what's first year HF bonus at 1bn+ fund?
any insights?
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HF comp is not nearly as standardized as IB comp.
agreed
What is your bonus based on at a HF?
Actually, I'm still not exactly sure what new analyst does at a HF.. Does he get his own book and trade for the fund?
What are one's responsibilities at a HF (junior level), and how is your bonus determined?
Obviously every fund has a different compensation philosophy.
Because we usually only recruit fresh undergrads, bonus is tied to individual performance the first couple years and not the fund's performance. Consequently, your bonus is fairly stable, but will not go up in a great year. Once you are trained (and actually contributing to alpha), bonuses become tied to the fund's performance.
Speaking from the perspective of a multi-billion dollar fundamental event-driven value fund, you have the following responsibilities:
modelling- all sorts of models to determine how the balance sheet, income statement, cashflow statement, and ultimately the value of the company will react to buybacks, levering up the balance sheet, LBO, spin-offs, break-ups, liquidations, divestitures, acquisitions, etc. You will also spend a good chunk of time trying to "normalize" data to get a better understanding of the company and the economics of their particular industry.
Channel checks- being the most junior guy in the fund gives you the distinct honor of being in charge of channel checks and "kicking the tires" of the fund's investments. For those who don't know what a channel check is, it is basically seeing a company from the ground. If you happen to invest in a company that is in retail, a channel check would involve visiting A LOT of company stores across the country to gauge customer traffic, check inventory levels, talk to managers, see the condition of the store, etc. The work can be demanding, but you learn a lot about the operations of a company, what the competitive landscape looks like, and if the company is actually executing management's plan. These reports really bring a lot of credibility to the table when dealing with management and boards. On the bright side, you get to stay at really nice hotels and occasionally get to fly in the company jet.
Competitive analysis- While you are considered a generalist (and consequently get exposed to all sorts of companies and industries), you tend to be in charge of following certain industries that the fund is invested in and having your finger on the pulse of various key competitors. From compensation to margins, you are trying to understand what the competition is doing and why various metrics differ from our portfolio company.
Researching new prospective investments- You'll be assigned various companies to research and see if they're worth investing in. You'll present your findings to the director of research, and usually get grilled with various questions. You really do learn a lot during these meetings, and after a few grilling sessions you begin to understand what the PM is looking for and will become a better investor for it. We only invest in 1-2 companies a year so I see these sessions more as a learning experience and as an opportunity to pick the brain of very talented investors.
Talk to sell-side analysts- Not very fun, but you can occasionally learn a thing or two.
Do analytical/due diligence bitch work for senior people- You get to do all the projects the senior analysts do not have time (or don't want) to do. This can range from building the compensation and options vesting schedule of various CEO's to determining the fair market value of various leases and real estate holdings. I know...really sexy stuff lol. A lot of the work involves combing the footnotes of various proxies, 8k's, 10k's, and reading transcripts. While it is tedious work, you can find a pearl or two in the process. Sometimes you can back into data that a company considers proprietary by simply piecing together the hodge podge of information disclosed in filings and presentations.
At the end of the day, your work is a combination of finance and strategy consulting. Our fund's portfolio is much more concentrated than other funds so we take an owner's approach when looking at companies.
Thanks for the reply, malai44.
Honestly, the responsibilities for a junior analyst at a HF that you listed above sound really interesting. I actually thought work at a hedge fund would be pretty boring for a junior person, and thought it would be much like keeping the P&L, etc. But obviously, that was a misconception on my part.
Do you have any idea whether the responsibilities of a junior analyst will be similar at a smaller hedge fund? (think $500mm - $1bn)
Also, I know in the PE world, there are around 10 highly regarded firms. How many "large" hedge funds (multibillion) are out there, that would take junior analysts a couple of years out of undergrad?
Thanks!
Wow, great and detailed answer malai44. Sounds like the young guys at your fund get a great experience and the job demands a real mix of quantitative skills and business sense / aptitude. Any chance you'd expand upon how an event driven fund like yours works – assuming I’m not the only one a bit clueless. I don't know how much of the positions you take tend to be equity and how much debt, but I've never quite understood how being an event driven lender constituted a strategy. I mean once a fund throws a company into chapter 11 and converts their debt to take over ownership once, why would anyone do business with them again? Also what’s the event driven fund space like (if that’s the right term) – I would imagine there are a lot fewer event driven funds than long short equity funds floating around, because the barriers to entry are greater and the opportunities fewer.
It would be very interesting to get parallel answers about the responsibility and comp for intro positions from, say, someone working at a long only equity fund, a global macro fund, etc., as it seems that many funds have little in common besides their compensation structures.
Random final question to add to the brew – are there still pure risk arb funds? It seems like risk arb was very big at one time, from reading Den of Thieves, but I don’t think you hear about it as much anymore – is that because it’s less popular, because its one function of multistrategy funds, or what?
Just to give you a more realistic view of your responsitibilities, I'll share the unsexy version of your duties.
Channel check- You're freezing your ass off in the middle of Nebraska and it's the 10th straight day you've had to get up at 4am to stay on schedule. You haven't had a real meal since leaving for your trip.
Competitive analysis- Jim the senior analysts ask you how EBIT margins have changed to certain macro trends, but you were so busy screaming at your excel spreadsheet model that you forgot to update the data for the competitive peers in your portfolio. Consequently, you have to skip your lunch break to update the numbers.
Researching prospective new investments- You are assigned three consecutive mundane industries to research. After spending a couple hours going through historical data from 1992, the thought of quitting your job and opening a lemonade stand sounds like a good idea.
Talk to sell-side analyst- Nothing like listening to an analyst pull stuff out of their ass for 45 minutes.
Bitch work for senior analysts- They don't call it bitch work for nothing.
I had a stint at a small fund (small cap value investment philosophy) and responsibilities were somewhat similar, but it really depends on the philosophy/culture of the fund. I did a lot less modelling and a lot more old fashioned research (talking to CEO's, meeting competitors, talking to customers, visiting the company, etc.). I didn't have as intense knowledge of the companies we held since our portfolio consisted of 40+ companies versus the ultra concentrated portfolio at my current fund. I also had a lot less bitch work and a lot more time to focus on finding new companies.
If you're a couple years out, plenty of funds will take you if you have prior consulting/banking experience. Most funds will fill out positions by word of mouth and personal referrals.
We only focus on equities, but I do know a few things about distressed debt (those in distressed debt, feel free to chime in since my knowledge isn't that in depth). A good friend of mine is director of research at one of the big event driven distressed funds (I think they are 75%+ in debt), and I'll occasionally bounce questions off of him. Over time, I've compiled a random collection of distressed investing insights.
Event driven (or special situations) investing is basically buying companies undergoing a corporate event that has caused a mismatch between the market value of the company and its "real" fair value. You should read joel greenblatt's "you too can be a stock market genius" to get some idea on the various kinds of special situations. Corporate events can range from spin-offs, restructurings, recaps, huge buybacks, buyouts, etc. In essence, it is value investing with a catalyst. Why these corporate events occur can be for multiple reasons, but a lot of these catalysts are (lately) being caused by shareholder activism initiating the change.
Think about why a company would go to an event driven lender in the first place. Obviously the company is undergoing a distressed situation and has exhausted all of their traditional financing sources (banks, public markets, etc.). At this point they can either begin to prepare for bankruptcy protection (which could be years aways) or they can make a last ditch effort to save the company. Afterall, it could just be that the company is undergoing a severe cyclical change in the industry and they just need some liquidity to finance their operations and wait for the industry to bounce back. Or they might need liquidity to finance a huge turnaround that will benefit the company in the long-run. Event driven (or distressed) lenders make money by financing these situations with high interest loans that have senior claim on the assets of the company. Consequently, even if the company goes into bankruptcy, the distressed lender will usually end up with the majority of the equity in the reorganized company. Maybe it's glorified corporate loan sharking, but it makes money.
Funds usually only trigger default as a last resort. You're right, no one wants to work with an overly aggressive lender so you have to demonstrate some restraint or future dealflow will be affected. At the end of the day, there is a reason why companies are borrowing from hedge funds...it's usually their last source of financing.
As the strategy became more popular, spreads and profitability shrank.
Thanks for the great post, malai44.
I assume from what you have stated above that the next level after "analyst" would be "senior analyst". Is that a pre-mba position or something for more senior people?
What typically happens to HF analysts? Are they encouraged to learn about how the fund works and promoted through the ranks, or is it up to the analyst to find a fund that will take them on in a more senior role?
I guess my basic question is: What is the career path for an analyst in the HF industry?
Depends. Some positions are 2ish year programs, others are career track.
The typical hierarchy is:
Associate -> Analyst -> Senior Analyst -> PM
At my fund, associate would be considered pre-mba and analyst would be a post-mba/experienced position. But at the end of the day, all these positions are just titles.
Depends. Funds are a lot like family run businesses in that each place is a unique situation and the values/philosophy of the founder/founding members play a huge role in the way the fund is run.
You can be a career analyst or you can work your way up to PM and run your own fund. That's about it.
Would being a career analyst at a HF be like someone in IB that gets really good at executing deals, but not originating deals, and is kind of stuck at the VP/Director level?
Would the compensation for a senior analyst be similar to that of a VP for a BB IB?
Finally, you say "you can work your way up to PM and run your own fund". Does that mean each fund has only one PM, and everyone else is considered a senior analyst, or something similar?
Thanks for your time!
By the time you reach senior/career analyst level, it's a safe assumption that you're good enough to run your own fund. Depending on the fund, these analysts can have PM type responsibilties with the founder/senior hedge fund manager having veto rights on their investments. Career analysts are more like MD's who do not make Partner MD.
The reason people choose to be "career analysts" can be for all sorts of reasons ranging from location to culture to relationships. There are a lot of headaches that come with running your own fund, and some people are simply happy being well compensated at their current employer.
At the end of the day it's just a title. Comp will vary from fund to fund.
Each fund has a different organizational structure. Some funds have multiple PM's who are each allocated a certain amount of the firm's capital and run it like their own fund (sort of like a prop desk at a bank). Other funds don't have PM's and are run by senior analysts who make group decisions on investments.
Great posts man, thanks a lot. A have a friend who recently joined the DD desk at a large fund and what he's been telling me so far matches a lot of what you have said.
Probably the most informative thread I've seen on this website. Thanks for all the info.
http://www.hedgefundintelligence.com/eh/reports/2000_06/salaries.htm
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