Transitioning from IB/ER to HF Series - Part 2: Where to Interview and Behaviorals

Welcome to Part 2 of the Transitioning from IB/ER to HF Series. See Part 1 here. This portion will focus on where to interview and behavioral questions.

You've been anxiously awaiting the beginning of the interview season. You've spent time with headhunters, prepared a long and short stock pitch, and now your first interview is coming up.

Where should I be interviewing?

From my experience, most people go into hedge fund recruiting with a predisposition toward whatever form of investing they know most about. This typically means either value or credit. You're making a big mistake if you go into the process with tunnel vision. Instead, I suggest you approach it with an open mind, as (1) you won't know for sure what style is best for you until you've been in the seat and (2) we have a natural tendency to feel more comfortable with things we know more about. You've never built a cash flow model to figure out whether a company can make payments on a note? That's ok, you'll learn.

If I won't know what I'll like until I'm on the job, how am I supposed to decide?

Meet with as many funds as you can early on. You'll get a rough sense of what you find interesting very quickly. Case studies help push some over the goal line – it puts you in the mindset of that type of investor, and you get to hear how their thought process compares to yours.

But didn't you say that I should be confident with headhunters? This makes me seem fickle and clueless.

As I mentioned before, headhunters will want to know your investing style and industry preferences. I think it's important to select a focus without closing doors to other options. Simply say that you prefer x and supply reasons, but are open to exploring y and z and supply reasons for those as well. You can pick out some key distinctions between credit and equity from my first post.

And what about industry?

If your goal is to become a PM, staying generalist as long as possible is suggested. However, many PMs started off with an industry specialty and branched out later. For example, the founder of my firm got his start in tech. Most roles these days require industry specialization, so I suggest you figure out what industries you're interested in and which ones you can't stand and communicate your preferences to headhunters.

Don't worry if you know nothing about an industry. Even if you spent two years of banking in an industry, we really don't think you know all that much. It's easy enough to pick up a space on the job. I knew nothing about consumer or tech going into my fund, but ended up concentrating in the two.

I have an interview with X fund, but can't find anything on them.

That's pretty normal. Your best bet is to (1) ask headhunters and friends for any feedback on the fund, taking any headhunter commentary with a grain of salt, as they will sell you on any client of theirs and (2) look through 13F filings, which will include long positions for any fund larger than $100m. Also, the EU's short position reporting regulations took effect on November 1, 2012. The regulations impact all investment managers engaged in selling short securities domiciled in the European Economic Area (EEA). Managers are now required to publicly disclose net short positions that exceed 0.5% of outstanding ordinary and preferred shares issued by any company that principally trades on an exchange in the European Union.

These two datasets will give you an idea of how the fund invests and could also be used to start a conversation when interviewing.

Onto the actual interview!

What behavioral questions should I expect and how should I answer them?

I'm not going to provide an exhaustive list of questions, as you've received many of them while you interviewing for your current job. Instead, I'll focus on the most important ones and the general answers I look for.

A concise, compelling story

Concise. Make sure it's concise. My job requires me to take massive amounts of information and consolidate it all into easily digestible thoughts. I could read a primer on the vitamin industry, and would need to boil all the information down into a short paragraph or less. For example: based on my research, I expect increasing consumption penetration and growth in key demographics to lead to mid-single digit growth in the category in the U.S. for the next 5-10 years.

Because my job requires me to be concise, I expect you to be able to convey your short employment history in a timely manner. If you don't, I'll get bored and you'll lose my attention.

Concise means 1-2 minutes, tops, unless you have a truly fascinating story. Most of you don't have to worry about that. The story I told during my hedge fund interviews was shorter than my banking one, even though I had significantly more substantial work to speak to.

What should you convey? A logical reason for sitting across from me. How did your experience lead you here and why? You need to show me that you're hungrier than an Ethiopian and you'll bust your ass working for me, you'll dig deep on companies, and you can barely contain your excitement when you think about investing. You need to demonstrate that you have a solid intellect, understand how to use logic, have great problem-solving skills, are not afraid to think differently, and love to compete & win. You need to have a solid modeling and accounting foundation. You need to convince me that you're really awesome without coming off as humble as Kanye. Finally, be likeable. It goes a long way.

A good reason or wanting to be an investor

Before I get into the above, I'll remind you of this yet again: make sure you tell them that you've been investing a PA for some time, even if you haven't. The only exception to this is if there's some outstanding reason preventing you from doing so, like having to pay down student loans. I'll still respect you after having heard that.

Back to the matter at hand: why do you want to be an investor? You love the markets, you're interested in learning about businesses, you're competition and love to win; you're intellectually curious and are constantly learning; and you're excited by the idea of being able to express a view on how companies, industries, and even the world will change over time, as well as debates that are at the forefront of the public's and investment community's minds (eg AAPL, HLF).

Why you?

If they ask this first, just rehash some of the points above, combining why you're a good candidate and why you want to be an investor.

What do you want to do with your life? Where do you see yourself in 5-10 years?

If you don't want to be an investor long-term, you're in the wrong place. You need to have a true passion for investing if you want to be a good hedge fund analyst. This isn't the kind of job that you just tolerate and do just enough to get by. There is no getting by. Either you're successful, or you're out on your ass looking for another job.

The only other answer I'd accept is saying that you want to be an investor, but would also consider starting a business of your own at some point in the future. Though, I don't see why you need to tell your interviewer that you'd want to leave them at some point.

They key here is to tell them that this isn't just another 2-year step – you're looking for a place where you can learn and build a career. It was true for me and it should be true for you.

There are some funds that have 2-year programs and in that case just pitch the idea of working hard for them to learn as much as possible before moving on to your next opportunity.

Would you go to business school?

I'd lean to a "no" on this. Most funds look down on B-school and investors think it's a waste of time and money. If you are successful at your job, there's no reason to take a 2-year hiatus. The only reason to go would be to leave the industry.

There are many more questions they could ask, but given how little standardization there is in the hedge fund industry, it'd be impossible for me to compile a complete list. These are the most important ones. If there are any others you're curious about, please just post below and I'll get around to answering your question(s).

Keep an eye out for the next installment, where I'll focus on technicals and the case study.

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Comments (24)

Best Response
Jan 14, 2013 - 2:00pm

MFFL:
Looks like a lot of quality information - thank you for providing. I noticed that Part 1 only says IB to HF, whereas this one is IB/ER to HF. What are some of the main differences in switching from ER to HF versus IB to HF?

On average, IB guys have an edge over ER because they have a more standardized experience and HFs know what to expect.

The issue with ER is that your experience varies significantly depending on the work style of your analyst. Furthermore, someone could be training you to look at stocks the "wrong way" (the average sell-side analyst isn't the best stock-picker). HFs know what to expect when they hire an IB analyst: he knows modeling & financial statement basics. With ER, on the other hand, it's hard to tell how involved a junior guy has been unless they actually interview him.

It's a little harder coming from ER, but personally I'd rather hire someone from ER than IB. At least in ER you're exposed to the markets constantly vs. IB where it seems like you live in a black box. I know most of my peers in IB didn't look at or care about the markets.

Jan 14, 2013 - 2:37pm

DMMSY,

Thanks for making these threads. I sent you a bit of a long-winded message two weeks ago on an BS opportunity I'm pursuing.

Let me publicly ask a related question so that others benefit from the answer:

Had an interview at a $10B fund with one of the PMs. First round was mostly fit, with the questions mostly mirroring what you outlined above. I'll find out in ~2 weeks if I'll be invited to the second round.

1) Second round would be with the CEO of the firm. What should I expect?

2) If I don't get a second round, what would be the best way to learn about additional opportunities? Are HH a viable alternative? I've already reached out to ~10 professional that I trust and expressed my interest in making the transition from SS ER to BS ER.

My background:

1) Big-10 undergrad with 3.7+ GPA
2) Started in SS ER at a top middle-market firm in Midwest
3) My analyst is young but well-respected by our clients
4) 2.5 years out of school
5) CFA level III candidate
6) Want to avoid MBA - preferring to work in the industry (I expressed this during interview)

Follow me on Twitter: https://twitter.com/_KarateBoy_
  • 3
Jan 14, 2013 - 3:38pm

KarateBoy:
DMMSY,

Thanks for making these threads. I sent you a bit of a long-winded message two weeks ago on an BS opportunity I'm pursuing.

Let me publicly ask a related question so that others benefit from the answer:

Had an interview at a $10B fund with one of the PMs. First round was mostly fit, with the questions mostly mirroring what you outlined above. I'll find out in ~2 weeks if I'll be invited to the second round.

1) Second round would be with the CEO of the firm. What should I expect?

2) If I don't get a second round, what would be the best way to learn about additional opportunities? Are HH a viable alternative? I've already reached out to ~10 professional that I trust and expressed my interest in making the transition from SS ER to BS ER.

My background:

1) Big-10 undergrad with 3.7+ GPA
2) Started in SS ER at a top middle-market firm in Midwest
3) My analyst is young but well-respected by our clients
4) 2.5 years out of school
5) CFA level III candidate
6) Want to avoid MBA - preferring to work in the industry (I expressed this during interview)

1) You should expect much of the same in terms of behavioral questions. I'll get into technical interviews during my next piece, but for now have a good long/short as well as an opinion on your industry and all the names you cover.

2) No reason not to explore every avenue. Talk to HHs, use LinkedIn, see what new funds are launching and reach out to any employees you can find, let your clients know that you're looking for an opportunity (perhaps ease into the conversation asking them how they like their job/firm and tell them you're considering switching and were wondering if they had any advice and/or knew of any opportunities), etc. Reaching out to 10 professionals is not all that much. Most analysts I know had 10-20 interviews before securing an offer.

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Jan 15, 2013 - 2:42pm

DontMakeMeShortYou:
KarateBoy:

1) Second round would be with the CEO of the firm. What should I expect?

1) You should expect much of the same in terms of behavioral questions. I'll get into technical interviews during my next piece, but for now have a good long/short as well as an opinion on your industry and all the names you cover.

I heard back sooner than I expected and my 2nd round is tomorrow.

Should I take a different approach with the CEO? I don't see why my answers would vary between the PM and him.

*Fingers crossed*

Follow me on Twitter: https://twitter.com/_KarateBoy_
  • 1
Jan 14, 2013 - 3:41pm

Thanks for the quick response.

Doesn't one run out of high-quality firm to apply to after 10-20? Especially in a strategy such as value?

Follow me on Twitter: https://twitter.com/_KarateBoy_
Jan 14, 2013 - 3:43pm

KarateBoy:
Thanks for the quick response.

Doesn't one run out of high-quality firm to apply to after 10-20? Especially in a strategy such as value?

No. There are far more funds out there than you'd ever be aware of, even after working in this industry for a few years.

Jan 15, 2013 - 12:34pm

valueisoverrated:
How did you end up specializing in consumer/tech? How long did it take for you to pitch your first idea solo?

After working on a few ideas in various spaces, I simply found those two to be the most interesting to me and expressed that to my seniors.

First solo pitch was 3 months in, but it was a special situations idea, so it was a simpler thesis hinging more around two specific catalysts than the underlying business itself. My first solo fundamental pitches came 4-5 months in.

Jan 16, 2013 - 10:54am

DontMakeMeShortYou -

Thanks for taking the time to do this. Could you elaborate a little bit more on how you got your story down to less than 2 minutes? I'm interviewing for ER jobs coming from another area of finance and having a little bit of a problem doing this. Thanks!

Jan 16, 2013 - 11:52am

Isuckatlife:
DontMakeMeShortYou -

Thanks for taking the time to do this. Could you elaborate a little bit more on how you got your story down to less than 2 minutes? I'm interviewing for ER jobs coming from another area of finance and having a little bit of a problem doing this. Thanks!

First of all, I basically speak in bullet points. I think if you looked at my writing on this site 2-3 years ago vs. today, you'd notice that I've become meaningfully more concise. My speaking--at least at work--has changed in a similar manner. Then there's the story and how you tell it. I like to go through mine quickly, and focus on three key aspects: (1) show an evolution (2) discuss key highlights and (3) provide examples.

I'm assuming you didn't come from banking, but I'll show you how you can consolidate two years of banking into a few sentences.

I've spent the last two years with ABC bank's M&A team, where I received top tier rankings both years. Knowing that I've wanted to go into a hedge fund after, I've used this experience to develop a strong modeling and accounting toolkit, while also learning as much as possible about x industry, what makes a good and bad business, and how to value a company. I've worked on three major deals and I think the most interesting one was X, where I routinely interacted with the CFO of a distressed company to build a division-level operating model and closely worked with the company as they turned their business around. It gave me an introductory understanding of what can go wrong in a business and what it takes to fix it. I've learned plenty during my time at ABC bank, but I'm ready to move on to what I'm really excited about, and that's why I'm sitting here.

This can be cut down further and it's a rough draft so it's not entirely smooth, but you get the gist of it. You communicate that you (1) are a top analyst (2) know your modeling and accounting (3) have been proactive in your experience to best position yourself to be successful in a hedge fund role (4) think like an investor (5) have had a lot of responsibility on the job (6) have a curiosity/desire to learn and (7) have an ability to see the big picture. There's probably more to it, but I try to make the story such that it shows my interviewer that I have the characteristics they're looking for in a candidate.

Notice that I don't talk about every deal or responsibility. It's very high level and keeps them interested because I'm only showing the highlight reel. Think about a great football game: you can enjoy all four quarters and there's so much that happens that's important, but when ESPN talks about it later, they can only assign a few minutes to the story, so they focus on the most important parts in order to keep the viewer interested. Your interview monologues should be thought of in the same vein.

Jan 16, 2013 - 2:00pm

What are your thoughts on focusing your story on the evolution of your interest in investing vs. how your current role is valuable to the firm.

I feel like the skills you learned, namely modeling, and exposure to management are pretty well-known.

From a high level, I speak about

1) Starting to manage my own PA in HS
2) Losing most of my money and chalking it up to "market tuition"
3) Majoring in finance & accounting to learn the basic skills
4) How I shifted my focus to fundamental research/value-investing
5) Further fine-tuned my skills at Firm X but looking for a new challenges
6) Working at a value-oriented fund has been a LT goal and that I think your firm may be a good fit

Follow me on Twitter: https://twitter.com/_KarateBoy_
  • 2
Jan 21, 2013 - 1:12am

KarateBoy:
What are your thoughts on focusing your story on the evolution of your interest in investing vs. how your current role is valuable to the firm.

I feel like the skills you learned, namely modeling, and exposure to management are pretty well-known.

From a high level, I speak about

1) Starting to manage my own PA in HS
2) Losing most of my money and chalking it up to "market tuition"
3) Majoring in finance & accounting to learn the basic skills
4) How I shifted my focus to fundamental research/value-investing
5) Further fine-tuned my skills at Firm X but looking for a new challenges
6) Working at a value-oriented fund has been a LT goal and that I think your firm may be a good fit

Why would I hire someone based on interest if they don't demonstrate the qualities necessary to execute on that desire to succeed? I never said not to talk about your interest--I in fact encouraged it. However, I'd cut the following:

2) Why admit failure based on sheer stupidity when the only lesson you learned was not to take risk when you have no idea what the fuck is going on? Furthermore, why talk about something negative right off the bat? It doesn't contribute much to the conversation. If they specifically ASK how you did, then that's a different story. Be honest, but focus most on meaningful learnings

3) Include it, but spin into it a better story. First, talk about managing your PA and intriguing you about becoming an investor, then say you chose finance and accounting to help prepare you for the job you needed to get to eventually get to an investing role (no one cares that you learned basic skills--that's implied), etc etc.

5) Further fine-tuned your skills? What skills? I didn't know jack squat coming out of college, and I had pretty meaningful internship and course-work under my belt. You can't "further fine-tune" something that doesn't exist. You went to X firm to learn how a business is run and valued, get a preliminary exposure to the markets, and develop the modeling, accounting, and management relations skills necessary to move on to a hedge fund role.

#6 is okay, but you need to spend far more time selling your ABILITIES to me than your interests and desires. I want to be impressed with what you've done with than why chose to go to X school to study Y major.

Jan 18, 2013 - 4:13pm

Hi DMMSY, great content! Very insightful, as the previous thread.

Is the place you're working at, or have you heard of anyone else, open to recruiting people outside IB/ER as buy-side analysts? I.e. someone previously working in Reinsurance, or LDI funds or a fund accountant?

Colourful TV, colourless Life.
Jan 21, 2013 - 12:59am

Bonus:
Hi DMMSY, great content! Very insightful, as the previous thread.

Is the place you're working at, or have you heard of anyone else, open to recruiting people outside IB/ER as buy-side analysts? I.e. someone previously working in Reinsurance, or LDI funds or a fund accountant?

Unfortunately, I don't know. I don't get much insight into the hiring process outside of my own firm.

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