so in this case any returns made are on the $250m?
3) What is the average team size per pod?
4) I understand that turnover at these places is very high, how much of that is a result of teams blowing up and getting fired vs leaving for a better opportunity elsewhere?
5) Finally, what sort of performance is considered mediocre/good/incredible under a market neutral strategy? (e.g. 2/4/6% ?)

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Comments (50)

Most Helpful
Sep 21, 2020 - 7:29pm

Just some questions on equity L/S MM's, would really appreciate it if anyone can offer some insight as I know very little atm.

1) What is the average allocation per pod at a top MM?
2) Is the amount allocated already levered? E.g. if a PM is allocated $250m, can that be levered up 4x to $1bn? Or, is the allocation already levered so in this case any returns made are on the $250m?
3) What is the average team size per pod?
4) I understand that turnover at these places is very high, how much of that is a result of teams blowing up and getting fired vs leaving for a better opportunity elsewhere?
5) Finally, what sort of performance is considered mediocre/good/incredible under a market neutral strategy? (e.g. 2/4/6% ?)

1) Most MM's think in risk, not AUM - e.g., when the market is more volatile risk is higher and so AUM is lower. In a normal environment (VIX <20) an average pod at a top MM is probably working with $1.5b+

2) Allocated amount is already levered. How much is not usually known by the pod and is not relevant to their business anyway

3) Team size depends on PM. I've seen guys at MLP running $2b with one analyst and I've seen teams at other places that have 4-5 analysts and 4 - 5 associates while running $2b. In general, I'd expect one PM and 3 analysts as average

4) Turnover is usually because of performance. The MM's generally have similar payouts so its very unlikely to see teams moving around for a better cut of the P&L - rebuilding infrastructure and hiring a new team is not really worth an extra 1% payout. Sometimes you'll have a place throw obscene money at a top PM but that is more the exception than the norm. At the analyst level, it's not uncommon to see movement for better opportunities.

5) 2% is a pretty solid year in an MM model. On a $2b book that's a $5-10m payday for the team after costs. Split between a 4 person team, everyone is leaving happy. 4%+ is an exceptional year - maybe 5% of teams a year would put up something like this. 

  • Analyst 1 in ER
Sep 21, 2020 - 7:48pm

Thanks for your response! Wrt team payout, how did you get $12-17m on a $2b book and 2% return? That sounds quite high (30%+ cut for team)?

  • Analyst 3+ in HF - EquityHedge
Sep 21, 2020 - 10:19pm

5) is very accurate. Don't let any PMs give you BS about how they're trading at 2+ sharpe. That's exceedingly difficult to maintain if doing vanilla equities at that size.

Interesting you say average pod is 1.5b. My impression is that's on the larger end for fundamental equities at places like Milennium, pt72. Most starter books are ~200m.

As for team size, I've seen 5-12 for 2b.

Also want to point out that sometimes a pod has access to, say 2b, but most of the time there aren't enough ideas to deploy the full amount. So average gmv over a year may be 1.5b. This also helps smooth out volatility.

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  • Analyst 1 in IB - Gen
Sep 22, 2020 - 7:11pm

It's probably average for Citadel but significantly higher than average for other MMs.

  • Associate 3 in Consulting
Sep 22, 2020 - 10:02pm

"1) Most MM's think in risk, not AUM - e.g., when the market is more volatile risk is higher and so AUM is lower. In a normal environment (VIX <20) an average pod at a top MM is probably working with $1.5b+"

Thanks for your reply. I am curisou how to think in risk, not AUM? What do you mean when VIX is up, AUM is lower?

Sep 22, 2020 - 10:23pm

"1) Most MM's think in risk, not AUM - e.g., when the market is more volatile risk is higher and so AUM is lower. In a normal environment (VIX <20) an average pod at a top MM is probably working with $1.5b+"

Thanks for your reply. I am curisou how to think in risk, not AUM? What do you mean when VIX is up, AUM is lower?

The idea is that the amount of money you can potentially make or lose is not a 1-1 function of how much money you invest. An extreme example: if you put $50bn of your money into 1 month treasury bills, the amount of money you could make or lose has almost 0 variance. But if you put just $1bn into, say, a lone volatile stock like Tesla, your range of outcomes is huge. 

The same holds at the portfolio level: you could deploy $1bn in a market neutral portfolio that was very tightly hedged, with closely correlated investments on the long and short side, and thus take very little risk in terms of how much money you could make or lose. Or, you could deploy that $1bn of capital into a portfolio that was less tightly hedged, had some sector bets, etc., and thus more volatility and more potential for profit and loss. For the same amount of capital deployed, the range of outcomes can be far wider depending on how it's invested. Even the same portfolio can have a different range of possible outcomes depending on how market conditions change. A portfolio that seemed sleepy in January might have felt pretty darn volatile in March.

The MM platform will adjust down the amount of capital it gives to PMs (and the PMs may hold back as well, depending on their mandate) when markets get more volatile (i.e., VIX is higher), because the risk of loss has risen. They want the volatility of outcomes to remain steady, and that means less capital gets deployed.

  • Associate 3 in Consulting
Sep 22, 2020 - 10:26pm

Thank you so much for your detailed explanation. I appreciate it.  So as a MM market-neutral PM, do you like high VIX or low VIX, or does not matter?

Sep 23, 2020 - 1:57pm

Thank you so much for your detailed explanation. I appreciate it.  So as a MM market-neutral PM, do you like high VIX or low VIX, or does not matter?

There are positives and negatives to a high-vol environment. On the plus side, there are more dislocations, and sometimes this means there will be some obvious easy money to be made (see: all the obvious COVID net-winners that traded off hugely in March). On the negative side, higher-volatility environments often mean the relatively-narrow signals PMs are looking for are swamped by broader market moves. It means one's hedges across a number of risks need to prove very very effective. In particular, common investor risk is a big problem in a volatile environment. PMs and analysts generally think alike, and tend to pile into similar trades. If rising vol means all the MMs need to pull back their exposures at once, it can lead to painful "unwind" days where all the various pods are getting out of the same trades, leading to a vicious cycle of losses.

  • Research Analyst in PropTrad
Oct 13, 2020 - 12:07am

How would you rank the importance of the following with a score from 1-5, with 5 being the most important for a PM at MMs? 

(1) capital/risk allocation

(2) drawdown limits

(3) payout percentage

(4) infra support / headcount

  • Analyst 3+ in HF - Other
Sep 21, 2020 - 7:30pm

Just some questions on equity L/S MM's, would really appreciate it if anyone can offer some insight as I know very little atm.

1) What is the average allocation per pod at a top MM?
2) Is the amount allocated already levered? E.g. if a PM is allocated $250m, can that be levered up 4x to $1bn? Or, is the allocation already levered so in this case any returns made are on the $250m?
3) What is the average team size per pod?
4) I understand that turnover at these places is very high, how much of that is a result of teams blowing up and getting fired vs leaving for a better opportunity elsewhere?
5) Finally, what sort of performance is considered mediocre/good/incredible under a market neutral strategy? (e.g. 2/4/6% ?)

1. Most PMs at the large multi managers start out with an allocation of 200-300mm. Given that the majority of PMs lose money and get cut, that is also probably the median book size 

2. The allocation given is already levered. Typically, though the allocation is quoted in VaR terms or max drawdown. It makes little sense to think in capital terms when most MM strategies require significant amounts of leverage to operate. 

3. I would say median team size is probably 2-3. Again because most teams fail, very few expand to larger than 2-3. 
 

4. Nearly 100%. All of these platforms are fungible as in they all offer roughly the same payouts/terms. Why would anyone leave their current seat for an exact same one at a different firm where they would have to rebuild all of the infrastructure, team, soft capital with the founder etc. Almost everyone hopping around the platforms has been blown out. 
 

5. I'll answer this in terms of drawdown limits. Assume your book drawdown limit is X - lose X and ur fired. Most conservative PMs will run an annual volatility of X/2, because even if your strategy was dictated by a monkey randomly throwing darts, assuming normality (not true in practice) you would only hit your drawdown once every 20 yrs. An absolutely stellar year might be a realized Sharpe of 2, which would put your PnL around X. 

  • Analyst 1 in ER
Sep 21, 2020 - 8:11pm

Super useful stuff, thanks! Nearly 100% of turnover being performance related is insane.. Some follow-ups based on this if you don't mind

6) Do most PM's and analysts hop around different MM's after being blown out because they can't find good seats anywhere else (at a SM or LO e.g.)? Or do they love the game and want to continue betting on themselves? I can't imagine being blown out looks great on a PM's record more than once, so not sure why trying a different platform is worth the risk.

7) Are there things you wish you'd known/done prior to joining a MM that could have made your life easier?

8) Is there a disparity between PM's covering different sectors in terms of returns and longevity? i.e. is covering one sector generally better than another? 

9) How long into your time at a MM should you really decide if the strategy/model is for you? (to keep SM options open and not be labelled as the MM guy - assuming that's even a thing)

@bulge4lyf" would love to hear your thoughts too - thanks!

  • Analyst 3+ in HF - Other
Sep 22, 2020 - 9:12am

Super useful stuff, thanks! Nearly 100% of turnover being performance related is insane.. Some follow-ups based on this if you don't mind

6) Do most PM's and analysts hop around different MM's after being blown out because they can't find good seats anywhere else (at a SM or LO e.g.)? Or do they love the game and want to continue betting on themselves? I can't imagine being blown out looks great on a PM's record more than once, so not sure why trying a different platform is worth the risk.

7) Are there things you wish you'd known/done prior to joining a MM that could have made your life easier?

8) Is there a disparity between PM's covering different sectors in terms of returns and longevity? i.e. is covering one sector generally better than another? 

9) How long into your time at a MM should you really decide if the strategy/model is for you? (to keep SM options open and not be labelled as the MM guy - assuming that's even a thing)

bulge4lyf would love to hear your thoughts too - thanks!

6. Not too familiar with SM, but generally once you're in the MM space that's where you stay. I think most people at MM view (or eventually realize) the MM platform business as the purist representation of the hedge fund mandate and generally find SM to be a secular decliner going forward.

7. Not to be fooled by the smoke and mirrors. Making money is incredibly hard, and MM are no exception. Look past the PM pedigrees and sales pitches and be honest with yourself that a MM endeavor is likely going to be a failure (especially as an analyst). MM gives you an opportunity to take risk and try things. And in an industry where most people don't know what's going on, you'll need to try and fail probably multiple times to build your own process. 

8. There is but it's cyclical. Popular pods these days are in Tech, Healthcare, Consumer. I'm sure that wasn't the case in the 2000s. These things change

9. Tbh I think if you want to have longevity in the industry, don't think about the distinction between SM and MM. There is only one distinction making money and losing money. SM have been on the wrong side of this distinction for a long time.

  • Assist. VP in RE - Other
Sep 22, 2020 - 10:19am

Thanks guys for sharing your MM insights.  I was wondering if anyone knows how Plotkin manages to pull in his current winning streak?  Is the guy still running a market neutral book (factors, sub-sectors, etc.) with 5-6 times leverage and really killing it (i.e.: returning 5-6%+ on the gross book)? Or he has deviated to the long/short equity model and has taken more sector risks (long aftermarket retailers and short restaurants).  

Sep 22, 2020 - 12:48pm

5) 2-3% annualized return is considered very good. Especially over the last few years, which were difficult for this strategy in general. Return is not the first thing you should be worrying about though. Many MMs have tight drawdown and volatility limits. Some enforce these terms more strictly than others, and from what I understand this is the real bottleneck to survival for most.  

Sep 22, 2020 - 1:57pm

mlroxx

5) 2-3% annualized return is considered very good. Especially over the last few years, which were difficult for this strategy in general. Return is not the first thing you should be worrying about though. Many MMs have tight drawdown and volatility limits. Some enforce these terms more strictly than others, and from what I understand this is the real bottleneck to survival for most.  

This is true. Everyone should keep in mind that 3% for the pod is actually 9-12% to the firm/client at 3-4x leverage.

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