Hedge fund interview questions typically are trying to uncover how you think as an investor. One of the best ways to demonstrate your knowledge is to highlight that you look for investments that offer the greatest odds of success - investments with an asymmetric risk profile. This strategy was invented by Graham and Dodd and made famous by none other than Warren . Often, without even thinking we employ this strategy in our every day lives. We are constantly making decisions that minimize risk and maximize our probability of success. Choices related to education are great examples of seeking an asymmetric risk profile.
Having had the good fortune to take the unusual path of corporate strategy to a hedge fund and the opportunity to sit on both sides of the interview table at both my corporate job and my current fund at such a young age I feel that I have a rather unique perspective on the interview process and what makes a candidate successful.
My experiences have led me to believe that the most successful candidates in interviews for any industry or position actively seek to create an asymmetric risk profile for themselves. While many of the specific points I will make are going to be geared towards interviews in theindustry they are easily applied to general interviewing.
The All Risk - No Reward Questions
Tell me about yourself? Walk me through your resume?
Your answer to this question should flow nicely, but not sound rehearsed. I have had people tell me a proper answer lasts no longer than forty-five seconds and others tell me no shorter than three minutes and preferably five whole minutes. Personally, I try to keep my answer around one minute in order to further minimize my risk. Your story should lead the interviewer to think that based on your previous experiences it is logical for you to apply for that position and him/her to be interviewing you for the position.
Specifically, for a HF interview you want the interviewer to know you have the ability to break down and evaluate businesses, know your way around financial statements and have the reasonable assumption that you can handle the pressure of putting large sums of money behind your ideas.
Why investment management? Why Hedge funds?
I cannot overstate the importance of your answer to this question. The interviewer, ideally, should not have a doubt that you want to be in investment management for the long haul. You should come across as mature, steadfast in your decision and appear as though you have thoroughly researched all your options and come to the decision that IM is for you.
The answer to this question is very personal and if you can't come up with a sufficient answer pretty easily than, honestly, this job is probably not for you. I will say, however, that this is a great opportunity to let your interviewer know that your personality lends itself favorably to being successful in the capital markets. Humble people who are competitive, inquisitive/perpetually seeking to learn, and intellectually honest often do well in this business.
It is important that you are able to answer any technical questions you are asked well. In my experience, the level/amount of technical questions you are asked is directly correlated with what you project on your resume. Obviously, this is used as a BS detector in many situations. As a hypothetical example-- if you say on your resume that you can build anwith both eyes closed and one hand tied behind your back be prepared to be asked to do it during an interview.
Because the amount of technical questions can vary wildly by fund and because they have already been discussed quite a bit on the site I'm not going to list many actual technical questions. However, there is one question that you will almost certainly get that I feel needs to be discussed:
If you could only be provided on piece of information (read: metric) about a company before making an investment-decision what would it be?
The answer to this question at my fund, and consequently any other fundamental L/S fund I am aware of is Return on Invested Capital [ROIC]. We will also accept Normalized Free Cash Flow Yield.
ROIC is the return a company earns on each dollar invested in the business. Therefore, obviously, the greater ROIC is the better. ROIC is used as a quantitative measure of competitive advantage and, as such, if you are going to make an investment decision based on a single factor it would serve you well to choose the business with the greatest competitive advantage.
I call these questions the "All risk - No Reward Questions" because, simply put, answering them well will not earn you an offer, but answering them poorly can very well get you dinged quickly. Therefore, it is important that you prepare judiciously for these types of questions, but do not expect even amazing answers to earn you an offer.
High Risk - High Reward Questions
The stock pitch is always a staple of the HF interview and you should prepare accordingly. I come prepared with one long idea and one short idea as I think being able to demonstrate that you understand the nuances of shorting is a great way to differentiate yourself from other candidates. If you are interviewing for a specific sector/industry I suggest that you pick a business from that industry to pitch. Yes, your interviewer will likely know more about the industry and/or company, but as long you stick to stating this you know and not trying to BS your way through you should be more than OK. I use a pitch structure similar to what WhiteHat outlined here , but I will discuss it quickly:
1) Industry: Why is the industry attractive? [I suggest using a quantitative metric to show you did your homework here, such as, "ABC Industry has the ability to grow xyz% in the next 3-5 years. This is also a good place to highlight changing competitive dynamics, etc.]
2) Company: Why is the company attractive? [I suggest something like, "The business has sales of $30 in a $3000 industry representing a 3% market share despite being recognized as the product leader and having an exceptional management team."]
3) Catalyst: Why is the market wrong and how will the market realize the intrinsic value of the business? [This is the most important part of the pitch. I usually begin, "ABC is currently valued at 10x [insert multiple], but is being unfairly discounted because of the incompetency of the prior management team. Since the current management team has taken over [insert metric] has improved XYZ. As of right now the market has not recognized the improvement in XYZ or the overall business, but I expect that [insert catalyst] will demonstrate ABC's true value to the market within [insert time frame]."
4) Valuation: What is the intrinsic value of the business? [I suggest saying something like, "If my assumptions [discuss them here] about the effect of [insert catalyst] prove true than the market will realize ABC's intrinsic value of [insert valuation]." You can then speak about contingency valuations, etc.]
I try to keep my pitches as short as possible and as high-level as possible. This allows me to minimize the chances of putting my foot in my mouth and allows the interviewer the chance to ask more in-depth questions where he/she feels necessary. You do need to be prepared to answer in-depth questions about anything pertaining to your pitch - the industry, competitors, the company, etc.
If at some point you are asked a question about a company/industry that you do not know the answer to DO NOT try to BS an answer. It is acceptable to say, "I do not know, but I will find out and follow up with you." or "I am unsure, but my first thought would be [insert educated guess]." There is an old saying in the industry that, "You have to know what you don't know." Knowing what you don't know is almost a badge of honor and acting like you know everything is certainly not.
Knowing what you don't know is the key to doing well with the High Risk - High Reward Questions. Like I said in my networking post the key to being successful in breaking in to the buy side is demonstrating a higher level of thinking and being willing to admit what you don't know goes a long way to demonstrate higher level thinking to interviewers.
This post suddenly became incredibly long so I will move a couple topics to my next write-up. As always - questions, comments and dissenting opinions are not only welcomed, but are encouraged.