the career tradeoff for a PM - commodity merchant vs hedge fund - depth vs bredth.

This is a little specific, so sorry in advance. But it probably can be applied generically to a lot of us.

I am a reasonably talented and mid-level/rising (~5yrs of successful experience at good places) trader/investor that focuses on the commodities and macro space confronted with two options. Do I go to a hedge fund or a trade house? From the long term career perspective, is it better to go deep at a great place that will give me lots of capital or go broad at one with tighter risk limits?

I would think the + on the HF side are:
* Your track record is viewed as portable.
* You have a broader mandate and can also do macro.
* Your payout in a good year is higher.
* You can ultimately lateral to other financial products like l/s equity if commodities becomes very boring (or even more boring).

The negatives are:
* There is very high netting risk.
* Risk limits are much more stringent.
* Capital is not permanent and can be flighty if the fund suffers a bad performance patch.
* HF industry is generically in decline (though can argue macro AUM has likely toughed).
* Spending on research/resources can be tight due to investor scrutiny of these line-items.

On the merchant side:
* Risk limits are long-term oriented and there is much less concern about month-to-month vol as long as thresholds are not breached.
* Capital allocated to your strategy can be ramped up very quickly based on performance.
* Much more robust set of research and analysis resources to tap into.
* Less (but still some) netting risk.
* Can participate in and originate some asset deals.
* "better" way of thinking about things. More patient and fundamentally oriented. Can take big positions and really swing if the conviction is there.

* Can ONLY trade a handful of commodities.
* Potentially stuck in commodities for the rest of career. Cannot broaden into a more well rounded trader.
* More limited exit opportunities if the space gets boring.

I'm having difficulty deciding between the two. Both are excellent opportunities. I guess the question I'm trying to ask myself is what is more important in the long-term career of a portfolio manager - patience of capital or product flexibility? Depth vs Breadth, from a career sustainability perspective. Which can you solve 2 years out, versus which is kindof permanent?

Anyone with relevant experience, I'd love some feedback on the decision you made, if analogous but in other asset classes, and whether in retrospect you feel it was the right one.

I do recognize that I'm lucky to have either one of these opportunities, and am thankful for everything that has happened to me thus far in my career. I know neither is a bad choice overall.

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Comments (7)

Aug 14, 2014 - 4:13pm

where do u people get this notion that the hedge fund industry is in decline? I certainly haven't seen it and I think the hiring environment is the best its ever been right now. Also AUM for the industry is growing massively. Are there some metrics that can show this decline I am hearing about?

In terms of the question its impossible to answer without specifics of both deals.

Aug 17, 2014 - 7:17am

@ mrmarket, I think your +/-ves are valid, so I'm just adding more bullets to think about:

1. How ready do you feel about yourself? Are you still willing to learn or broaden network at the expense of slightly less responsibility or VaR or you are at the stage to maximize your experience and relationship for higher revenues? Do you think you can generate solid pnl from 3-5 months onward without big drawdowns? If you get things unlucky initially, will HF let you run with your losses?

2. What's your trading style in commodities, and which house(HF or merchant) can better accommodate your needs? I've known a few really good fundamental traders who probably won't flourish that well at a HF, and some decent bank traders who don't need that wealth of information from trading houses - for them it's simply redundant to know this cargo moving here, that basis going up or down, while most prop traders in trading houses(even on paper desk) will have a vast interest in the non-futures side of the business and will incorporate them into their risk metrics.

3. Do you know people in those firms, someone senior or directly reporting to, who will back you up when you want them to?

To me (2) mattered the most followed by (3) and (1) so I chose the current trading house over others options I had (bank and a fund types). So far has been satisfied with my decision because ultimately one would want to leverage the skills and network he gained at the trading house to have a higher earning potential in a more mature stage of one's career. I might be running the risk of not becoming the youngest PM in my circle, or perhaps never, and I'm ok with that risk as long as I stay tuned in my current path and keep building experience. We seem to be around the same age or I'm perhaps slightly younger, so to each his own.

I doubt you can take part in the origination or asset, M&A part of the chain nowadays most big trading houses run a separate department for those functions within the team. Unless you are very high up (desk head level) or have specific physical background you have very little to contribute and most importantly you wouldn't have time to do both when intraday positions are massively moving and so is your pnl. If you want to make a career out of origination deals then that's another consideration.

Finally all depends a little on your specific industry(energy/metals/softs) and who you'll be working with. Even if you are in the prop side if you are joining a merchant type of business then your colleagues and clients mean your source of info and thus your strength in positioning if you play it well so I wouldn't completely discount the softer, culture part of the deal... who my management is and whether I will be getting along with my colleagues was some factor for me.

Aug 17, 2014 - 11:20am

To add.... I wouldn't attempt to answer your patience of capital vs. product flexibility question since there is so much variability within funds or trading houses, and whether you trade crude oil or natural gas, or wheat. But then I would know deep down there that if I have to be seriously concerned about tighter capital and risk and whether patience would wear out first before I can possibly turn things around, then that position is probably not for me, at least yet.

As for flexibility, yes having many doors open gives me certain comfort as I know whom to call when I need to or jump onto other products next to my desk(though I'm not sure HF often allows this either) It could be seen as offering some plan B, and I used to think this way a lot too, but ultimately if my core plan doesn't work out in the next few years I gotta admit that I will have been a little screwed, and my other options will have been faded in comparison anyway..... it's like, having flexibility might look today as if you are holding an at the money option, but your theta is quickly eating up your intrinsic value so by the time you want to exercise it the option might have left with very little worth. So by a little extension, I think it tends to work out better if people after 4-5+ years of work experience try to forge the best outcome in one field until they build good reps.

It's just me, experienced traders in this forum may differ in their views.

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