Q&A: HF Analyst @ $5bn+ Fund - Breaking In and Transition to Risk-Taking Role

Based on some of the feedback from the thread titled "Associate Comp at HF?", figured I'd set up this Q&A if I can be of any help to prospective HF analysts or junior HF analysts looking to make the jump to a risk-taking seat. A lot of the boilerplate questions that usually get asked on these (background, coverage, comp, lifestyle etc) were addressed in the aforementioned thread, so I would encourage you to read through that first (my responses are from "Analyst 3+ in HF - Equity Hedge"). I've copied a few of the responses from that thread below, but would still recommend going through that and reading responses from a few of the senior folks that chimed in for full context. 

 
I'll try my best to keep answers as objective as possible, but as always, your mileage may vary and there's a significant amount of randomness involved in outcome even if you input the exact same steps as I did. So, I'd ask that questions be focused on process vs outcome, career/role transition points, or the like. I'm not keen on answering anything more revealing on background, fund, coverage, etc, and have included as much information as I'm willing to share below and in the other thread to get those questions out of the way. 

Background:

5th yr at a HF ($5bn+ AUM) and 1.5yrs in banking at a top firm prior to that.  I spent my first 2yrs in HF in a junior analyst role and after that transitioned into a role where I had risk responsibility (lots of variation in titles for this sort of role at HFs - senior analyst, senior associate, associate PM, junior PM, principal, etc). 

Comp:

If helpful, my earnings arc has been the following since graduating college. First working at a top IB, and then working at a large equity L/S fund in NYC. All figures are annualized base + bonus + deferred. From convos with peers, first 3yrs were roughly in-line with avg for type / size / credibility of firm, and the last 2yrs have been decently above peer avg (personal performance driven). Comp volatility obviously increases the further out you go. 

Yr 1 (IB): $140k 

Yr 2 (HF): $275k

Yr 3 (HF): $400k

Yr 4 (HF): $1mm+
Yr 5 (HF): $1mm+

These are all great points in this reply and the prior person's reply. Always take comp #s with a grain of salt and understand what percentile you're pegging ambitions to and whether you have a realistic shot of getting there (side note: percentile of comp doesn't necessarily correlate with percentile of intelligence). I do think there's a high degree of over-averaging on this forum though, and there isn't great insight into what comp in the "good seats" looks like. Avg comp will be far lower than the numbers I gave because the average fund economics are mediocre and deteriorating (operating leverage + fee compression), and the avg fund doesn't have a reason to exist given persistent underperformance vs benchmarks. Like many other industries, right tail performers will keep a very disproportionate share of industry wealth.
 

What I've always found helpful is understanding the range of outcomes, and probability adjusting your own potential to be in each situation. While there's a significant amount of luck in performance, getting in the "right" seat , or working for the "right boss", there are simultaneously several controllables / diligence-able fund characteristics / process dynamics that will help narrow down the universe of good seats or help you be a better performer (in the event you're actually able to be a chooser and not just a beggar). If it's of any interest to the juniors / prospects, happy to do a separate AMA on some of those factors that I've found valuable (ymmv) in recruiting and in the transition from a the junior to risk-taking role, and I think it could benefit from some of the successful / senior guys chiming in as well. Not enough discussion on process vs outcome on this sort of stuff. 

Hours / Lifestyle:

So it's always difficult to give a meaningful average given event / performance volatility. But what I would say is I work a lot, and more than my peers at other firms (and even within my firm) since I'm in more of a risk-taking seat and on the young side in that sort of seat. The difference vs IB, PE, etc hours is that it's far more self-imposed and nobody is breathing down my neck on any regular basis. I do have a high level of flexibility on how I shift those hours throughout the week, and I rarely miss important personal events. The hours are more mentally taxing though, and you physically feel it a lot more than IB. Genuinely not a facetime culture at the firm, but a get shit done / high accountability culture.
 

In terms of specifics, I generally work 6 full days/wk, and ~70-80hrs/wk under normal circumstances. More than that around earnings and conferences, and less than that schedule permitting. Last year was obviously an anomaly in the markets, and I clocked in 100hr+ weeks pretty regularly, pulled multiple all-nighters, etc. Was a real throwback to the IB days... But again, it was less about someone breathing down my neck (we fared well throughout the periods of high volatility), and more about the volatility creating very rich opportunity sets that you wanted to work through as quickly as possible. 

Under normal circumstances, I'd say there's nothing precluding me from working 50hrs/wk. Just a personal choice. I generally enjoy my job (don't get me wrong, there are days/weeks that suck) and had a relatively unique opportunity to move into a risk-taking role early where the learning curve was quite steep and I have been front-loading a lot of the effort (TBD if/when that tapers down). It's been an unsustainable pace over the last 12mo though. 

Coverage:

Nope. I started out with pretty broad industry coverage that narrowed over time into now almost entirely focusing on one non-tech sector. Won't get more specific than that. 

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Comments (120)

  • Investment Analyst in HF - EquityHedge
Mar 13, 2021 - 8:51pm

Just started a new role after ib + PE at a l/s equity fund. I'm struggling to keep up and am working very hard. So far everyone has been very nice but I feel like I've been thrown in the deep end.

Any advice on how to climb the steep learning curve? I'm afraid my boss was expecting more from me? But I'm not sure what his reasonable expectations could have been since there's so much to learn in a public markets role while PE was just ibanking 2.0

It's like he wanted me to be knowledgeable about ten plus names my first day and I'm reading as fast as I can but can only read so much

  • Intern in PE - LBOs
Mar 13, 2021 - 9:47pm

Hey there - do you mind describing the elements of the learning curve, and specifically what is giving you trouble? Considering the same move.

Most Helpful
Mar 14, 2021 - 12:19pm

I can sympathize with the feeling of being thrown in the deep end. Unfortunately there's an abundance of very smart people in HFs but a deficit of good mentors. What type of model are you in? Ranging from the spectrum of MM-style w/ relatively strict coverage in 1 or 2 industry verticals vs generalist broad coverage SM? That can make a difference on how you approach devouring the whale. Regardless, the most important thing is being organized on your research process. I can't say what works best for you or your boss, but below is how I tend to organize my thoughts, in broad strokes. 

In very generic terms, I take a step-based approach to getting knowledgeable on the companies I follow. First step is getting knowledgeable about business fundamentals -- this is very broad and lots of ways of going about it, but generally goal #1 is understanding how they make money and sustainability of that (e.g. maybe a porter's 5 forces type of framework; some investors like making checklists as well). That's viewing the business model as static though and the approach will change if the business is changing how they make money. Second step is getting knowledgeable about what matters most to other participants in the story / narrative (i.e. isolate the few KPIs that drive the stock) and seeing how that meshes against what you learned in step 1. Third step is understanding what the path to get paid is if I think, based on my research in step 1, others are over/underestimating prospects in step 2. And I don't think you cycle through all 3 steps for one company before moving on to the next, especially if you're new to the industry. When I first started, I went through step 1 for several companies simultaneously before I even moved on to the other steps since it's difficult to develop opinions about a business without more context of competitors and substitutes (especially in industries being disrupted). Trying to learn all of that same information without a structured approach can incur serious brain damage or a sense of being overwhelmed -- if I see junior employees struggling to stay afloat, this is generally why. 

The way I think about mechanics of each step is as follows:
 
1) Learn to put on blockers on information flow early on. While at some point you may have to be on top of every piece of information from sellside, industry, PRs, filings, etc for any given company, it can be overwhelming to try and process all of that without a good understanding first of the companies you work on. When I first started, and even today when I pick up new names or new industry verticals, I try and learn about the company and develop my opinion in a vacuum using only company-provided information. i.e. what are the drivers of this business over the next 12-36mo, and is it a good / bad business and good / bad industry? What is the information or data I need to be able to get an answer to those questions?  So, first you develop an opinion on the business quality. 

2) After step 1, I layer on isolating the 2 or 3 key KPIs that are of the most importance from an op profit driver perspective, or from a stock debate perspective. i.e. what is it that makes the stock work. Pull sellside models and see which segments or line items are driving the majority of op profit growth contribution over the next 1-3yrs. Is it a revenue growth story? Is it a margin story? Is it 1 segment or product that's expected to contribute all the growth? Is there something that they're missing altogether? Slowly layer that with your understanding of the business in step 1. e.g. Is it a cyclical name that saw massive increase in margins / returns on capital from some sort of demand / supply shock (i.e. it's at a cyclical peak) and people are extrapolating strength into perpetuity even though you learned in step 1 that it's a low barrier to entry to business in which new supply can come on quickly? If you view those earnings to be unsustainable and they're currently valued at a peak multiple, there's the budding of your short thesis right there. 
 

3) What is the catalyst or event path for your view to be realized? This is where you start thinking about how you'll get paid for the inconsistency between your view of step 1 and how other actors / sellside are treating step 2. It doesn't always have to be an opposing view but it could be a difference in magnitude. You can still be long a consensus long if you think the magnitude of upside is underappreciated. Different types of funds will have different views on how important nailing step 3 is in the presence of variant views on steps 1 and 2. Some firms have high turnover portfolios and are very focused on trying to nail timing into rich catalyst / event paths. Other funds take longer term views and have high confidence in the end result and don't mind being early or taking volatility in the interim bc they have longer duration capital. 

  • Analyst 3+ in IB - Cov
Mar 13, 2021 - 9:21pm

Hi thanks for doing this! I'm an IBD analyst recruiting for a research analyst role at a small Equity L/S HF. AUM is slightly over $100 million with a team of 1 PM, 1 Senior Research Analyst, and 2 Research Analysts. (so I would be their 5th hire).

1) what is the idea generation like for a research analyst. I love the idea of investing but I'm worried I don't have that "idea generation" skillset to constantly come up with ideas. How often should you be coming up with a new idea? 

2) Given how small the AUM is I'm concerned that the comp and bonus potential would be very low? Could you share what you'd expect my comp be for this role? They haven't told me anything. b) Should i ask for my bonus to be linked to PnL given how small the fund is or is this stupid to ask for a research analyst?

3) do you think it's fine to join a HF so small or would it be better to wait to try find a larger one?

4) could you comment on what the typical Equity L/S fee structure is? Is 2% / 20% still the typical structure or has it changed over the years? Is there a hurdle rate to achieve the 20%? If so, what is the typical hurdle rate?

Thankyou

Mar 14, 2021 - 12:40pm

1) This can vary greatly. Truth is that lots of idea generation can be random. Sometimes you start of with quantitative screens on business characteristics to whittle down  investable universe. Sometimes you learn about an interesting nook of the industry while researching a different company, and decide to dig into that nook further. Sometimes you just hear a friend mention something. Sometimes you have a secular view on an industry and dig to see which verticals are most exposed to the upside or downside. Some models you have a defined coverage universe that you basically force rank. There's not really a consistent way to go about it. Idea velocity will also vary greatly by type of firm and role. My approach with junior analysts is that they should, at the onset, work with their bosses on higher conviction ideas that the boss has already screened so that they can get good reps on the deeper side of the diligence process. So I wouldn't place a large burden on juniors for idea generation early on -- this tends to be consistent with what I've seen at other firms. That's a skillset they develop over time (generally a couple of years). That being said, it's never a bad thing to pitch your boss ideas that you find interesting, as long as it's not coming at the cost of you doing the work they want you to do on the already-screened higher conviction ideas they've chosen. 

2) I can't tell you what your expected comp for that role should be -- that's a conversation you should have with the fund and it's totally fair game to ask them to walk you through expected progression under various return scenarios. Also you'd need to have a view on AUM progression. Unless your boss is generous or you had significant contributions, I wouldn't expect a junior analyst is likely to be hitting the $250-400k on a "normal" return year at that AUM / head. As unsatisfying as it is to hear, they'll ultimately pay you what they want to pay you unless you have a contractual guarantee or an explicit % of firm carry pool you'd be getting. If you're very talented and have potential to be a PnL generator day 1, or have other opportunities w/ better comp prospects, then you can obviously push them more. If you're not, then your bargaining power at an entry level is pretty nonexistent. EDIT: Very simple exercise to do on comp is map out the carry pool. $100mm AUM, let's say that at that scale, 100% of management fees goes to covering costs and there's no excess (if anything there could be a deficit). Maybe expected return is 15%, so $15mm generated. Probably closer to a 15% performance fee given AUM is concentrated in early investors with more favorable terms. So carry pool of $2.3mm. Evenly split amongst 5 investment professionals is $450k / person bonus, but it obviously won't be evenly split if 1 of the 5 is the PM and 1 of the 5 is the senior analyst. Really quickly you can see how the math doesn't add up that favorably for the juniors, all else equal on AUM and return profile. Isolate the variables (AUM trajectory, return profile, # of heads and payout split) and develop your own view on the trajectory of each or ask their view on each of them to build what comp trajectory could look like. 

3) That's going to be dependent on learning experience and firm trajectory. The former depends entirely on who you're working for and the latter will depend on historical PM returns and AUM trajectory of the firm. If it's some rockstar who just launched after leaving a well known firm or platform and could scale to $1bn if they wanted to, that's generally a more attractive opportunity than a $2bn firm w/ sloppy returns and AUM on the decline.

4) Varies. You'll find scaled firms with top returns have pricing power (and are oversubscribed / closed to new capital) and you can still see that 2 and 20 (or more). Others will have cost pass throughs that equate to higher than 2% mgmt fees. Generally the industry has deflated to something between that and 1.5 and 15. Also depends on how mature the firm is -- if most of your capital is seed capital or early capital on "special terms" that's obviously deflationary to the fee structure. 

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  • Senior VP in HF - Other
Mar 14, 2021 - 1:09pm

Really great detailed reply from the OP. 

Curious if you're at a solid BB seat or a more off the run IB seat - ie is this the best you're gonna get or just one of the first opportunities presented. In my view, your first move post IBD is pretty critical and if you're in a good enough seat you should get plenty of looks with time. $100mm is really small and if it blows up you're gonna be in a really tough spot from a career perspective. As said above, unless there is a really good path to growing that AUM and fast, I'd be very hesitant. There are a lot more 100mm funds that sell junior hires on growth opportunities and spin their wheels than actual funds that get traction.  As a side note, that head count seems very bloated. 

Mar 14, 2021 - 1:48pm

I would agree with this. You're typically losing optionality with each step in your career in this industry. If you're at a point of high optionality (e.g. top IB), you generally don't want to jump to a role with minimal optionality ($100mm HF) without a personal track record, unless you have extreme conviction in the quality of the PM and trajectory of the firm. The probability of failure is much higher at smaller firms given the fixed costs of running a fund -- and being in the position of failing at an unknown fund / with an unknown PM can be detrimental early on. Granted, this is all dependent on what the other options you have are. 

Mar 13, 2021 - 10:51pm

I've been able to make Sr Analyst at an accelerated timeframe ( 

To what do you attribute your successful transition to a true portfolio management role? The jobs of a senior analyst and PM are very different at my shop - i.e. PMs do not engage in analyst work and fully delegate that portion. What qualities do I need to be working on and how do I demonstrate such qualities while not already having that role to prove that I deserve a shot at managing capital?

Ugh the FBI still quotes the Dow... -Matt Levine
  • 3
Mar 14, 2021 - 1:08pm

It's not as binary in my seat as you described between delegating vs doing the work, and this will vary by firm. I'm absolutely still in the weeds since my coverage universe didn't expand (if anything I got more specialized over time). But I will of course delegate part of the work to the person working under me, especially on maintenance work (I'm not going to be the one updating every model or leading every call). I'm still leading the charge on deciding where we spend time, which requires doing a lot of the upfront analyst work on new ideas. 

I think the 3 biggest factors were 1) that my ideas did well from a PnL contribution standpoint consistently (it wasn't 1 home run that I was leaning on), 2) I had a fairly structured research process (see my response above; a lot of this was adopted from people I worked under) that gave leadership confidence that my time spent independently was used effectively (vs needing someone else telling me what to do) and I could generate ideas consistently (and #1 wasn't purely random), and 3) there was room at the firm to grow into that sort of role as we weren't headcount / coverage / capacity constrained. Sometimes for #1 and #2 you'll find that there's a conflict where people will want to keep you as a junior working under them (and effectively underpay you), but that isn't really the culture at my firm, and people had the view that everyone could be better served letting me scale (i.e. total carry pool could be bigger). I also was pretty upfront about my expectations for wanting more responsibility (especially as I felt my performance contributions were pretty easily measured). #3 was a fortunate situation that wasn't really in my control but is often a limiting factor for others (and an inability to scale will often create the dynamic I just described of keeping people as juniors)

Mar 14, 2021 - 3:04am

Hi, thanks for doing this Q&A!

I'm currently at a long only Asset Management and am somewhat interested in the HF world.

What's it like for somewhat in my field to try and break into HF? I've thought about trying to apply directly from my current position, but think that I might need to get a few more years of IB or PE on my resume before I'll be a true candidate. Just curious.

How did you handle the transition into the risk-taking role and what were some of the biggest things you learned from the transition? 

Mar 14, 2021 - 5:30pm

I don't know if I've seen the LO > IB / PE > HF route before (without b-school in the middle). I would think that if you're in a market-facing role right now, doing well there is the best pitch for you wanting to stay in a market-facing role vs going to IB / PE. I can't comment if IB / PE at your level has greater recruiting opportunities vs LOs -- I more just question how likely that transition from LO to IB / PE is and whether that makes sense for your end goal. I've seen LO > HF happen plenty, going to both SMs and MMs, especially from some of the bigger names in the LO world. That skillset has greater overlap with most HFs than IB does. 

I'd say transitioning to a risk-taking role wasn't a flip of a switch. While the title change was, my habits and process were gradually changing over time. Put another way, I wouldn't have been put in a risk-taking role were I not already operating at that expected level. I'd say the biggest things I learned from the transition were the importance of having a process to organize idea sourcing, diligence, ranking, and portfolio construction. Additionally, one of the biggest behavioral / mindset changes, especially early on coming from banking, was learning to prioritize workflows and cut uninteresting ideas even in the middle of diligence. That's an unnatural feeling in IB, where the name of the game is spending a lot of time on the marginal change that doesn't really matter in the grand scheme of things, all in the name of pursuing perfection. Conversely, the most important thing for me today is managing the opportunity cost of my time. My view was that IB and PE put a big emphasis on limiting mistakes and being so focused on just the downside which led to a lot of focus on the minutiae that isn't needle moving, whereas in the HF world the best are still wrong > 40% of the time and you have to have more of a mindset of risk vs reward rather than just absolute downside. So you have to be comfortable with and completely unemotional about walking away from unfinished work and opportunities to maximize return on time and with understanding you're going to be wrong a lot of time. 

Mar 15, 2021 - 12:31am

Thanks for the detailed response! 

The reason I ask about LO > IB/PE is because I am about to start in active LO out of undergrad. This is a fairly rare thing apparently, complimented by the fact that I will be joining the company in a class of 3 undergrads (in the entire ~500-550 person investments area, there are only 11 of us without either a full-time IB background or an MBA). The reason I've considered re-entering IB is because the only major pathway to advance internally and in LO is getting an MBA. I've come to question the virtues of this pathway and the accessibility of M7 business schools from my current position. Nearly all portfolio managers at my current firm went to one of Stanford, Harvard, Stern, Wharton, or Columbia. The firm has made it fairly clear that these specifically are the kinds of MBAs they are looking for, not from somewhere else.

I'm also just not the hugest fan of my current location. Active LO firms, like mine, are not located in major finance cities since they can be basically located anywhere. Not the hugest concern, but just something I've thought about. 

Now clearly, the overlap of this position and HF positions at the junior level are more similar than IB or PE positions are at the same level. This however doesn't necessarily make recruiting into those HF positions easier. That's pretty much why I'm considering going back into IB so I can make that transition. Most people in LO stay in LO. They don't leave. This gives me a very limited sample size of people who have gone LO to HF at my level (or maybe I just haven't done enough digging). Do you have any different insight knowing this?

I also appreciate hearing about your transition into risk. I'm definitely someone who likes to plan out transition and find that transition for myself is rarely an overnight affair. I'm someone who's usually a bit stubborn about their habits. Walking away from unfinished work not only feels unnatural to me at the moment but practically blasphemous in a work sense. The two things above that you mentioned are major parts of what one learns in IB and in university and I without a doubt to this day fit both of those descriptions. I constantly focus on simply finishing everything no matter what, no matter if it's good or bad, no matter the upside. Everything must get done in my mind period. Walking away from a project unfinished or half-way there just seems like I'm giving up on an opportunity. Additionally, I'm a major perfectionist. My family and friends have consistently criticized me about this since find myself worrying about everything in a presentation or document, including things that will certainly not be noticed by others. I'll have to keep those in mind as I progress through my career. Again, people have been particularly critical of the perfectionist mindset, so I'll have to generate a workflow that allows me to consider not being perfect rather than emphasizing a lack of mistakes. 

EDIT: the linked thread above concerning M7 BSCH was automatically linked and has nothing to do with me or this post

  • Research Analyst in HF - Other
Mar 14, 2021 - 3:36am

at broad strokes can you share what type of fund(s?) you were at? i think it does matter given the variability in hf structures/lifestyles/culture. e.g. rough team size, sm vs. sm/sub-pm vs. mm structures, that type of stuff. 

Mar 14, 2021 - 12:49pm

Beyond adding that the AUM / head is multiple hundred million, I'm unfortunately not going to go into a whole lot more detail here. Assuming you're asking in relation to comp, what I'll say is that I have seen peers at SMs @ $5bn+ as well as the larger MMs, both see low-7-figure paydays by late 20s / early 30s if they did well stepping into risk-taking roles. Those #s were more frequent as a % of sample in SMs vs MMs (keeping in mind the # of seats in the former is just lower so there's sample bias). Typical? No. Possible? Yes, but requires measurable impact on performance.

Mar 14, 2021 - 1:50pm

What's the politics like at your / peers SM funds in terms of coverage? Would think everyone wants to cover FAANG or the good companies. At an SM, probably only 1-2 people cover these names but at a Millennium - there are tons of pods with analysts covering the same names. In your experience, how do juniors / employees navigate this at an SM if no one at the top leaves their seat? Or is it more 'take what you get dealt with' ? 

Mar 14, 2021 - 2:37pm

There's a lot to unpack here and unfortunately the degree to which coverage is a headache will vary tremendously based on 1) fund structure (e.g. SM vs MM), 2) fund risk parameters (net exposure overall and by industry), 3) average position size / concentration limits (i.e. how big is your investable universe), 4) fund compensation structure, and 5) fund culture. I would say that to determine how big of an issue coverage would be, you'll need to make your own assessment on a how a given fund rates on each of those factors. My thoughts on each of those are as follows:

1) Fund structure: the nature of the headache is different between SM and MM. At SM, it's a question of whether you have the ability to cover XYZ company if it falls within someone else's purview. At MM, the issue is more on having to share access to XYZ company if 5 other teams at the firm cover it and you have firm-level seat limits in meetings and corporate access (e.g. XYZ will only give 2 seats to an MM firm at the conference even though there's 5 analysts at an MM covering). So it's ability to cover period vs ability to cover effectively -- both are obviously headaches. 

2) Fund risk parameters: If you run a low-net strategy and have to run industry level nets low, then access to the good companies is less of a relative advantage since good companies are often residing in good industries. A lot of times you're riding industry beta. If you're the TMT analyst, sure you can go long FAANG, but it's as much of a challenge to think about what you're going to short against it to get your nets in order. Under this sort of model, intra-sector spread is what matters, and it's probably more of a level playing field among analysts covering different sectors in terms of relative opportunity sets (though there are differences in intra-sector dispersion by industry). This is how many MMs run. Unfortunately, that's not the way most SM funds are set up, and the model is generally higher nets (60%+) and taking inter-sector spreads (i.e. long secular winners and short secular losers). In which case being able to take higher nets in high flying industry (i.e. taking industry beta) is a relative advantage, and people will probably be more defensive in trying to keep that relative advantage, all else equal. But, that's only a relative advantage to the extent the industry is working (which is what it sounds like your example is referring to)

3) Investable universe per head: put simply, the larger your investable universe, the less of an issue that coverage may be. Think about the AUM of the firm and the gross leverage. Then think about how many positions they on avg run long or short. Then think about whether they have limits on how much of a given company they can own. Before even accounting for stylistic biases (i.e. we only invest in companies with ROICs > X%), you should have a sense of how big/limited of an opportunity set they're playing with per head. I'll paint a very simple example (not to say this is the only set of things in consideration). If you're a $10bn+ fund running at 150% gross, you have $15bn of capital to put to work. Let's say you run 100% gross long and 50% gross short for 50% overall nets, so you have $10bn of long capital to put to work. You like running concentrated and only want to have 10 longs in your book, so therefore avg position size is $1bn. You don't like filing so you want to avoid owning > 5% of a company, so the company needs to be at least $20bn of market cap. How many companies just from a size perspective fit that bill within your respective industry coverage? If you already have all industry coverage accounted for and employee turnover is low, then it's probably more difficult to have coverage / risk ownership as a junior looking to progress. Now, flex each of those variables -- if gross capital is lower / liquidity requirements are lower, concentration requirements are looser, and number of accounted for sectors is lower, then coverage being a limiting factor is less of an issue. One caveat: while your free reign may be lower in the example I pointed out (i.e. high AUM and concentration is prohibitive), just by nature of scale, your economics per head will still be vastly better than most of the industry. So while you might be upset for not getting to cover FAANG, the fund is probably at escape velocity on AUM (and management fees) that you'll be well compensated vs most of the industry. 

4) Fund compensation structure: Owning the "good companies" will be less of a political pressure point if your fund compensates you on alpha vs $s (see my point on industry beta), and if there's a component of comp that is based on overall fund performance vs just your coverage. From my experience, generally at junior levels, team / firm performance matters more to overall comp than your sector performance (provided you don't own the risk), so it's not an issue you'll have to worry about as much. Comp determination method varies more significantly at more senior levels. 

5) Fund culture: Pretty self explanatory. The degree to which people are territorial is dependent on comp structure but also dependent on whether people have the mentality of someone else scaling being a zero-sum game. Culture will in part depend on AUM trajectory and whether or not there's actually capacity for the # of risk takers to scale without diluting the economics of incumbents. I was fortunate where, even though I was scaling into a role with some (albeit low) overlap with existing risk-takers, they saw it as beneficial for the overall firm and overall carry pool to better monetize my corner of the world. The easiest way to gauge this prospectively is see the nature of the employee turnover under the person you'd be working form. Additionally, you should absolutely bring this up in later stages of an interview process (or post-offer) to understand your path to scaling within the business.

To answer your question more directly: I've seen/heard coverage politics be a bigger issue in firms where the culture is sharp elbowed, comp structures are very PnL driven without much risk management, and AUM is prohibitive to expansion of risk taking roles without coming at the cost of existing folks in that role. 

  • Analyst 1 in IB - Gen
Mar 14, 2021 - 3:28pm

Thank you for doing this! I'm in IB and trying to evaluate a variety of HF opportunities. There's obviously household names (e.g., Elliott, Coatue, etc.) that are often mentioned here but I know there's a world of HFs outside the big 10 names that are still strong opportunities. Beyond people / culture (which would need to be diligenced on a per firm basis), do you have any guiding principles to evaluate whether an analyst seat is a good seat? For example - 

- What is a good AUM per head ratio? 

- What is the minimum AUM that I should consider? 

- What are minimum returns (probably a harder one to answer given the variety of strategies but would appreciate any guidance here)

- Pedigree of people (maybe?)

- Others? 

Mar 14, 2021 - 4:32pm

Similar to assessing stocks, your opinion on funds should be based on forward outlook rather than trailing or point-in-time characteristics (unless they help inform the forward outlook). Addressing some of the factors you bring up: my view is that ultimately career potential LT should be influenced by 1) personal performance and development, and 2) structural characteristics of the firm. We'll come back to #1.

On #2, we often talk about AUM per head as a measure for opportunity / stability, but really it's a proxy for carry $s per head and doesn't always paint the full picture. For instance, you could have a HF that has been growing AUM in a long-only product (which carry far lower fee structure) while core HF assets are shrinking -- optically AUM per head could be increasing but carry $s per head could be decreasing due to fee dilution. Break carry $s per head down into the components and think about each of them individually -- expected AUM, expected return, fee structure, and expected headcount. The HF industry is unfortunately littered with carcasses of $2bn-10bn AUM firms that optically had good AUM per head a couple of years ago at a point in time, but nosedived very quickly (for reasons that could be somewhat diligenced ahead of time) because returns lagged, AUM wasn't sticky, and/or they were too deep under a high watermark and that affected talent retention (which creates a downward spiral on performance and AUM). In theory, forward risk-adjusted return expectation should drive forward AUM and forward fee structure. Unfortunately allocators tend to be backwards looking and trailing returns often drive forward AUM and forward fees. A few of the things I diligenced to make sure carry $s / head prospect were intact, even if AUM / head looked good at a point in time: what have historical returns been the last handful of years vs their benchmark? What is trajectory of AUM? What is the level of concentration of investors in the fund? How much of AUM is locked up and on what time horizon? Are they coming up to a big gate on AUM while performance has recently lagged? What has fee trajectory been historically and recently? What are watermark terms and how in the hole are they on high watermarks? Depending on the answer to all of those questions, you can have a discrepancy between attractiveness of forward carry $s / head vs trailing AUM / head.

To your question on minimum returns -- this will matter on two factors. a) the lumpiness and sequence of returns, and b) the benchmark that allocators judge them against. For the former point, there's lots of funds that have great LT track records today but all of the excess returns were generated 10+ yrs ago. If they had grown AUM since (since allocators tend to chase trailing performance), average capital in the fund could actually be lagging a benchmark materially. On the latter point, you alluded to this when you mentioned this will vary by strategy. So I unfortunately can't give you a great answer. Expected or minimum return will vary based on style, vol, correlation, etc. 

So, if a firm checks all the right boxes on AUM outlook, doesn't have a watermark issue (so carry pool is intact and talent will be getting paid), and has been outperforming their benchmark, you've won a battle that 90% of HFs won't. You at least have minimized the existential risk of the opportunity vs peers. That's where point #1 comes in -- being in the seat that maximizes personal upside. Generally I find checking the boxes in #2 will create a culture that's more conducive to #1 (since people aren't fighting for a shrinking pie and will be focused on grooming talent). But one of the biggest factors here will be who you're working for. Unless you're a rockstar out the gates, the most valuable seat in developing your prospect for future performance will be under an apprenticeship model. What could be some of the leading indicators of that? If you're working for a more senior person, the career paths of historical analysts under them is a great indicator (note: turnover may actually be "good" here if his/her analysts are leaving to become PMs and sector heads at other firms). It's tougher to diligence if you're working for a more junior risk taker, and you'll have to rely on reference checks. I can't stress enough that who you choose to work under is incredibly important in your LT personal development (which is very important to LT comp prospects) especially since you only work under 1-2 people in most HF setups. 

The other point I'll note is that you can have bad seats at good funds. Won't name names, but some funds that people like to mention here actually have pretty crappy analyst development w/ high churn and are designed as model-monkey 2-and-out type roles without much room for progression (not to crap on 2-and-out programs in general -- some are still very good)

I'll caveat all the above by saying that very few people are lucky or skilled enough to have a large enough opportunity set of funds to pick and choose all these factors from. 

  • Analyst 1 in IB - Gen
Mar 14, 2021 - 3:31pm

This is a great thread. Thank you. 

Currently a PE associate and thinking of going to the public side because PE is so process oriented vs. 'answer'-focused. Do you have a sense of the pros and cons from any peers in the industry? Know you didn't do PE yourself but curious if you maybe have friends or colleagues who have

Mar 14, 2021 - 5:09pm

As you mentioned, I can't talk about that transition from a personal experience, so take the following with a grain of salt. There are some threads I've seen on this topic in the HF forum that may be a better source of info. 

The degree to which PE is a sea change from a HF role is dependent on both the PE experience you had and the HF experience you're looking at. There are PE firms where investment decisions are only made at the Principal or Partner level, and all the diligence is outsourced, and the sub-principal job is more about managing a process. From peers, I've tended to see that being the experience at the large PE funds and very similar to banking 2.0. Then there are PE firms that do diligence in-house, dig a lot more for non-process opportunities, and give more responsibility to junior employees. At the same time, HFs can vary from generalist, super concentrated, LT holding period, long-biased, compounder-focused SM HFs to the shorter holding period, heavy risk management emphasis / lower net, narrow coverage universe MMs. PE firm #2 and HF #1 may not be dramatically different at the junior level excl. the process dynamics. PE firm #1 and HF #2 are likely very different experiences. There's also very process-oriented activist firms or special sits firms that are more akin to the PE skillset. 

The friends I have in PE that did or want to transition to HFs generally did so because they cared more about the diligence side of the job rather than the process / operations side of the job. So it was more about what they found interesting rather than about an absolute expected value of one role vs the other. They went into roles at different types of HFs (#1 and #2, and those in-between), which was more a function of what investment style resonated with them.

In terms of the pros vs cons, just off the top of my head the below is what I gathered. But really the simple answer is if your real passion is diligencing companies / stock picking and you have enough of a stomach for risk, chances are you'll like the HF role more. 

PE Pros vs HF: firms are more stable so blowout risk is minimal and allocator $s have been flowing to private investments; there's likely a clearer path to getting to carry-accruing roles and risk adjusted comp at big PE firm probably better than avg HF; greater career optionality and likely more network building; getting more in-depth on any given company

PE Cons vs HF: portion of role spent on process vs diligence (only a con if you don't like process work); hours worse on avg and more importantly you're at the whim of process dynamics; greater number of opportunities looked at in the HF (since you don't have to spend 80% of your time on that one sellside); right tail outcomes are juicier at the HF at younger ages in the right seat

Mar 14, 2021 - 5:25pm

Thanks for doing this. Could you talk a little bit about the interview process that you went though, specifically the case study? How do you go about presenting information on a ticker given to you and what types of analyses are most helpful? What is expected from someone coming in from an IB / PE background given no formal training in public markets. Thanks!

Mar 14, 2021 - 6:59pm

Interview sourcing was mostly done through headhunters. I was coming from a good IB, and I was 100% set on doing HF. In terms of background, I had enough demonstrated interest and experience in / adjacent to the space to be convincing that was what I wanted. 

Interview structure was relatively similar across firms. First round was usually a "gatekeeper" round. Either HR or the direct reports with mostly behavioral questions and a mix of a few technicals and a short pitch. Second round was more in-depth interview with the direct reports and meeting with a couple of other members of the investment team. Flavor of each interview depended on what mattered to the person. Some more grilling into a stock pitch, some more technicals, some more deeper behavioral Qs. Next round was usually a case study -- either open-ended or you were given a ticker. It ranged from being in-office to take-home for 1 week. Varied whether that was presented to the broader investment team or just your direct reports, but in either case you present and get grilled on Q&A. Final round was usually meeting 1-on-1 with the founder or CIO or head of the strategy. 

In terms of handling the case study, it depended slightly on whether the format was a user-generated or them giving you a ticker. In either case, I'd stick to a very clear pitch that shows you know how to isolate the 1 or 2 key KPIs that matter for the stock and can express why you have a variant view vs other investors or consensus. I'd refer back to the first response I gave on this thread on how I manage my research process into stages. Generally it helps to break your case study in similar stages since it's a fairly logical flow. Determine business / industry quality > isolate the key drivers and points of debate and state your varying opinion > make clear the path to getting paid and realizing your discrepancy vs consensus. The only thing I'd add to that is making clear the risks of your view and the absolute risk / reward skew of the opportunity. 

If you have an opportunity to pitch your own company in the case study round, it's an opportunity to showcase your ability to dig and be original / creative. So don't let that go to waste with a very generic or well known pitch. If you don't care about the opportunity enough to put in work on a case study, you probably won't like the job. This is a response I gave in another thread: 

It's a tough question as there's no silver bullet, and everyone on the other side of the table is solving for their own unique needs or culture. From my perspective, the best things you can do for yourself in terms of increasing your attractiveness as a candidate coming from IB or PE are 1) work at a top brand name firm (high signal - why should I make it an "either/or" decision on talent vs pedigree if the talent pool is deep enough that I can have both), or 2) come up with good pitches that are truly value added and original - I always liked to pitch undercovered companies bc it showed that I wasn't just ripping off SS research or regurgitating a well documented HF hotel thesis / VIC write up. Most pitches I hear are phenomenally unoriginal. Not suggesting that a thesis has to be original to make money (your #1 goal is to make money - not to be intellectually superior), but rather, from a recruiting standpoint I don't glean anything incremental on your unique ability to think or pitch or dig when hearing the same type of pitch on the same type of company over and over.

Mar 21, 2021 - 5:52pm

Thank you. This has been very helpful for my processes. 

Do you have any suggestions on what questions to ask during a interview process that could further clarify the fund's research process? I realize every fund is going to say they do bottoms-up, fundamental research, but is it really about looking at the PM / Analysts backgrounds? How candid are you with candidates that interview with you? What questions are typically off-limits (i.e., comp, career trajectory, aum outlook, etc.)? 

Separately, on the job, what does your time allocation look like in terms of sourcing / researching new ideas vs. tracking existing positions / coverage universe? It seems difficult to find time to do deep diligence on new ideas (e.g., industry landscaping with consultants, expert calls, channel checks, etc.) while maintaining a coverage universe of 30-40 companies especially during earnings. Has your time allocation changed significantly from your early days now that you might be more familiar with the companies you cover? 

  • Analyst 1 in AM - Equities
Mar 14, 2021 - 6:00pm

Thanks so much for doing this!

Can you speak a little bit about breaking in? How were you able to find the opportunity / how much was expected from you first joined? Were you expected to already be up to speed on the industry or did they give you time to adjust? 

Mar 14, 2021 - 7:11pm

In terms of breaking in, I would refer to the comment above this one. It was fairly generic use of headhunters coming from a good IB seat, and I had demonstrable interest in the space. 

In terms of expectations, it's an interesting question. A lot of prospects have the view that you're expected to be idea-generating day 1. That's really not the case from my own experience and peer experience. Despite having to pitch a few stocks throughout the interview process and case studies, I wasn't expected to be the idea engine upon starting. More than anything, those parts of the interview were screening your interest, raw talent, and ability to communicate effectively. As well as screening your maturity level to make sure this is someone I can put in front of a management team without reflecting poorly on the firm. Every firm has their own manner of diligence and process, and your first year or two is about learning that rather than letting you loose on idea sourcing. Disclaimer that that will depend on the nature of your talent and the nature of the role the firm is looking to fill.

The IB / PE role on avg is quite different from the HF role, so you're not expected to have the full toolkit ready to go aside from your technicals (making sure you can build a model without errors and I can trust any numbers you give me) and work ethic. Nor are you expected to be an industry expert coming into a junior HF role from IB. Frankly, in most cases, you don't really learn shit about your industry in an IB coverage group outside of the surface level. 

  • Analyst 1 in AM - Equities
Mar 15, 2021 - 4:28am

SB'ed - thanks for the helpful answer. 

As a follow up, how do you balance the short term view vs long term? As an example, let's say you were bullish on Amazon LT because of xyz but think the stock may fall in the ST due to the value rotation. Would you buy anyways? In terms of coverage, what made you choose your specific sector? 

Mar 14, 2021 - 7:19pm

Appreciate the gesture. Unfortunately I've found myself using "vary" "generally" and "caveat" a lot throughout this thread, mostly to try and drive home the point that there's so much randomness involved in outcome and there's a wide variety of roles / strategies / cultures in this space. Best bet is to always get as many opinions as possible. Hopefully we can get some of the WSO HF vets to chime in with their thoughts and pushback on my views. 

Mar 17, 2021 - 12:10am

Seriously, you should write a book on this stuff. This post is gold

Instagram: @dickthesellsider | Substack: dicktoad.substack.com

  • Analyst 3+ in ER
Mar 15, 2021 - 4:13pm

What is your view on SM vs MM? I am shocked at how many ppl think all SM hold concentrated positions for a long time frame and that MM are just quarterly trading machines, really depends on teams in my research so far. From your experience in the industry what are the skill sets that MM can help with SM job and vice versa? 

Mar 16, 2021 - 10:45pm

I think it's really just about the quality of the position and PM right? I've seen people go from good SM seats to good MM seats voluntarily and it's been career enhancing for them (quicker access to risk taking roles). I've seen the opposite happen going to a bad seat. I've seen talented people ~30yrs of age consistently clear 7-figures in both models with different investment styles. I've seen people hit a wall in comp and get stuck in a middling role and burn out or blow up in both models. I've seen styles and holding periods range at both models (you're less likely to see the multi-yr holding period at MMs - more the point that a lot of SMs are higher turnover than people think). As you mention, it's kind of difficult to compare the two generically. Have to look at it on an opportunity-by-opportunity basis. While it is incredibly important who you directly report to under each model, diligencing your PM / direct report is probably more important at MMs since it has greater influence over your staying power vs most SM setups I've seen. 

I can only speak to the experiences I've seen from friends and peers, but at the non-PM level, I think the best SM seats are better than the best MM seats (mostly because of the economics per head and management fees at the very best SMs, though seats are fewer), but the best MM seats are better than most SM seats. Keep in mind that average SM is not some $5-10bn AUM firm w/ 10 IPs consistently clipping double-digit % returns - it's a much smaller firm with declining AUM that's underperformed its benchmark for years. 

  • Analyst 1 in HF - EquityHedge
Mar 16, 2021 - 11:09pm

This is by far the best answer I have seen to this question on this site, and is very helpful to a young analyst like myself so thank you.

  • Investment Analyst in HF - EquityHedge
Mar 15, 2021 - 9:15pm

Hey thank you so much for doing this. super insightful answers so far. leaving PE for HF seat at L/S / LO later this quarter.

a. Can you expand on what were the toughest parts of the job to ramp up on  / get used to when you first started? 

b. what resources have you found the most helpful to stay on top of news and trends for your current holdings? How do you keep on top of 10+ names on a daily/weekly basis? 

c. What's your approach to new idea generation? How do you identify a new name to cover? 

d. i know everyone hates answering this question, but can you give a bit of a week in the life in your role? hours, type of work? 

e. what have been the biggest takeaways for you as you have grown in your seat? advice for someone starting new?

Mar 16, 2021 - 9:33pm

Most of my thoughts on these questions were probably covered elsewhere in the thread. But just to go through the list:

a) I'd say the toughest part was just managing the firehose of information in trying to get up to speed on the industry you're working on and the book you're working under. I'd refer back to one of the first responses in this thread I gave about how I generally trie to split out steps in developing opinions on the existing positions in the book when I joined, as well as new opportunities I was working on. 

b) The most helpful tools for managing information flow are the third-party providers. Alphasense, Sentieo, Bloomberg, CapIQ, etc. I set up watchlists and alert lists for ticker lists of interest that I go through every morning (includes filings, press releases, sellside research, etc). I also leverage sellside sales and sector specialists who generally send out morning notes covering industry and news highlights. 

c) I'd refer back to one of the earlier comments I posted in this thread about idea generation. Truth is that it can be fairly random. New company pickup is a little bit more organized for me now that I've narrowed my coverage specialty over the years. Also, "new idea" generation isn't always sourcing new companies - more often it's revisiting opportunities I've looked at in the past and have stayed on top of or are at a point where they're interesting again. 

d) I'd refer back to my original post on lifestyle and hours. On a normal week it's 50/50 working on maintenance of existing positions and new ideas. And of that, it's roughly 50/50 of spending time in the #s vs reading and doing calls. 

e) I'd have to think on biggest takeaway - too many to narrow down, and more are likely cynical takes. As far as advice - always do your own work, especially early on. This is something I tried to be very conscious of at the start of my career. Naturally at some point you'll have to start leveraging and trusting others to do the nitty gritty for you, or you develop enough trust with a few folks whose opinion you hold in high regard to dig into something that they mention. But you have to learn to dig on your own and you have to learn to develop independent views. I find it very difficult to build conviction without having done the work yourself, and similarly it's difficult to differentiate between a well-presented pitch vs a good pitch (the two are not always equal) without developing that analytical muscle over time. As much crap as people give sellside research analysts for not being willing to make counter-consensus calls, you see plenty of it on the buyside as well (i.e. people play it "safe" without doing a lot of independent work). The point on always doing your own work is one that I know people like to debate e.g. it's a waste of time to build your own models when 1 or 2 KPIs are all that matters, there's no pride in ownership of work only in getting the right answer, rewarded on outcomes not effort, etc, etc. Looking back, I retrospectively found it valuable to start diligence in a vacuum, but that's just my opinion and I didn't enter the industry in a role where I was constantly under time pressure. But it is always a balancing act w/ time management, which is just a skill you have to develop over time. 

  • Senior VP in HF - Other
Mar 17, 2021 - 2:33am

Really liked your last bullet on doing your own work. Great advice for younger analysts. Couldn't agree more and is my personal style. Sure it takes more time, but for example, the last thing I do is read sell side reports / talk to sell side analysts, where as for many its the first. Forming a view without the clutter of others is far more valuable and leads to compound learning, which pays dividends over time. Short cutting might get you a good return but foundation is weak and fleeting. 

  • Summer Associate in IB - Cov
Mar 15, 2021 - 10:14pm

I really appreciate you doing this. I am about to start as an MBA associate in FIG and hope to join a hedge fund after a few years. I realize that this move is much more difficult at the MBA level but I love the public markets and know that's where I want to be long-term. 
 

How difficult will this move really be and how can I position myself to make the move? How long do you recommend I stay in IB? Will headhunters be any help or will I have to cold email my way in?

thank you!

Mar 16, 2021 - 9:40pm

Unfortunately I can't provide much help on answering the "likelihood of breaking in" type of questions. I went through a fairly well trodden path to break in. At least in my seat, entry level roles were largely filled by HHs who got your contact info from the departing analysts at the bank. I'm sure you could get in touch with those same HHs through your analysts if you aren't already on their email distros. 

From my experience, HFs (at least in the L/S world) tend to have a preference to take in younger people at junior levels, with the exception of those who have built a sector expertise over time. But I've seen plenty of backgrounds end up in HF seats, and IB Associate is hardly one of the abnormal ones. As long as you're in a somewhat visible role to recruiters (or have a good network), then talent and passion will trump precedent. If you have those two, you shouldn't be discouraged from trying, irrespective of how many associates from your group / bank made that same jump historically. 

Mar 16, 2021 - 1:14am

Thank you so much for doing this. I have read through all your responses to others and already am benefiting. 

My questions are:

  • is it a difficult transition from a high turnover portfolio seat to a longer duration capital seats (long only / family office / or just longer-term oriented HF)?
  • Any tips on efficiently going about locating HFs with longer duration capital? 
  • How to better forecast quarterly and think about sequential and year-over-year trends? (To me, if it's a big secular story and I plan to it for 3-5 years or even longer, why do I care about "tough comps", again I guess it comes back to the duration of LP capital)

Thanks. 

Instagram: @dickthesellsider | Substack: dicktoad.substack.com

  • 2
Mar 16, 2021 - 10:24pm

Going through the questions: 

1) I can't really comment on this since I haven't made a similar transition to what you're describing. How difficult the transition would be is dependent on how much of a skillset you developed on deeper diligence (or at least how good of a reason you have for wanting to switch to that model). People often conflate a turnover with not doing diligence (don't get me wrong, there are definitely diligence-light high-turn shops). Not always the case though, and there are several well known SM funds that trade a lot more than people WSO think. 

2) Easy proxy is to look through 13F filings over time. Whalewisdom is a good source for this. You can screen for funds of interest, or you can pull up fund-by-fund to get a sense of how portfolio size has changed over time which can give a view of how AUM has changed. 13Fs are by no means a perfect tool though since they only show domestic long positions (so a firm with increasing international market exposure isn't well captured). The best way to know a firm's capital duration is to just ask them when you're interviewing. 

3) There are threads on the HF forum I've seen in the recent past that do a good job of giving an overview of building quarterly forecasts. I would recommend searching for those. The mechanics are no different than an annual model - it's just about being more granular on things like seasonality and layering in lower latency data points. In general you should build all your models quarterly since for US domiciled companies that's how often you're getting updated information, and you always want to be working with the freshest information in the cleanest format (updating an annual model as the year goes on is an even bigger pain than just updating the quarterlies flowing into an annual). To your second question about why NT / MT trends matter in a LT thesis - it's always about maximizing the monetization of your ideas. Position size should in theory reflect probability adjusted risk/reward and catalyst path (which feeds into the "probability" part). You can believe the LT story while at the same time your research gives you a differentiated view they're going to unexpectedly whiff the quarter in a way that looks damning to the narrative and NT #s (see this plenty with companies with good LT prospects going through an underappreciated and accelerated investment phase and gutting margins) while they're going into the announcement on peak relative valuation and NT outperformance vs peers. That's where the skillset of differentiating between a good business vs a good stock comes in. Why be maxed size on that company into a really crappy event path if you could have the option to scale post-fact at a better price? Truth is sometimes you just don't care about the NT, sometimes you do. Lots of smart investors feel very strongly about both sides of the debate and have different beliefs on how good of traders people actually are (research suggests not very good) and what windows of alpha generation look like. Just depends on the confines of your model and your personal skillset. 

Mar 16, 2021 - 11:37pm

Thank you so much. Very helpful and also your answer is very balanced. Look forward to picking your brain down the road. 

Instagram: @dickthesellsider | Substack: dicktoad.substack.com

  • Works at 137 Ventures
May 4, 2021 - 8:55am

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  • 1
  • Works at 137 Ventures
May 4, 2021 - 8:56am

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  • 1
Mar 19, 2021 - 2:16pm

Thanks a lot for doing this. I had a couple questions:

1) You said under normal circumstances nothing precludes you from working 50hr/week. I'm guessing working 50/hr week makes it much harder to make successful investment ideas and increases your chances of going out of a job?

2) You mentioned your time is spent 50/50 on working on numbers vs reading/calls. Curious what kind of numbers work you are spending the bulk of your time on, and whether someone who prefers talking vs reading could spend comparatively more of their time on the former and still do well.

3) The hedge fund job is a grind akin to banking with condensed hours and it seems you really have to enjoy the job to put up with all the work. For me, 60-80hr/week of reading and modeling sounds rather painful. Curious whether/why you truly enjoy the work and what makes you stay in such a stressful job vs taking it easy, especially after having made millions already.

Mar 20, 2021 - 11:03am

1) At the end of the day, the output you're solving for is good ideas that make money. Hours worked are just an input, and will vary by person. As I mentioned, I worked a lot because I was still young (i.e. I still have the energy and no family of my own) when I stepped into a risk taking role where I felt I had a lot to prove (and still a lot to learn). A mentor of mine always said that sequencing of events determines success in this industry. Let's say that in a string of 10yrs, 2 individuals are equally talented and would have put together the same CAGR of returns and would have 7 amazing years and 3 bad years. If person #1 started off with 2 good years, and person #2 started off with 2 bad years, I guarantee their career arcs will look different all else equal. My goal was to try my absolute hardest to make sure I could be person #1 and start off on a good foot in that role (that's what I meant earlier when I said "frontloading the effort"). So maybe I worked more than I needed to frankly. Also, in my case in particular, you can assume that over most of the time I've been working I haven't had a junior employee working under me, which is something that will ultimately change the # of hours I work. I have no intention of continuing to work 70-80hrs/wk in perpetuity if I feel it's LT counterproductive physically and on ability to think clearly. To your specific point about whether 50hrs/week is a death sentence - it's not. As long as you're effective at your job. Different people just have different styles and processes that are different levels of taxation on time. Holding periods and idea velocity are also generally determinants of lifestyle (lower portfolio turnover culture generally equates to better lifestyle). 

2) When I say #s, I'm generally referring to models or back of the envelope types of analyses. To the second part of your question - like I said, you can do whatever forms of diligence suit you best as long as you're consistently making money (legally). You can't really avoid reading and #s though. Talking generally entails listening to someone else's opinion rather than developing your own. What I will say is that your idea velocity (and therefore depth of diligence) will in some ways determine what the split between the different types of work is. If you're a really deep dive, long holding period, low velocity type of place, then you probably spend a lot more time per idea on doing things like expert network calls. 

3) I think it's really difficult to have longevity in this job without enjoying it just given it's pretty mentally taxing and there's more transparency into your personal performance vs other jobs. I mentioned this in a different thread, but in *very* broad strokes I generally think of a 2x2 matrix (shout out to consulting friends) with passion for the work and talent (which is always subjectively measured) on each side. Low passion + low talent = don't bother. High passion + low talent = maybe you get your foot in the door at the junior level, but are found useless pretty quickly before getting into the money-making seats. Low passion + high talent = can probably string together a few nice years but then burn out. High passion + high talent = people I've seen with greatest longevity and success. It's not a uniform distribution of these combinations / outcomes, and there are obviously so many other factors that determine probability of success which I've mentioned in other posts. But it's always helpful to think objectively which bucket you fall in for any high stress / high reward job like this. I do genuinely enjoy the job in aggregate (there are always shitty stretches though) and that is good medicine for the stress for me. And to your point about just taking it easy after a few nice paydays, I'd say that a) the numbers I gave were gross and you can assume I'm in NY / CA where the tax man takes their fair share and COL is high so I don't feel I'm anywhere near a walkaway net worth, and b) upside potential is what excites me more than the trailing performance especially when I like the job enough to keep me motivated regardless. 

Mar 24, 2021 - 3:29pm

A couple is low balling it. 

Instagram: @dickthesellsider | Substack: dicktoad.substack.com

Mar 22, 2021 - 10:57pm

Awesome post man, great job! Suppose you are a PM/partner at a $5-10bn+ L/S HF (SM) that runs lean: tiger cubs, other creme de la creme funds that everyone wants to work for but are extremely difficult to get a seat at. In a blowout year like 2020, let's say the fund put up 25-30%+. Assuming you helped contribute to that performance, what would you expect to make in terms of comp? And how would that stack up against a weaker year, say 0-5%? Again, really great job with this post! 

Mar 23, 2021 - 8:02am

Well I feel like you're manufacturing a right-tail outcome so that I give you a right-tail answer (that you likely have in mind already). Not sure what that's really accomplishing? If you're in a top role at a top fund with top performance, you'll obviously make a killing. But, just to indulge you so you can hear me say it, in that sort of setup I've seen senior employees that are equity partners or clear performance contributors walk away with 8-figure paydays (and not necessarily at the lower bound). Just do the math on the carry pool I laid out earlier and make your own assumptions on % splits (though at a fund that scale and lean, the mgmt fee is likely also in excess of operating costs). 

Mar 23, 2021 - 9:29am

Curious as to how your compensation is structured. Is it individual performance based and so, do you get a discretionary amount based on what your higher ups think of your performance or do you have equity/carry in the fund so that it's tied to overall fund performance more than anything else?

Mar 23, 2021 - 9:48am

As mentioned in the original post, I'm unfortunately not going to go into much more detail on comp than already provided. What I'll say is that in risk-ownership roles in general, personal performance tends to be the biggest factor in comp and my case is no different in that regard. 

  • Associate 1 in IB-M&A
Mar 23, 2021 - 4:40pm

How do you decide when to exit your position - both winners and losers. Do you have a stop loss or do you sometimes hold on tight in hope that the thesis will still play out?

Mar 25, 2021 - 8:06am

To grossly oversimplify it, I tend to think about exiting the same way I think about initiating a position - in no particular order, the medium-term outlook, valuation / relative performance, quantifiable upside / downside to street #s or key debate points, and more near-term catalyst path are the inputs to sizing. My view (and the one I was trained on) is that ideas should always be competing for capital, and I exit an existing position if I'm wrong, something's played out, or there's a much better use of capital that can replace it. Barring liquidity issues, I generally don't like being in positions that I wouldn't re-underwrite today. 
 

Also, I think it's important at all times to understand whether your thesis has played out, is wrong, or has a *real* new leg. The first two are conducive to trimming / exiting a position, and the latter can often be defense for staying in or adding. What you want to avoid is thesis creep, where your original thesis plays out, and you stay in a position because it's worked well but are starting to stretch the rationale that can you can diligence. One exception is stellar management teams (if you're getting them at a discount) that create optionality and can pivot narratives because they can see around the bend much better than the investor community. That can often still be diligence-able though.

  • Analyst 1 in AM - Equities
Mar 24, 2021 - 10:44am

Thanks for this AMA. Fantastic info on the industry. Especially agree on the first principle/critical thinking more than financial wizardry that most would assume are necessary ingredients to do well.

Was wondering how you manage information flow and knowledge sharing within the firm? As a PM, are you inclined to let your analyst know the portfolio stats - e.g. sizing and allocation? Or do you think this is a distraction as you just want him to analyze single names and make a call on idiosyncratic risk/reward? 

Thanks for the sharing. 

Mar 25, 2021 - 8:12am

Just to be clear, I'm not at the level of seniority that you'd consider a PM or sector head. So, the question you posed isn't really a decision I dictate.
 

In my experience though, we always had full transparency to the portfolio across all risk-takers. The culture was more about always making sure everyone knew what was driving performance and what others were invested in (ie not a black box), but trusting that you'll act responsibly and not screen-watch all day.

There were a couple of different takes on this in one of the other HF forum threads recently: https://www.wallstreetoasis.com/forums/first-time-pm-now-what

  • Associate 2 in PE - LBOs
Mar 25, 2021 - 5:37pm

What does risk taking vs non risk taking entail? Is it a function of trading discretion or PNL associated with ideas?

incredible insights here - one of the all time posts on the site. Thanks for all the contributions 

  • Associate 2 in PE - LBOs
Mar 25, 2021 - 6:59pm

Thank you. Do you still need to convince a PM to put on an idea or can you do it directly without going through a investment writeup or process?

  • Summer Associate in IB - Gen
Mar 26, 2021 - 10:12am

Thanks for this - I'll be a Summer Analyst in FIG at a BB in the next couple of months so have been thinking a lot about career choices recently. Obviously I still need to actually get the offer before any of this really matters but I'm just curious about your experience in IB - were you 'top bucket'? Would you have been willing to endure IB longer if you felt like the HF role you got was not 'right' for you for whatever reason (e.g. fund not in alignment with your own personal investment philosophy, the fund wasn't SM, fund wasn't big enough, etc.)? Did you feel at all pigeonholed by your sector in IB during HF recruiting?

I'm also still sort of on the fence about the HF/PE debate - not because I think I'd like PE more, but because salary expectations seem a lot easier to forecast. I think I would really be energized and motivated by working at a HF, but I also sometimes wonder if I'll be good enough to really perform at a top level (and earn a top level performer salary) like I want to. PE just seems a lot more forgiving in the sense that you can 'hide' at least at junior levels. At the same time though, earning anything above 100k at this point in my life is really not something I ever considered to be atrainable, so I feel like even considering PE over HF for the reason that my salary would be more certain is kind of silly. Just curious about how you view the volatility in your own salary and how you think about it and also how you feel about your prospects at beating the market or your benchmark into perpetuity.

My last question is about optionality. Do you see yourself in HF for your entire career or at least the next 5-10 years? I feel like if I were to join a HF I wouldn't want it to be like IB or PE where I spend 2 years and then move on to the next thing - I see it as a long-term thing (obviously that's somewhat dependent on performance). If you aren't planning on staying in HF long term, what are you thinking of doing and also what are the common 'exit opportunities' from a fund like yours?

Mar 30, 2021 - 10:59am

Addressing each of the paragraphs in order:
1) Not trying to inflate myself, but yes, I was one of the top analysts in my class. I would say I wasn't necessarily the quickest, most responsive, or most professional though (which are often key inputs into determining how "good" an analyst is in IB), but I tended to take more interest in my work than others and tried to be more thoughtful (and made less mistakes). Not everyone appreciates that vs the former qualities, but I was lucky to work with people who did. And yes, I would have been fine staying in IB a bit longer for the right fund -- keep in mind that I also left before the 2yrs were over (lots of people who went straight to HFs did the same). HFs are leaner, less forgiving, and narrow your optionality, so it's a more important decision to diligence than IB or PE I feel. And no, I didn't feel pigeonholed by my sector -- if you work at one of the top IBs, that shouldn't be much of an issue. Not like you learn that much about your sector as an analyst as it is (or at least not in a way that most HFs care about)

2) I can't comment on PE from personal experience, but I posted a comment earlier in the thread that was comparing the two based on convos with friends. In general, the people I knew who went to a HF out of banking were pretty convicted in that decision, and those that went to a HF after PE needed the extra time to make that decision. In terms of comp volatility, it's something that I've accepted and understand is just the nature of the game. The HF industry is probably lower median comp than big-cap PE but will have a longer right tail. Depends on the shop, but from what I've observed there's less comp volatility at junior levels (just bc you don't own PnL and places often understand the other set of options you're benchmarking comp to) and several folks I know had a yr-1 all-in comp guarantee in their first HF role out of IB / PE. At my stage now, I've been fortunate in building decent savings so far and the prospect of down comp YoY doesn't really bother me. As a competitive person, it obviously bothers me if I underperform my expectations or past self, but I can't fault the comp # just being the output of performance. Just make sure that you don't let lifestyle creep too much after a good year. 

3) I see myself doing it for the near-to-medium-term. Couldn't say for certain in 5yrs though. Frankly I haven't thought too much about what I would (realistically) do instead. The burnout isn't debilitating so far, personal performance and comp has been good, I generally like the people I work with / for, and most importantly I'm still interested and engaged in the day-to-day, so I can't complain too much. I have passions outside of work but none that I would pursue as a career vs a hobby at this point. Always reserve the right to change my mind though!

  • Associate 2 in AM - Other
Mar 26, 2021 - 1:03pm

You mentioned :"One exception is stellar management teams (if you're getting them at a discount) that create optionality and can pivot narratives because they can see around the bend much better than the investor community. That can often still be diligence-able though."

Would you mind elaborating at a high level?

How much importance would you place on conducting primary research vs relying on secondary research?

Which do you think is more important: having proprietary sources of information (i.e scuttlebutt, building a network of industry contacts) VS using the same pieces of data that most other investors would have access to (i.e Gartner, expert networks) but applying a differentiated analytical framework?

Mar 30, 2021 - 10:10am

Addressing each of the questions:

1) The point I was trying to get across is that new legs to your thesis should be measurable as upside in your models (or at least attempt to be). I've found that's the best way to be disciplined about measuring incremental upside, especially after a position has "worked". The exception for me is if you have a good business with a great management team that can create its own optionality, or can pivot in a narrative-changing way that isn't immediately measurable or changes the business model. Meaning I don't know what they might do, but I have confidence they'll do something right (strategically or capital allocation). I'm willing to take a bet on management in those instances if they're not being awarded a proper premium on valuation -- but management will never be the only leg of a thesis for me. Some examples are big pivots (e.g. NFLX) or increasing TAM w/ new products and a captive audience (e.g. AAPL) that the investor base probably didn't fully understand before the fact.

2) Whichever it takes to answer the questions you have. I tend to focus more on primary research for grounding my views on business quality and secondary sources to track data points or sentiment / changes in narrative. So upfront work tends to primary, maintenance work tends to be a mix of primary and secondary. 

3) Tough to say as it'll always depend on the industry or company at hand and duration of view. It all comes down to what answers the question you're trying to solve, or what piece of information or KPI outcome settles a key debate in the stock. If you're sensitive to NT stock trends, you need to know what other investors are looking at especially if there are well tracked / distributed data sets since those will often drive NT moves. Availability of data, expert networks, etc are commoditized, but ability to make the most use out of them is not. I still think there's value to each by asking better questions or applying a more rigorous data analysis framework. You can also develop the different views from the same source depending on your duration. In terms of proprietary sources, the two that you mentioned you need to be careful of, especially at larger funds where compliance policies are tighter. At several funds you can't talk to industry contacts if it's not through a pre-approved expert network or post proper compliance onboarding. There are instances I've experienced where non-human proprietary data (e.g. a custom data set or tracking methodology) have been huge, especially in relatively simple single-product type companies where there's 1 KPI in heated debate. 

  • Associate 2 in AM - Other
Mar 31, 2021 - 1:14am

Wow, thanks for the insightful response, very much appreciated!

  • Intern in IB - Gen
Mar 28, 2021 - 6:25am

Just started in HF and one thing I'm always afraid of when pitching to my PM is when to determine that its good enough to be pitched vs time spent. So

1) when do you hit that stage of "ok there's still further research to my thesis, but I have spent XYZ time on this and there are other things to do and its solid enough to be put in front of PM"

2) when do you think the time spent on something is too long and you abandon an idea?

3) any general advice on how do you manage your time to outcome yield?

Mar 30, 2021 - 10:29am

1) I would refer back to the first comment I had in the thread on organizing your research process. So I think of a soft pitch as being an indicator to your PM of when something is worth spending time on (rather than it being all done and dusted) -- I'm assuming this is what you were referring to rather than having a done-and-dusted write-up for an investment committee type of set-up. I'll caveat by saying that depth of pitch will depend on fund culture and idea velocity. Generally I think an idea is ready for a soft pitch if you've isolated the key KPIs that drives upside / downside or is are key point of debate, have a differentiated hunch, and can back of the envelope show interesting risk reward. You don't have to have the answers immediately on catalysts, or specific hard evidence of why everyone is wrong on the KPI in debate, just that it's worth spending time on and others' assumptions didn't pass the sanity check. Usually that's a good moment to run it by them to start the dialogue and see if they have a gut reaction. There's no reward for running a science project on something that's unactionable and you don't want to be spinning your wheels. 

2) It's less about absolute time and more about whether the risk-reward, potential positions size, etc. justifies the amount of time you'll spend on it. Generally I ask myself about the 1) size potential, 2) measurability of thesis / outcome, 3) risk-reward potential (one input of which is differentiation) of any opportunity as the key factors for determining how much time I spend on something. If I can't be meaningfully sized in something for whatever reason (fund style bias, liquidity, etc), am not really differentiated in my view, and I can't properly measure or diligence the tenets of my thesis, then I move on. I've spent significant amounts of time on diligence-ing single positions that check all 3 of the factors I mentioned, so it's not so much about managing to absolute # of hours I spend on any one thing, but rather EV-optimizing your efforts.  

3) See above

Mar 30, 2021 - 6:34am

Any specific advice for those recruiting at junior analyst levels? Are the interview process (stock pitch, case study) similar to what is on WSO and M&I?

Thanks again for this Q&A. Found it to be very informative!

Mar 30, 2021 - 10:31am

Can't really comment on what's in the WSO / M&I guides. I would refer back to some of the earlier comments I posted in this thread about the general interview process / stages, how to think about approaching and organizing a stock pitch, and how to diligence fund health 

Apr 3, 2021 - 7:05pm

Thank you-this has been a great read. 

Looking at the spectrum of equity-based HFs based on portfolio construction and time horizon, you have the MMs on end (short-term, high turnover) and then folks like ValueAct (among others, not necessarily activist) on the other end. From your comments, I'm getting the impression that your fund is somewhere in the middle (although please correct me if wrong). How did you decide on this particular place in the spectrum and why do you think it is a superior approach to the other models out there? 

On the various comments you've made on differentiated views, could you elaborate more on some of them? What are some examples of 'custom datasets or tracking methodologies' (surveys and the like?)? For firms with low turnover/long time horizons, what do you think are the best ways to determine a differentiated view vs the market? Firms like Ruane Cuniff will do 50-75 industry calls, for example, but curious to hear your thoughts. 

Lastly, what are your thoughts on the role of humans vs AI in the industry? Which strategies, beyond just equity-focused ones, do you think are most immune to the phenomenon of AI replacing humans?

Apr 8, 2021 - 3:32pm

Addressing each of your paragraphs in order:

1) Unfortunately not going to comment much on my fund's style or mandate. What I would say is that, in my opinion, there's not really a "right" or superior form of investing or average holding period. There are people who do each well. It's more about making sure that you're a) working under someone who performs well in their specific style, b) to some degree you are personally someone who philosophically aligns with that style , and c) the LP capital at least matches duration of that style. It's possible to live in a world where we think Michael Platt and Warren Buffett each have successful investment models. My comments are specifically focused on duration of investment view btw -- I do think there are objectively superior types of return streams though (i.e. alpha vs beta / leverage). 

2) I won't get into specifics on unfollowed things I've used to get an edge from a tracking standpoint. But yes, surveys, Freedom of Information Act pulls, channel checks, industry consultants, etc are all things that HFs will use as primary research to develop an "edge". On your second question, I'm not sure there's a boilerplate "way" to determine your differentiation if you're a LT investor. Usually it'll show up in #s -- consensus or buyside peers or just massively under/overmodeling out year prospects vs your expectations. Maybe it's an S-curve type business that's being modeled linearly and you have a differentiated view on adoption rates vs consensus. I can't tell you a generic way to determine that, but deep understanding of the industry / trends or understanding similar businesses in different regions / timer periods where a similar thesis has played out are generally good places to start. Industry experts and historical case studies are a way of discovering that. 

3) I don't think it's an either / or as far as the industry being purely discretionary vs purely automated, and I don't think "AI" can just be used as a generic concept. There's plenty of AI use that improves insights for discretionary investors to connect the dots. One of the big HF managers w/ systematic strategies had a good interview on this - think it was Two Sigma, Citadel, or DE Shaw. So I think of breaking it down as tech that supplements vs tech that replaces. Plenty of exciting stuff in the former. Maybe someone way smarter than me at RenTech is working on the latter and I'll get disrupted without seeing it coming. In terms of immunity to automation, the common example is distressed credit -- less liquid product, lots of nuances in legal documents, plenty of instances where you'll have to rely on legal settlements to get paid. 

Apr 3, 2021 - 9:31pm

Wow, your AMA responses are great. People are lucky that you are so thoughtful in your responses. 

I don't think anybody has asked you about shorting. First, how much of your time is spent on longs vs. shorts. Second, and more importantly, how do you and your team approach shorting?  I guess a better way of asking the question would be...if a junior analyst joined your team tomorrow without much experience on the short side, what would you tell him to look for, what to avoid, where to look, etc. 

Apr 8, 2021 - 4:46pm

Appreciate the kind words, and everyone should be grateful of all your contributions as well. 

Good question. I think shorting is a good and differentiated skillset to develop and at least for me, makes me a better long investor (due to a more heavy emphasis on evidence-focused approach, and generally adding more balance to your views). I'd say I spend far more time on shorting than my average peer. Probably not that far off 50%. A couple of reasons for this - 1) I actually enjoy it and my short alpha is better than my long alpha (note: alpha % and not PnL % return), and 2) I have a higher velocity on shorts vs longs bc my avg holding period is longer for longs (I'm generally more catalyst focused on shorts), 3) nets exposure % is managed top down rather than bottoms up where I work, so shorts aren't purely opportunistic -- there's a constant "need" for a certain amount of them. 

In terms of criteria for shorts, there are some who have the philosophy of shorting only the 3 Fs -- fads, frauds and failures -- or basically terminal shorts w/ bad or unsustainable business models. My criteria is far more broad, but I am more focused on catalysts. I'm fine shorting half decent business models where expectations + valuation are out of whack or there's reason to believe they're overearning and that should reverse.  What I would remind a junior analyst is to always differentiate between good businesses and good investments (and the opposite). You can have good businesses be bad investments (i.e. good shorts) but the better the business quality, the greater burden of proof will be on you (hence the importance of differentiation and catalysts in those instances). Also, especially with shorting, you have to do your own work and tune out the noise since the industry runs long bias, and sellside ratings are always positively biased. 

In terms of what to look for, the 3 Fs mentioned above are always great, but I would encourage juniors to broaden their universe of short opportunities. For example, one of the things I like to look for are mathematical inconsistencies. Some of my favorite instances of shorts are when you have an industry where the expectations for each of the companies individually doesn't make sense for the estimate for the underlying end market e.g. public player(s) guidance is actually expected to contribute way over 100% of the expected growth for the underlying industry. Mathematically it doesn't add up if you don't have obvious share donors, but you'll find that sellside will often view guidance in a vacuum and model each company according to the LT plan that mgmt gives. Another example is the type of setup I was mentioning in the very first comment in this thread on building up investment theses -- instances when people conflate transient cyclical changes with structural changes and valuation paradigm "incorrectly" changes. Both of these types of examples could be happening to companies in good neighborhoods or industries, but can still be good shorts. What these examples can be summarized as are instances where you see material downside to the key KPIs to the business (or the narrative) while valuation leaves low margin for error. It doesn't always have to be on a differentiated view on direction btw -- maybe people are already negative on a secularly declining industry, but not negative enough and underestimate operating deleverage on sales declines. You'll sometimes see these called "value traps" (valuation optically looks "attractive" on NT #s, but the pace of LT degradation is underestimated and valuation is expensive on out year #s i.e. they're cheap on NT #s all the way down). 

The main thing I would say to avoid are valuation-based short theses absent a catalyst (outside of some extreme situations). Additionally, don't underprice optionality for good management teams running good businesses (I had a post in this thread earlier about what that means). And the last thing, depending on your holding time horizon, is being mindful of technical dynamics around short squeezes i.e. consensus shorts with really high SI% and low liquidity going into a positive catalyst window -- this goes into determining bad business vs bad investment (bc of a bad setup). 

Most people don't like to short because on avg, positive short alpha is still negative returns % in PnL terms because equity risk premiums are LT (+), and most of the industry is compensated on PnL terms. Chanos is arguably one of the greatest short sellers ever but barely makes $s in PnL terms in his short-only fund (might have since gone negative -- LT returns I last saw were from a few years ago). So why bother at all with time on shorts if even the best are going to make no $ from it? Answer is that Chanos historically made a stupid return in his other fund that is long a 2x levered index fund against his short book (so 100% net exposure on 300% gross, but short book basically contributing 0% and long book contributing 2x SPX). Point being that being a good short seller allows you to go more long (i.e. > 100% gross long) and run a bigger balance sheet with downside insurance. Always think about your ability to generate L/S spread. 

  • Managing Director in S&T - Other
Apr 8, 2021 - 9:44pm

Nailed out of the park brother. Multiple sr PMs in my career have said "short alpha is much harder to achieve than long alpha". Not a knock against the long-only dudes since their job is different and typically their time-horizon / benchmarks differ. But the way you explained so clearly why it is so hard to achieve and the power/ability to do other things. Then how you explained the reasoning behind the ideas...and one super key thing for the juniors out there he said "nets exposure % is managed top down rather than bottoms up where I work". A college junior should bookmark this thread truly.

OP, has given fair amount of recipe for how to succed and why not everyone needs to focus on the hot sector (tech right now).

Apr 10, 2021 - 1:40am

Filling a short book with only "absolute" shorts in a low net book is hard, and often a futile attempt. Need some relative shorts on their or else an inherent biased is present to the short side when evaluating businesses. Shorting fads and frauds only and filling the short book this way is dangerous because these type of shorts can easily go against you for extended periods of time.

Having relative shorts on good business but very stretched valuations safely brings down your net exposure at very attractive risk/rewards.

A balance of absolute and relative shorts is needed in my view.

  • Investment Analyst in HF - Event
Apr 12, 2021 - 1:15pm

I joined a HF out of college last year. Did lots of internships during college and quickly decided that HF was what I wanted to do. Luckily I found a good seat at a growing fund. AUM isn't great but at ~200m / >50m per IP including me it seemed a great opportunity at the time. While the fund is doing great (AUM growing steadily, fund posting great returns vs benchmark / other funds, PM focuses heavily on mentorship towards partner / PM type role, I'm performing the same tasks that the principal at the fund does), at times I wonder if I made the wrong choice not going down the traditional path of IB / PE and having more optionality because of a few reasons below but also because I don't really love what I do.. it just feels like a routine job to me.

I like my seat at the fund, but I also think that at this level being the junior most guy on the team, I might end up getting shafted with comp. I get a base on line with what 1st yr IB guys make but at some point I think I won't be seeing paydays like I would had I gone down the traditional path then moved onto a HF because of the fund size. My second concern, which ties to the first, is whether I would have the option to jump to a bigger ship down the line or if people would view joining a smaller fund vs IB out of college negatively. I'm not at a big 1-5b+ fund that recruiters would be aware of. I've always for some reason felt that IB / PE would open more doors and be a more stable path and that's why consider maybe switching to an IB role then do PE while I evaluate what I actually want to do; however, that also seems like I'd be wasting time in between in the sense that I want to start at ground 0 just to maybe come back where I am. All the guys at the previous places I interned at went down the traditional path.

Are my concerns valid or am I just overthinking at this point? Obviously I know that I'm a very junior guy and to think that I should get a good pay day might be naive, but that and the fact that I might not have better opportunities later on just sits in the back of my mind.

Apr 12, 2021 - 9:42pm

I'm not sure I understand the question? Trying to piece together what you're saying, I would have 2 pieces of advice.

1) Focus on what you can do to optimize the decisions you've already made rather than dwell on the decisions you didn't make. Unless you're planning on going to an IB role to re-recruit for HFs, just focus on getting the most out of your current role, especially if it sounds like you're under a good apprenticeship model. Even if you think you made the less optimal choice based on whatever criteria, at least build up a skill set or knowledge to show for it. Talent and performance creates its own optionality to an extent in this job.

2) You said you're not excited about your job. Is that because of the role itself, or because of the comp trajectory? Try and isolate the variables that make it not interesting to you. If it's the former, that's a more difficult problem to solve with a grass is greener approach at other HFs. Would encourage some introspection here on what you want out of your job rather than dwell on a roundabout way to get to a different place where you'd be equally unhappy 

  • Research Analyst in HF - Other
Apr 13, 2021 - 1:30am

Most hedge fund hires seem to either come from the banking analyst pool or PE associates - especially for SM funds. Given your experience at your fund, how would you say the prospects are for Post-MBA IBD associates to make the transition to hedge fund land? (Assuming top group etc., just that they are older and not IB analysts).

Secondly - and this is kind of random but just curious since SM funds tend to pride themselves on deep fundamental diligence vs. the MMs - Could you go to PE if you theoretically wanted to, or is that door pretty much closed.

Thirdly - on comp - as a risk-taking analyst - is your comp directly tied to the P&L of your positions, or is it still at the guy at the top's discretion (taking into account your P&L qualitatively)?

Apr 13, 2021 - 10:12pm

Not intending to single you out, but I don't understand what the purpose of these hypothetical mobility questions are a lot of the time. Its an evolution of the "rate my chances" type of posts you see on College Confidential when you're in high school to "rate my prospects" at XYZ bank on WSO once you're in college. As you probably come to realize in each of those scenarios, talent + some pedigree + preparation + hustle will open its own doors and trump precedent after a certain point. If I told you that you only had a 5% chance of making the IB Associate to HF Analyst jump, it should frankly have little bearing on your willingness to try if you fundamentally have a passion (and mindset) for the latter over the former. It shouldn't matter what conditional probability I assign to that move since that's not a reason alone to drive (or deter) a switch. I would instead focus on what it takes to be successful in a desired role, how that's different from your current role, and how you can optimize for that ahead of your next step. 
 

But, to address your questions more specifically in order:

1) Answered the same earlier in the thread somewhere. Would ctrl + f "MBA associate" to find it

2) I have seen the switch a few times before, mostly in cases where some level of industry expertise was built up. I'd say you do have some bias inherent in the pool of people in HFs though in terms of their draw to the industry - felt like for the people I know who went to a HF, it tended to be a higher conviction decision in deciding vs PE, or they already tried PE before. Hence the tendency to see more one-way flow of PE to HF
 

3) Not going to speak to my specific setup, but generally fair to say there's a material weighting for comp on personal performance in risk ownership roles

  • Research Analyst in HF - Other
Apr 29, 2021 - 9:28pm

Thank you for your responses! I agree that the probability of successfully making a move shouldn't deter you if that is what your goal is for sure. As a former post-MBA Associate who had a tough time making the jump (but eventually did it), it's helpful to see from your perspective in the seat the kinds of people that a make it for an interview and through the process for fund like yours (which generically seems to be in the top tier as far as equity funds go)!

Wishing you 4-7 more years of investing success at your fund, and then hopefully can launch your own fund! :)

Apr 14, 2021 - 2:32am

I'll echo everyone else and thank you for doing this - tons of helpful information throughout.

I'm curious about the hiring of junior analyst at SM L/S shops. When looking at these roles, how would you try to make an apples-to-apples comparison of someone with 2y of IB/ER experience vs someone straight out of undergrad with relevant internship experience? Would the only pros of the undergrad hire be more mold-ability? Why would a fund even consider hiring an undergrad when there are professionals who have 2y of training willing to work for similar (if not the same) comp?

Thanks!

Apr 14, 2021 - 8:20am

Can't really make a true apples-to-apples comparison bc the set of funds that hire directly out of undergrad are probably not representative of the norm in terms of their hiring criteria. If a fund hires from undergrad, they probably have different criteria weighting than a fund that only hires out of IB / PE. So while the traits that will make you successful in a role aren't limited to being developed with IB / ER experience, it doesn't mean that the gatekeepers are focused on exclusively those same traits. People like to hire from IB / PE because 1) they have somewhat greater assurance that you know how to model / won't mess up #s, and can work hard, 2) it can be high signal from a branding standpoint (look at all these Top IB + Top PE analysts we have!), and 3) it's what they did. 

The cases I've seen of hiring from undergrad are if the person is 1) exceptionally talented, 2) well connected, and/or 3) can pay them less in somewhat of a fixed churn model. 

  • Analyst 1 in IB-M&A
Apr 15, 2021 - 7:33pm

Thank you for doing this thread, it's been very informative. I'm in a similar background, in a top M&A group and looking to exit to a L/S fund. How do you evaluate smaller fund opportunities, whether it be new launches or funds that have grown but haven't yet exceeded the $1.0bn threshold? Something like in the $300mm-$1.0bn AUM range? My first thoughts are that it's risky, less branding on resume, it's hard to diligence small funds online, and there's a lot of them out there, but the upside could be the faster growth, leaner teams so better learning, and potential equity? How would think about a smaller fund as a first job out of banking from a top group?

Apr 19, 2021 - 1:05pm

It's really going to depend on the pedigree and track record of the founder, as well as what the historical pace of AUM growth has been. For newer funds, diligencing the founder and their reputation / track record are the most important things you can do. For funds that have been around a while and are small bc they never scaled, it's equally important to ask why (and if that's expected to change). Opportunity at a $500mm launch w/ a rockstar spinning out of one of the bigger shops =/= opportunity at an unknown $500mm fund that's stayed at stagnant AUM for an extended period of time, especially if the former can scale materially. The one exception is AUM intentionally stagnant at lower levels if scaling doesn't align w/ the investment strategy (e.g. illiquids, small caps, etc -- basically something that has to generate respectable alpha). Now of course there'll always be the hidden gem outliers of people who started small, relatively unknown, and scaled over time w/ big upside for the early employees, but that's hardly the norm these days. Lots of threads on Twitter from some of the well known finance accounts about the difficulty of being an emerging managers that I would encourage you to search for. 

Learning experience is a tricky one bc that doesn't necessarily inversely correlate to size of fund, especially if the PM / founder is spread very thin w/ administrative duties. There are varying degrees of how institutionalized small funds are, and a lot of that is dependent on the realistic path to scale (which will often be a function of founder pedigree / track record). Point being, I don't think learning experience is necessarily dependent on fund size / how lean the team is, but optionality will often be dependent on fund / founder pedigree. 

In terms of thinking about smaller funds from a top group, I'd point you back to one of my earlier responses in the thread to a similar question. 

flaco

I would agree with this. You're typically losing optionality with each step in your career in this industry. If you're at a point of high optionality (e.g. top IB), you generally don't want to jump to a role with minimal optionality ($100mm HF) without a personal track record, unless you have extreme conviction in the quality of the PM and trajectory of the firm. The probability of failure is much higher at smaller firms given the fixed costs of running a fund -- and being in the position of failing at an unknown fund / with an unknown PM can be detrimental early on. Granted, this is all dependent on what the other options you have are. 

  • Analyst 1 in S&T - Other
Apr 19, 2021 - 7:18pm

Great AMA, thank you for doing this. 

A few questions:
1. What do you do with your money? How do you save it - investing? Any compliance issues?
2. Any tax tips?
 

Bonus (feel free to ignore): Most expensive purchases?

Asking from the perspective of someone who recently joined a similar industry with a relatively high future expected income.

Apr 21, 2021 - 8:00pm

1) In terms of the portion of wealth set aside for return generating purposes, the majority is in liquid investments. Also have a decent amount invested in the fund at work (though less than in my PA). Started doing some private / illiquid investments as well, though still a low % of overall net worth. In terms of non-return generating, I donate a relatively fixed % of annual income every year, and then also send some back to the parents. Regarding personal investment philosophy and compliance, I don't do much active trading in the PA. In the event I do single-name investing, it's usually for at least a 1yr hold. My shop does impose reasonably strict personal trading policies. I don't spend a lot of time on hunting for single ideas for the PA, since that time is usually better spent hunting at work (ultimately greater financial leverage on the outcome)

2) I'm not at the point where I have terribly complicated taxes, but they get marginally more complex every year. Nothing groundbreaking to offer for advice, but I'd just say a) be smart about tax leakage in your PA (be mindful of short term vs long term cap gains, properly tax loss harvest at the end of the year, etc), b) don't try and play games on questionable deductions that don't really move the needle (e.g. home office deduction on rent), c) when you're at the point where it's a low cost as % of income, get a good CPA, and d) move to Miami. 

3) No one thing I would highlight as excessive. The biggest increase on the cost side over time has been living in nicer places and paying more rent. It's the more gradual lifestyle changes that add up -- nicer clothes, nicer apartment, nicer gadgets, nicer dinners, nicer gym, bigger holiday gifts for family, etc. I'm no monk by any standard, but have tried to keep lifestyle expense at a fairly serviceable level (expenses have grown far less than income) just given a) the potential for comp volatility to the downside, and b) I didn't come from money so I don't have some high standard of lifestyle I'm trying to uphold. So I live well, but well within means. Don't think there's a perfectly right way to go about it, just depends on what matters to you (and whatever your personal obligations are) and what makes you happy while not completely mortgaging from your future self. Frankly, I don't think I'll ever feel richer than after my first IB bonus though. 

  • Analyst 1 in S&T - Other
May 11, 2021 - 10:41pm

How often do you read non-work related media?

Anything (books, papers, etc.) you've found particularly helpful?
 

May 12, 2021 - 12:57am

Good question. I'd say as I transitioned into a seat w/ more responsibility, the amount of non-work or non-business related media I consume has gradually declined. Probably one of my bigger regrets as I feel I've become less interesting of a person over time (at least in terms of variety of topics / current events I feel I can speak at depth on). Part of it is self imposed i.e. I find the job interesting and let it consume the information I take in w/out boredom, and part of it is just dictated by the evolution of role and needing to be more on top of the universe I cover. I'd say the last couple of months I've made a conscious effort to strike greater balance in reading non-work related things for leisure. 

In terms of books that were helpful for on-the-job, honestly I don't find much useful direct instruction to be drawn from a lot of the classic books that people mention here (e.g. telling me to buy net-nets is not really that helpful anymore). Most of the real learning related to the job, was done on-the-job. Those classic investing books I've found more useful for understanding the different kind of philosophies at play, rather than a practical how-to guide. I do like the interview style books though - the original Market Wizards, The Invisible Hands, etc. Some of the more abstract stuff I enjoyed as well such as Fooled by Randomness (though can only handle Taleb in small doses), and Against the Gods. In general, the investing books I valued the most were related to learning how to think rather than how to do. Over the last couple of years, I've found myself gravitating more towards books like biographies (not just investing related) or case studies, as I've found more life lessons to be drawn from there vs just investing advice. 

In terms of more academic type of work, I was always a fan of anything Damodaran and Mauboussin published. I've always found value in having a good academic understanding of finance / valuation even if that's not how you end up looking at the world day-to-day. And it opens up more interesting and thoughtful discussions on investing in general. 

May 14, 2021 - 10:15am

What is career progression like at your firm? Do you essentially have to stay in the position you are now forever (senior analyst/junior pm) or is there an opportunity to move up and become pm/partner? And if you're not comfortable talking about your own fund maybe you can provide an idea of what progression looks like in general at the single manager funds after your level?

  • Analyst 1 in S&T - Other
Jun 15, 2021 - 9:13pm

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  • Research Analyst in HF - Other
Jul 14, 2021 - 2:32am

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