Mod (Andy) note: The much anticipated BlackHat interview is here (see part 1 here). Questions came from myself and members of writing and intern teams. BIG thanks to BH for his really in-depth/quality/quick responses. I promise all of you will have some great takeaways from this series.
If you don't know of BlackHat, he has been in the HF industry for 5 years (broke in straight from ugrad), has been one of the most active members on the site this year, and boasts a formidable 173:25 sb:ms ratio.
Here's how the four part series will go:
- Background / breaking into HF
- Working in HF, Money & Motivation
- Career advice for all you WSO Monkeys + how he advanced in his career
- General life tips
First question of Part 2: Who is best fit to work in HF?
(btw, try to keep your questions relevant to the current post as he may have likely already answered it in a previous or upcoming post.)
There’s so many different kinds of funds out there it’s impossible to speak to all of them, but as far as value funds go, the right person is somebody who take in a ton of information and truly learn about a business rather than jump in and out of a bunch of short-term ideas in plug-and-play fashion. I’d say the biggest qualities are autonomy, communication skills (including and particularly written), and a genuine thirst for knowledge. Most of the businesses I end up covering are ones I end up getting really interested in and learning everything about. I’ll call up academics, industry experts, and other people to try and get information that the companies won’t just hand out (else they may look bad) and learning all about the way the business works from these sources is not only what generates alpha, but what makes it so fun. Having an investigative personality and a high level of curiosity is a huge plus, since there’s usually a reason a stock is trading cheap and you have to play detective and find out if it’s legitimate or not. It’s not for everyone, but if you didn’t notice I absolutely love it.
What's a typical work day like for you?
Here’s a typical day without the morning workout, which would go down at 5am:
6:00am – Wake up, roll around and make loud noises to piss off fiancée
6:15am – Shower, get dressed and ready for work
6:45am – Catch up on news from overnight and if there’s any 7am earnings releases I’ll wait
around for those. Check WSO of course and basically dick around for a while
8:00am – Head to work, maybe grab food at a cart or wait until I get to the office
8:30am – Get to the office, check emails, read newspaper, get caught up on everything
9:30am – Watch the markets open, start doing research and pick up where I left off day before
12:15pm – Go get lunch, usually with co-workers, but usually bring food back to my desk
12:30pm – Possibly look into some phone calls I need to make to IR or some management
2:00pm – Start writing up a memo for my boss and other analysts that summarizes my research and upload it on the network we all share. Afterwards, keep doing research or maybe updating model for whatever company I learned new information about if needed.
4:00pm – Watch market close, wrap up research for the day and maybe host a quick daily debrief in my office with PM and a few senior analysts. We’ll discuss how our positions held up in the market and talk about what we’re working on currently.
5:00pm – Print out a 10-K and some quarterlies to take home for a new company I’m looking at
5:30pm – Head out if I don’t have motivation to keep working on whatever research I was on
6:00pm – Gym, then pick up food or groceries or whatever fiancée says we’re doing for dinner, then jack around on WSO or whatever to kill time until dinner.
7:30pm – Dinner, followed by maybe going out for a quick drink or something, sleep by 12am.
What do you do to relax or take your mind off work?
My favorite hobby is probably MMA and/or Brazilian Jiu Jitsu. It’s a very demanding sport physically, but also mentally. Sparring in Jiu Jitsu is really like a chess game, and there’s way more strategy and planning in MMA than people give it credit for. I love being able to work on certain finesse techniques and try to set people up in certain positions, so it actually compliments my job pretty well. And let’s not forget, when you want to blow off some steam there’s no better way to do it than by kicking someone/something in the head. Aside from that I also love a good glass of wine and am a big movie fanatic. I used to play a ton of poker online too but unfortunately we can’t do that anymore…
What keeps you motivated?
The only thing that really keeps me motivated is that every day in finance is a little different, so life doesn’t get too monotonous at work. And like I mentioned, I’m motivated to learn [somewhat] useless information, which you tend to gain a lot of when you’re becoming an expert in several different businesses and spending your entire day reading and talking to a variety of people associated with the business or industry.
How much does money motivate you?
I can’t lie, money probably provides about 60% of my motivation to ‘succeed.’ The only way I can do everything in life that I want is by making enough money to be financially stable. Right now I’d say I’m most motivated by money because I knew I wanted to propose to my girlfriend and I didn’t want to do that until I was confident I’d be well-off enough to provide for her and a potential family. As I get older I don’t think money will be as much of a motivator, but I can’t just pretend like the almighty dollar isn’t at least a partial influence in why I work as hard as I do. First and foremost, however, is the fact that I enjoy what I do and would happily do it for 10% of the pay.
How much does someone in a role like yours make per year (base + bonus)?
Oh boy, of course this is one of the questions. Okay, well I’ll explain how I get paid and then go into how it generally works for more junior guys I guess. First off I feel like I need to start by saying I’m pretty fortunate at 26 years old to be given a lot of responsibility, whereas there’s guys under me who are older but still get trusted with less and push less ideas into the portfolio. My compensation is such that I get paid a decent base salary but am entitled to a certain percentage of our incentive fees for the year, in my case a little less than 1%. So someone in an agreement like this at a $2b fund might expect to see $300k salary and, let’s say the fund returns 20% (so $80M in fees), if the payout is 75bps, $600k as a year-end bonus. The downside of this is obviously that you can get killed if your fund loses money, but the upside is clearly very attractive. Don’t expect this until you’ve been working for long enough to have the trust of your PM and some sort of track record of good ideas and the ability to invest on your own. I’m in my 3rd year as an analyst and I’d still expect that’s way earlier than most places to get a chunk of fees worked into your contract. Luckily we run lean and my PM is pretty meritocratic, so I got an early opportunity.
Let’s take someone else at the fund who might work more on a discretionary bonus compensation plan, though. At the same seniority, it might be a similar base, but the bonus would just be “anywhere from 0-200% of base salary.” Typically that will also to a certain extent be based on fund performance, but we definitely know whose picks are whose, so if you’ve been repeatedly picking winners or losers, your bonus will reflect that. For 1st and 2nd years, base salaries are going to be decently lower and the bonus range might only go up to 100% or 150%.
Big Money! $$$
got a tip?
Love this series thanks for posting
Thanks kids
Good read, but unfortunately now I have to wait for the next part to come out. Thanks for doing this BH.
+1, thanks for the write-up
Blackhat/WSO, thanks for part two. Blackhat, I got a question if you have time.
You mentioned earlier your fund is value oriented. How does your fund view other styles of investing? Whether it is growth oriented, technical, quant, etc. If frowned upon, how would it view a hybrid of say value oriented and one of the above methods? Thanks.
Everyone has their own style hence why I am trying to get information if suiting same investing style with fund is an absolute must or if one can use hybrid approach, one being the focused method of the fund. Thanks again and much appreciated.
We have certain portions of the fund that we'll kind of give the green light to in terms of breaking from the traditional 5+ year value target approach, and in our NYC office we do actually get away with making some short-term bets somewhat often. Most of those are based on our understanding of the company as we viewed it from a value perspective though, so I wouldn't say they stray away too much from our philosophy. It's not like we're doing quant-ish algorithmic trading on top of our value strategy or anything, but we do have a hybrid approach in that there's certain times when you know something is going to happen or you really understand a business better than the market and know you can make a good return on something event-driven or whatever, and our outlook on that is just like hey, why not do it, let's try it. So we do a decent amount of that stuff, which is why I like your description of it being a more hybrid approach in a lot of respects actually. Think Seth Klarman's event-driven strategies + Buffet's traditional long-term approach.
Thanks for the in-depth response.
Wow BlackHat -- you are a baller.
So you only make 2 Lamborghinis a year net of tax?
Thanks for the insightful responses BlackHat.
Just curious, have you ever invited any finance acquaintances to the MMA gym? I enjoy boxing myself (pretty much for the same reasons you've mentioned above) and I've always liked introducing friends to the sport.
I think there's a certain stigma attached to MMA so it's pretty tough to just casually bring someone along to spar or something, but I do box sometimes with people who I've met from work that also box. Mostly though, it's pretty tough to just bring someone who's never trained MMA and have a friendly sparring session with them. The sport isn't really built for that the way it is for tennis or squash or something. I wish I knew more people interested in it though, I'd love to have some work buddies that were at least well-versed enough to roll with me or something.
Ha, true. Most of the partners in my office play tennis, golf, and squash. They asked me what I did for fun and I mentioned brazilian jiu-jitsu and they were kind of like...what, really? It's too bad it often gets lumped with the Ed Hardy / Affliction "just bleed" crowd - it really is an intellectually deep discipline. Lots of really bright guys where I train - engineers, comp sci guys, some finance guys.
You're in NYC right? Ever make it Marcelo's?
You are 26 and making $300k base? Jesus Christ
Hey BlackHat, thanks for this really insightful and useful thread. My question is about social life. I've read/heard that one of the biggest positives of working as an analyst in IBD is the camaraderie you build with your fellow bankers. I have also heard that PE/HF do not provide many opportunities for friendships/camaraderie, due to their small size and age difference top to bottom. Can you comment on this? Do you have true friends from your HF that you go out with / have fun in a non-work related role? Who do you hang out with? People from college? Or do you have no time at all (engaged, after all)? Thanks in advance for your response.
I'd agree with that. There is that almost fraternity-style social aspect to IBD... it's like you all 'pledged' together and that's a camaraderie that you notice bankers will have that guys like me who were in pretty autonomous roles for their entire careers will not have. It may be a downside, depending on how you look at it, but being a pretty private person I've always been happy to work alone and not to have a "crew," so to speak, that I'm always hanging out with. I have friends at my fund that I go out with a lot - some are my age, some are 10 years older, but the age doesn't really matter. Most of my time is spent with my fiancee or work friends or even business acquaintances. When you spend as much time on DD as I do you end up making friends with some interesting people, especially management.
I'd say my most consistent group of "non-work friends" is either a group of guys from my gym that are a lot more similar to me than my work friends usually, and then a few buddies from college who I'll see on weekends every once in a while or whatever. I spend most of my time meeting new people though rather than having a base group of friends that I do everything with.
I have an extreme intolerance for the banality and boringess of the majority of people so the more alone time I have the better, so take that for what it is.
You're only 26?! Shit, I am so far behind in my career.
This is why I disapprove some ballers here to disclose how much they make. That will make so many little monkeys feel miserable about themselves while in fact they are still far better than most. Nice interview, anyway. I'm gonna remember this hat.
Keep in mind I haven't said this is MY comp... just typical of someone in that position :p
Hi BlackHat, thanks for doing this.
I had two questions -- What % of the industry would you say is value oriented? And is there any kind of research on performance of hedge funds based on their strategy? (I guess what I'm trying to ask if value oriented hedge funds perform better, on average, than other hedge funds)
It really depends, since the term "value fund" has been stretched so out of whack that literally anyone who invests on fundamental analysis will argue that they're value investors in at least some capacity. I have no idea how prevalent the quant crazy has gotten but I'd assume the number of HFs in that space is just as high if not higher than ones based strictly on fundamentals. That said, I think the majority of AUM is still with people who invest fundamentally, so basically looking outside of your RenTechs and your AQRs... etc.
The best way to describe it is they will do a little better in a bull market and we'll do a lot better in a bear market, and when things are sideways (and again, I'm biased) I think we outperform a quant fund most of the time.
pushing 1 million in comp at age 26...unreal. invest wisely and you can retire at 35.
Retiring implies you don't like what you're doing or are no longer capable of it. No plans on retiring until I'm dead.
I know, but theoretically you could. You are very lucky to be one of very few people that makes a ton of money AND actually enjoys their job.
Hi BlackHat, I appreciate you doing this. My question is about doing an optimal, non-traditional career path.
I'm getting my MSF this year at Wash U and was wondering what my chances are to join a value focused HF as an analyst without having to go through the two-year IB stint. I'm more than willing to do M&A for a BB, but the chances of me securing an analyst position from a semi-target in this harsh recruiting environment appear bleak. Would you consider equity research to be the best alternative? If so, what type of funds (or particular firms) would give me the best exposure to prepare and get myself noticed by a value oriented HF? Thanks.
If your goal is to get noticed by an HF, then I suggest sell-side ER. It's the most applicable skill set to the typical HF analyst day in the life, so that would be my recommendation. Certain buy-side shops will be more advantageous than just being on the sell-side at a BB or a respected research firm (Steifel, Cleveland, etc.) but doing pointless number crunching to make sure the Small Cap Growth fund at Scottie Pippen Capital Partners isn't going to be as advantageous as covering Consumer/Retail at Barclays. You'll know it when you see it.
I'm curious what your downside is on a year when the fund loses money. Zero? Can you go negative or do you share in your fund's high water mark? Do people at your shop get fired for having bad picks one year?
Also, could you share the rough trajectory of comp - what was your starting point like in order to get to $300 + profit share in 3 years at this fund?
I'm an experienced hire and this is my first year here, but the jump along the way (looking 3 years back to when I started at my first pure HF) in base salary was 135k, 150k, then left for this firm and have base 305k. The profit share came after a more senior analyst in our NY office left (basically before he even really started) and our entire team kind of got the same deal until they established who would be running the book in NY. It's a unique situation.
My downside risk in a crappy year is that yes, I don't get paid bonus until we get back above high water mark. If the fund doesn't earn variable revenue neither do I. And yes, making a few bad picks in a row can be enough to put you in the doghouse and although we have patience when it comes to letting a position mature, once we know it's gone rotten we will cut it loose and everyone pretty much knows who fucked up. This led to my boss finally cutting someone loose no more than a few weeks ago. Scary thought but the reward is high to make the risk more than worth it.
This has been really insightful, blackhat! Anyway, I have several questions; I'll group them in two sections.
Workflow: -When you started to research a new industry, did you just read the past 5 years worth of 10Ks for each company in that industry? Or was it more structured studying -Do you use an RSS feed/twitter/etc to keep up to date on rumors and news? -Do you follow forums that might provide a deeper insight into the industry? -How often to you model? (and did you gain that modeling knowledge on the job, in school, or on the side?)
Personal (Didn't get to ask in the preview interview): -What was your major(s)/concentration(s)? -What percent of your time in college did you spend reading about investing and teaching yourself the stuff? -What's your take on CFA/MBA for your situation?
Thank you
Workflow: -Depends on the company, but mostly only need the last 2-3 years unless a major change happened. -No -No, but going to trade conferences and speaking with experts is way more useful -Every idea gets a model. Nobody will usually see the model except me, it's for sanity purposes and making conservative estimates and modeling out things like repurchases. Learned it on the side just by seeing the way guys like Einhorn thought about financials (base/bull/bear cases, what's important, etc)
Personal: -Finance, Minor in Psychology -Probably about 25% of my free time, and free time was 50% of my normal time, so a couple hours a day. -Both useless
BH: Would you rather have 100 RIM options vesting in 3 years or a lollipop?
Thanks for the interviews, they are good reads.
Einhorn? Did you read "Fooling Some of the People All of the Time" or...?
sweet 8.30 - 6 300k buyside lifestyle job.
it's flame btw.
BH, wanted to pick your brain a bit on the valuation process. The operating model bit that you've discussed before is fine. I'm interested in the type of logic you/your fund uses to assess "value". In PE, we value companies based on FCF and the use of exit multiples based on projected EBITDA which is fairly visible. For example, once a company gets to $100MM in revenue, it can expect to get 1 - 2 turns in the multiple (from purchase)--considering everything else remains constant. My point is, valuation for private entities feels concrete (to me) as often times I will exit at somewhere close to that projected multiple. With public companies, I have absolutely no confidence in assigning an exit value and therefore a price range...
Want to hear your rationale for stock valuation (especially now since my tech stocks are getting slammed...)
It's nowhere near that scientific for us. We're not usually in the business of putting a price target per se on a business, but more geared towards assessing its 1) industry advantages, 2) competitive advantages, 3) "cheapness" relative to its advantages. When a company is in a high-growth industry with a defensible business model and is trading at 6x earnings when it's growing the bottom line at 20%, you know it's cheap. Obviously it's never that simple and answering those questions and being confident that growth will continue is a lot more complicated, but the point is we're not looking for "oh the stock is at $11 we think it's worth $20 let's buy it" situations... we're looking for a company that we can expect something double-digit growth out of consistently, with responsible management that will give capital back to the shareholder, etc. and we don't care about where the stock price will be, just where the business will be. The idea is that the stock price eventually reflects the fundamentals (see: Mr. Market, et al).
Short answer is there's no science to it, which I think turns some people off to the idea. We don't rely on a single multiple, forecast, projected return, etc. when evaluating a company. Then again we're not the only ones who do that.
Great post!
Awesome post! I have a career related question for you: I understand that you started in an Asset Management firm before transferring to HF. what AM firms are best if my ultimate goal is to work for an deep value fund? im also interested in emerging market and global macro strategies.
I'm currently looking at Invesco, Fortress, and GMO. any other AM firms you think i should apply to?
correct me if im wrong but I think AM is much more interesting and more relevant for HF compared to IB. also the market for IB is terrible....
thanks in advance. one day i wish to be like you.
Those are all fantastic firms, and any of those would be an amazing foundation for learning to invest. I think (read: hope) most people would agree that an ER-type background is more relevant/similar to the day-to-day duties of an HF research analyst than IB is, but most people that make the transition come from IB and HFs continue to recruit from IB, as they should. On average, starting in AM I think would make you a better HF analyst if you successfully transition, since you have experience developing an investment philosophy of your own earlier and get more exposure to how a buy-side firm might go about evaluating an investment idea.
Besides the firms you've listed, any of the large AM firms like Fidelity or Vanguard that have actively managed value funds will be a great first experience, as well as any of the name-brand funds with well-known managers like a Magellan, Yacktman, etc. Those funds are probably harder to get exposure to and I'm not sure what recruiting is like but they would be the best learning experiences IMO.
Keep in mind that while the IB market is terrible, I wouldn't imagine it's TOO much better on the AM side, so never limit your options unless you know for sure what you want to be doing 5 or 10 years from now.
I know working for a VC is buy-side, would this be a route to a HF or would you say it would be a long shot?
thanks a lot! recruiting is OKAY at my school. it is a target but not even close to Wharton. I will apply to IB and trading too but AM is my top choice. Are the firms you mentioned typically recruit directly from undergrad? They don't come to my school.
A good amount of them do I'd imagine. Some of the more boutique-ish places with very few employees are probably not going to be recruiting at a non or semi-target, but the larger ones should probably be at most of the semi-target type schools, so that should give you a chance. It only takes one offer to get a job, so make the best of what you got goin on thru recruiting, then network from there or apply directly and hope for the best
Great post
Hey, could you talk a bit more about how performance is evaluated given the longer-term nature of your fund? How do you tell on a year-by-year basis which are the winners or losers if your time horizon is 5+ years?
Sure. As you probably know, when you enter a position you typically have a good idea of what needs to stay the same for you to stay in that position. At a certain point (not too far in the future) you start to either see that idea go your way or not go your way. And you should be pretty confident before you recommend a position that it's gonna go your way. And when it starts turning on you and you say to hold on, you better be right, and like I said we won't forget when we take a hit because of your confidence.
Hey, excellent thread! And spot on comment on people who "don't get it". One question for you: there are quite a few public companies in Greece that are trading at 1 - 2 P/E and as low as 0.1 P/BV, or even lower than that*. I don't evaluate investment opportunities in these two multiples only (that'd be stupid) but these numbers are just too low to pass up. Additionally, some of these companies' revenues are generated almost entirely by foreign markets (exports) and thus have little been affected by the current crisis. Would an investment in one of these Greek stocks, with a horizon of 3-5 years, be the investment of the century? It's obviously a very contrarian strategy, but the philosophy of value investing is contrarian to a very large extent, IMO.
*one of the reasons is that many foreign investment funds which had invested in greek stocks (~50-60% of the market's cap belonged to foreign investors) are not allowed to invest in below investment grade countries. Also, domestic investors have liquidated many of their positions due to liquidity issues.
BH, I have always wanted to try to get a hedge fund internship to see firsthand what it is about. However, I have not had the IB or ER experience, including modeling or accounting classes.
I'm a trader now a year out of college, and make good money (more than IB with less hours) but still want to transition to a "standard" finance role, and do not think I'd enjoy the IB route.
Any chance someone like me can break into the industry, possibly through something like B school?
Thanks for the post!
Is your fiancee hot?
Does your firm invest in energy companies? Would an energy/O&G IBD analyst have any use at your type of fund?
WSJ or FT?
1) To me she is 2) Not usually. We don't want to be betting on the price of oil or anything like that so we don't do a lot of it, though energy services or equipment companies have been positions from time to time. We don't like to peg people for specific industries at the time of hire I'd imagine, since we're all generalists by definition, though after a while you do end up kind of settling into certain industries and everyone knows who has the most experience with each sector. 3) FT no doubt
Thanks for your reply earlier.
One more question, how is your compensation taxed? Does any of it get taxed as a capital gain? Care to throw out a number?
SBd you.
Salary is just federal income tax rate, but bonuses get taxed a little bit higher, and I have money invested with the fund but haven't ever taken it out and didn't do that at my last firm, so not sure exactly how that'll work, but I'll assume it's just federal income tax rate so that if anything I won't be disappointed. I'd imagine that should be long-term capital gains though, but not sure.
For what it's worth, I'm noticing more and more that my I'm netting only 50% of my gross which pretty much means all the work I do the first 6 hours of every day is for the government.
Taxes: you owe the same rate whether your income is bonus or salary, you usually just get WITHELD at a higher rate for a bonus. It all evens out with tax refunds or payments in April.
If you've been investing in your funds and they are LPs (which is likely the case), they are subject to pass through taxation, meaning if the fund generates long term capital gains , the gains are taxed at a maximum Federal rate of 15%. If it is either short term capital gains or interest, you would pay a maximum Federal rate of 35%. Capital treatment is preferable to interest income whether long or short, because losses are used to offset any gains, generally (exceptions do exist).
Disclaimer: i am neither a CPA nor tax lawyer and I do not give tax advice and all that stuff.
Totally agree with you on BJJ.
I come from a boxing/ judo/ karate background and was happily surprised by BJJ.
It's a very strategic sports and to make a small analogy with chess it is all about timing, strategy and how to use "free" spaces between you and your opponent.
Thx for sharing - I am very glad to read this kind of post.
"understanding a company's business better than other people is actually really important even for short-term trades. We ended up doing this with corn, for example. Spend a week talking to farmers and fertilizer dealers and you get a pretty good idea of what the crop is actually going to look like, while the typical trader or whoever is just gambling on whatever the USDA comes out and says in the morning, with no true idea what the hell is driving those numbers other than a gut feeling and a weather report."
why aren't all those farm boys retired and chilling on their yachts? you're weak shit ass flame.
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