Q&A: equities hedge fund Senior Analyst at large U.S. fund

Update: Thread closed as of 6 Aug, I won't be able to comment after that. Ladies / gents - thought of doing a Q&A. I have worked in the hedge fund industry for 4 years in fundamental equities for a large multi-strat US hedge fund. Worked in banking before. Fire away any questions - usual disclaimer: I will not go into specific stock names and comp details. Also, there is plenty on threads on banking, so let's keep the discussion on HFs. I will answer questions for the next 2-3 days.

 

We are all generalists. Over time you start looking at certain industries (basically the PM allocates themes to me) and are the to-go guy for it. I am not in the position that I can opt for certain ones given I do not have full discretion yet.

There has been a substantial progression since the start. 1) You build knowledge over time and benefit from that in recurring situations. 2) You manage to find potential flaws in other investors reasoning and improve the efficiency of sorting out ideas. 3) Idea generation becomes clearer on your own and I find that I have built an investment framework by now. 4) You network in the industry and understand the playing field better. Latter is challenging working on the sell-side.

 

What's the PM structure at your fund? Single vs multi/sector-based vs generalist /internal allocation vs separately raised?

Assuming you are doing US L/S, how do you generate ideas? What do you think is the edge of your shop? How concentrated are your positions? Holding period?

How did you get to where you are? What are your next steps?

Thanks a ton for doing this.

 

It is one large master fund with several generalist strategies across geographies. Allocation is rather fluent, meaning that it is not set in stone and can vary across cycles and performance.

Idea generation is manifold, but usually the PM's allocation has priority (surprise). I have found ideas from various sources: journals, newspapers (rare though), screening (watch that the screen is right), talking to other investors, and the list goes on.

In terms of "edge" I think we stick to what we know, eg if we are not certain about key facts around the business model, it is a simple pass. Also, we stick to our core strategy. I have friends working in distressed who work on equities shorts these days. Their mandate most likely allows them to do so, but I think one should focus on the "bread and butter" business. We are running a fairly concentrated portfolio and holding periods can vary and change depending on the situation.

I interviewed at many places and it took me a while as a few years ago the hiring situation was poor to say the least. It took a lot of stamina, which always pays off. I would recommend joining a larger, more established shop coming to the buy-side as one usually avoids the situation that the fund shuts down in the ST for a variety of reasons. Becoming PM has to be the next step as by now I am certain about the right strategy I want to pursue in the LT. Latter is extremely important: if you are working in an industry or strategy that a) does not suit your personality and / or b) does not suit your skillset, I recommend you to move seats rather sooner than later to become more successful.

 

What have you decided is the "right LT strategy" for you to pursue and how did you come to that conclusion? Not just SM vs MM, but as specific as you'd care to be (large vs small cap, generalist vs sector focused, long term vs short term, degree of concentration, long only vs net long vs pure market neutral, value vs growth vs other factor exposures).

Why do you believe PM is a natural next step? I believe some people are more suited to stay (and will have more lucrative careers) as analysts instead of PMs. I am still trying to figure out what markers one should look for that nudge the decision one way or the other.

 

At a hedge fund, will an analyst get castigated/looked down upon if they recommend something so "obvious" -- like for instance Apple? Even if you do your homework and establish why this company is undervalued, will your PM think poorly of you for recommending such a high-profile/crowded stock?

 

Very valid point - I evaluate investments based on facts and have suggested one of the "obvious" stocks in the past. If you have done your work and come to the conclusion the idea is a suitable, attractive investment, go ahead. However, one having an "edge" on a stock that is covered by 50 analysts on the street is usually more challenging. Some funds do look at those companies, whereas others focus on mid-/small-cap companies to find their edge. The next layer is your PM - some guys like large caps for a variety of reasons and others want the uncovered darling no sells-side guy is covering. Overall, I do look at both large- and small-cap stocks.

 

Are there other people in your hedge fund that came from a PE background rather than straight from banking? What do you think are the advantages vs. disadvantages?

Why did you pick your fund vs. single manager vs. multi manager?

 
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Most guys in my strategy have a banking or even buy-side background from other HFs. I know some guys on the credit side have specific PE background, think BLX etc. - Buy-side experience is always a plus IMO. - Coming from a different industry is a duration game: eg, if you have done PE for 5+ years and want to move to a HF it gets trickier. I would always want to know why you waited that long for a move. The work is certainly different. - Additionally, within equities there is a vast amount of sub-strategies, ie from trading-oriented platforms to deep value SMs. Moving from one to the other is a challenge and I would rather move to your target strategy as soon as feasible.

I opted for a more established HF and had offers from HFs that are no longer around. You simply don't know in this industry. A founder could decide to retire and that would be it for one as an Analyst. SM vs MM has been discussed multiple times here. There is many ways to make money; however, you should outweigh what suits your investment philosophy and character. That is the key for going for one vs the other.

 

It may sound prospectus-/marketing-like, but no day is the same (unless it is an industry conference). Usually going through announcements depending on the jurisdiction, scanning news, sorting out calls / meetings, and the majority I spent on reading. Work-life balance is better than banking (think advisory) and way more efficient / no face time. Yet, I find the work more intense than banking, where one has gaps during certain periods depending on deadlines.

 

How can you tell what the “right” investment strategy for you is? Specifically curious between deep value vs. multi manager styles. Without actually working at one, how can you know which one better suits you?

 

In short: your skillset, character, and trial-and-error. As I said above, sometimes you need to do one strategy to find out it is not meant to be for you (at least in the LT). Secondly, some guys are born traders, whereas others are not and have a different understanding of investing/trading. Lastly, your performance will show you whether you chose the right strategy for a career. I often interview guys who have not done their homework - I require people to know the basic differences between styles.

 

I meant I will be starting as an investment banker for 2 years after college, but what could I do senior year to prepare for interviewing with HFs? Dont think I will have much time when I start

 

Hi, thanks for doing the AMA.

I'm currently an incoming college freshman who knows only the basics of finance from clubs at school, but who is determined to learn as much as I can. I read in one of your replies that you spent a decent amount of your day reading, and was wondering if you have any absolute must-read book recommendations? Also, do you read any newspapers other than the WSJ?

 

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