Startup HF Decision
Hi WSO. I have a decision to make between joining a HF out of undergrad vs. RX at an EB bank. I have always been interested in the HF space and would be joining an HF after 2 years in RX anyways. The EB group places really well to top HFs in the distressed and L/S space (pretty much the top group on the street).
The startup fund will launch this summer with ~$800mm in capital. $500mm is already signed coming from big institutional investors. I worked with the manager previously in an internship and we have a great relationship. The group is spinning out of a major fund and past performance is excellent (2.9 Sharpe over past 8 years). The investment staff is currently 6 people (including me) with 2 co-managers, 3 junior PMs, and me as the first analyst.
First year comp at the fund is about 50% higher than street and the group seems to heavily promote from within (all junior PMs were former analysts). My concern is that if the fund performs poorly and investors pull capital, that I could be left high and dry without a BB/EB banking background in terms of future direction.
Thoughts on the choice?
Almost no downside with wider range to the upside if you go EB.
Feel free to PM if you're having some trouble. Tough to give totally objective advice not knowing more, but understand not wanting to reveal names
For a bit more clarification, the hedge fund is not in distressed/ LS equity but is a relative value shop. So it's a bit different skillset but aligns more with my academic experience.
You only live once, so why not live on the edge.
Seriously, depends on your risk averse level. I would hate to wonder 'what-if..' for the risky option.
Yeah seems like a pretty cool opportunity. Banking will always be there, and I bet most bankers would be pretty receptive to that story.
If it's anything like tech start-ups that go belly up all the time...you basically just find another job...
Probably similar situation
$800mm is serious funding for a start-up. Big institutional investors makes it even more impressive. If you know you want to end up in a HF anyway and they're willing to take the time to train you then I'd choose the HF over EB. Feel free to PM me - this sounds very similar to a team that spun out of my fund recently.
Second this. It sounds like you're getting real upside without dealing with the downsides of a small fund. I'd definitely take it. You might even be able to get a cut of the carry after a couple years.
What strategy?
If you are leaning to the hedge fund but are worried about risk of it being a bad fund/ not being a good opportunity, you should take it. That level of funding + institutional investor commitment is indicative that this is a serious operation. Institutions don't just commit hundreds of millions when they plan on pulling it next week if you don't return 100%. This is generally one of the big reasons many funds prefer institutional funding- while of course they care about performance, they generally have a more disciplined process for these things than your average HNWI. They also wouldn't be putting that much money in if the manager didn't already have a serious track record.
The advantage of the EB is that you will have far more transferability. The name will be known across the street, but beyond that, you won't yet be slotted as the "RV guy" and could still move around. If you go to the HF you are likely doing RV trading for life.
Would your answers be different based on the school I come from (H/W)?
Additionally, all capital has at least a 2yr lockup.
If you want to do distresssd then taking the EB RX gig might be better. If you want to do relval maybe take the HF. Unless I'm misunderstanding something these options lead you to two somewhat similar but still clearly distinct career paths.
I would agree here. I would also note that for this fund to get funding of $500mm at the start it must be extremely good. There are very few funds that start with anything close to that much unless they spin off from Point72 or Baupost AND are very high up in the org.
Not convinced Baupost and P72 is even on the same planet...
800m is nothing to sneeze at. If we take AUM size as proxy for stability, this is probably as good as it gets, especially in a "single manager / strategy" type shop.
Backing up the posters above saying HF. I am deeply deeply skeptical of startup funds, but $800M and serious institutional backing is a great opportunity. Sure, it could blow up quickly - but so could any hedge fund
I don't think it is as easy a decision as everyone here make it out to be. Obviously congrats on two amazing offers. I assume you have an offer at Laz/PJT/Evercore restructuring, in which case your options afterwards are top MM or megafund PE afterwards or straight to a top hedge fund (both distressed/credit and equity). The former keeps your doors open to top MBA programs as well as other top hedge funds, while the HF job out of undergrad basically keeps your doors open only to other public investment opportunities and there will still be top HFs that would prefer a traditional banking background if you are looking to lateral.
@wso_user" What makes you think HF out of undergrad would put him out of running for top Bschool. It would make it less likely he ends up at bschool period b/c he's much less likely to want to do it (due to having an established toehold in the high paying industry many bschool students dream of). However, if he wanted to he would have just as good (I argue better) of a case than if he'd gone to a top EB (adcoms will recognize that buyside > sellside in the prestige circus).
The HF doesn't really close the doors for other opportunities except perhaps restructuring/ more specialized funds. One must remember that PE/HFs are not recruiting for skill, they are recruiting for prestige/signalling. Kids coming out of your typical top banking group still know jack *** (and those who do generally learned it in their free time). If this happens to be a decent fundamental shop he will be leagues ahead of those guys should he need to compete with them on the job market (except, once again, for things like credit/ restructirng where I ASSUME but do not know that maybe there is some specialized skill involved he might miss out on)
You said "prestige/signalling" and "Kids coming out of your typical top banking group still know jack *** (and those who do generally learned it in their free time). "
Care to expand a bit more?
I generally know what you're saying but want to hear more. Just in case I fail my mission, I can justify it and feel good about myself.
Don't know what your mission is - my point is just that the tendency to hire from top groups, etc is largely about selection effect/ signalling (kids that got into those groups are probably pretty smart), not skills. This is why i always advocate going for the best regarded firm/group you can for your first gig (e.g. MBB > non-top bank even if you'd learn more at the bank)
Ok, the thing that this conversation is missing is exactly what the "relval" HF is. Is this market neutral, is it more performing credit or equity, etc? If it is any of these things and you want to end up at a distressed fund or top L/S fund (I am more familiar with former than latter), you keep that door wide open by going to the RX shop, but you potentially make it more difficult going straight to HF. This is not to say the HF is "less prestigious", because this doesn't fucking matter that much anyway. What matters is the skill set you develop and the obvious path to getting in the door at funds. If you are not developing a strong enough skill set, obviously your chances are worse off, but this seems like less of a concern. The bigger issue is the lack of natural recruiting step from the startup HF that you will 100% get from doing banking at a top RX group.
This is also assuming you 100% want to do HF, which honestly you do not know (even if you think you do). There's a chance you want PE or some hybrid, which again you could do coming from RX, but likely would be tougher from the HF.
As others have said, those in this thread who are so one sided seem to not know what they're talking about in my view. Happy to be proved wrong.
Such a solid answer.
Moot point now, but for the benefit of others I will point out the huge flaw in this thinking: You will never "100% know" if you want to do HF until you try it, and the same goes for PE. Doing banking will not give you this insight, though obviously you delay the decision for 2 years while you get more industry exposure.
The HF will better prepare you for future L/S jobs (in any type of fund) than banking. Obviously, it probably forecloses (or makes more difficult, you never really foreclose) the opportunity to work in distressed or anything more specialized w/out some detour (maybe b school).
Ppl here also consistently exaggerate the extent to which kids from top banking groups get to choose between Viking, top distressed fund, top long only, bla bla bla. The reality is recruiting is always tough and highly selective - most people end up going with the first strong offer they get (and usually only have a chance to get 1, maybe 2 due to offer expirys). In general, if you have an offer from a buyside shop you'd be excited to work at, giving it up as a bet that 2 years later you will have more/ better options is just silly.
Where our opinions differ is in two ways:
1) I don't think this unnamed HF obviously is going to be a better training ground for any HF he wants. Maybe it will, maybe it won't, but it almost certainly won't for distressed (based on the vague description), and for other areas (PE)
This isn't a clear decision based on the info provided, so pretending like it is just distorts reality
Thank you all for your perspectives. I ended up going with the fund, largely because I felt that the strategy and methods aligned with my way of thinking and approaching investing.
Would be interested to hear about your experience later on.
Congrats
Straying away from the usual WSO advice "You NEED to go Ivy --> IB --> PE --> MBA" and be as cookie cutter as possible.... here's some human to human advice.
You're young and clearly bright - there will be plenty of opportunities in the future. If you have the chance now (while you're young, no kids, no day care bills to pay, etc) then this is the OPTIMAL opportunity to take a chance on a "startup." That being with $800mm in investments, the company many be a 'start up' defined by the fact it's a new company, but not by the amount of capital invested. That's serious investors putting a serious big boy investment into the PMs/team/company's vision.
Yes, having experience at an EB i'm sure looks great - but being able to tell a story in an interview is significantly more important. "Well I always had interest in the HF space so I couldn't blink twice when this type of opportunity presented itself at the age of 22, especially considering I would be exposed to not only the inner workings of a HF, but ALSO how a company is built from the ground up."
Maybe I should go into counseling?
BroScience
If you want to be in banking and do restructuring then do the RX. The RX job also has exit ops into distressed debt but the best exit op is a job out of undergrad at a hedge fund. If the relative value trading style they do is something you want to do, I would do it in a heartbeat. A startup hedge fund like that is an incredible opportunity. The compensation is significantly higher than street, which is great, and it a good environment to advance (junior PM are former analysts, and being a startup hedge fund there is a lot of upside if it is successful. Given the track record and institutional backing, success is very likely. Institutional money is very good and is less fickle than individual money. The fact that so much institutional money is being put into it is evidence that they will be successful as shown by their track record. The ratio of pay per person is very good (2.67 million per head just from management fees, let alone performance). This is the kind of once in a lifetime opportunity you want to get in on early. Even if it doesn't work out, which is very unlikely, experience at a hedge fund is fantastic if you want to get into other hedge funds or buyside firms. This is the opportunity many people would do anything for. If you are serious about the hedge fund industry, I would accept this offer.
Just curious, why is this response getting monkey shit? I was trying to be helpful. If there are any specific issues with my post could you let me know?
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