Base rate. There are many more bankers than ER ppl, so I think it's more a function of a larger population. If you looked at the probability of a banking analyst jumping to a HF vs. an ER associate, I would expect the odds are slightly better for the ER associates. For the bankers who do make it over to HFs, I think this is largely in spite of their experience in banking, rather than because of it.

 
Best Response

No, talk to any HH (Dynamics is a good one) and you'll get the cold hard truth.

The primary (90%) reason is because HFs look for talent. HFs understand that IBD is simply the most generic source of top talent as it is a screening process for the job that most kids in finance have as their first choice. Whether it's true or not, the perception is that ER is basically second tier and has second tier talent.

Other HF posters have covered this before so do a search (i.e. "Just finished my first year at a top HF") thread.

If you have 1 spot, you're most likely going to go through a few dozen elite boutiques and GS/MS kids and know that they're decently competent rather than cast a wide net. Of course E.R. guys get HF jobs as well, but since OP is asking why the preference, it's due to perception of talent.

 
SanityCheck:

No, talk to any HH (Dynamics is a good one) and you'll get the cold hard truth.

The primary (90%) reason is because HFs look for talent. HFs understand that IBD is simply the most generic source of top talent as it is a screening process for the job that most kids in finance have as their first choice. Whether it's true or not, the perception is that ER is basically second tier and has second tier talent.

Other HF posters have covered this before so do a search (i.e. "Just finished my first year at a top HF") thread.

If you have 1 spot, you're most likely going to go through a few dozen elite boutiques and GS/MS kids and know that they're decently competent rather than cast a wide net. Of course E.R. guys get HF jobs as well, but since OP is asking why the preference, it's due to perception of talent.

This.

It's pretty much the entire premise of target schools vs non target schools too. You know they have been pre screened thoroughly enough to succeed. Could there be a better choice, yes, but it's safer to just go with pre screened success.

"It is better to have a friendship based on business, than a business based on friendship." - Rockefeller. "Live fast, die hard. Leave a good looking body." - Navy SEAL
 

In my opinion, this whole talk about ER being second tier is just pure BS. Secondly, ER associates are pre-screened as well. It's even harder to secure ER roles as there don't hire in bulk unlike IBD.

Ever heard of analysts being good but not smart enough so sent to IBD?

I know there is a large group of buy-side firms (mostly PE) looking to hire IBD analysts only and I see their point. Restructuring experience within advisory is helpful for distressed HY. But I also know another sect (mostly HF) that will target ER associates or MBA's. These are firms that tend to be very opportunistic and need really smart people who can think and act under pressure. People here don't really care about exceptional PPT presentation but just talented people who can work harder and are proactive.

From personal experience I know IBD analysts working for HF have this sad habit of saying, 'maybe'. Should we buy this? 'Maybe'. They clearly struggle at first and some even take a good 6 months or a year to adjust to being quick and having a view at the same time without being diplomatic.

In a pitch IBD guys working for HF come with these fancy points but there's tons of them for no reason. It's hard for them to pick the important ones and then pick the most important ones from that list and then to pick the top 3-4. ER associate will have all the stuff in his mind but when speaking with the PM he knows exactly what to say and mention the rest when asked for.

 

No one's trying to turn this into x vs y, which is unfortunately what WSO is prone to do. You should c+v your post to the hundreds of hedge funds who think that way. It is them that you have to convince, not the WSO crowd. For example, most top HF jobs are given to 3 banks, GS, MS and Blackstone. The fact that I went to a mid-tier BB and dislike that fact doesn't make it any less true.

 

You need to be a lot more specific. It’s naïve to say most top HF jobs are given to GS, MS or Blackstone. Seriously. I’m thinking you are referring more to PE. You need to stop thinking of hedge funds as only TCI and the likes. There are hundreds out there and many do well and don’t always have people from the firms you mentioned. For instance, the $10bn firm I worked at, my direct manager running $1bn never hired anyone from those firms. I’m pretty sure you haven’t heard the name of my firm because they are pretty reserved. We did have some sell-side ER guys on the desk but they got in because they were really clever. I loved research from UBS, BAML and JP and many smaller research boutiques. We’re more likely to hire those guys vs IBD.

I’m not trying to convince anybody; luckily for me HY corp credit research people I’ve met are not that fixated on having IBD background. They’re more interested in how I think about companies, have decent accounting knowledge, genuine interest and passion for the industry and the willingness to work hard.

Most L/S guys I’ve met doing ‘large cap’ equities have their own models but pretty basic; if you’re covering 30+ stocks in the books and many more on top of your head you don’t have the time to keep modelling each piece in detail – another reason why IBD modelling skills seem to be irrelevant here.

The reason I’m going on about this is because many here seem to think of ‘golden routes’ to hedge funds and in this context it being IBD and that there are only few selected top hedge funds and after that the world ends. Also, please, be specific and avoid huge generalisations. Like 7xEBITDA said, IBD seems better for x,y,z and ER for a,b,c and so on.

Having met some good PM's at the kind of top HF's you keep talking about, I know they are more likely to hire someone even from a mid-tier BB if they've know the person for a year or so, have discussed ideas and stayed in touch making a good impression (i.e. networked well)

 

It wouldn't make sense for me to be specific because that would be an anecdote and anyone with any background can get any job. You're right, it depends on the individual there, there are even journalists & lawyers at HFs.

I didn't mention modeling at all. I mentioned IBD in the context in that it's all about talent & perception, not about modeling.

I frankly don't even know what TCI is or does, I was thinking along the lines of a Baupost, York, Point72, SPO Partners, Maverick, etc. and the 1 person I know at each of those funds were from GS/MS/Blackstone. Doesn't mean you have to be from there, I'm just speaking generally and as an example. I'm not from those firms so I have no reason to prop them up. I'm just trying to answer the OP & lots of questions similar to this one which alludes to top HF recruiting and their preferences.

Anyways, not here to argue, best of luck to the OP.

 

Considering that most people who want to get into the buy-side in equities/fixed income get there out of undergrad at Fidelity or Goldman Sachs AM (or another fund), that means the equity research associates out of undergrad are essentially buy-side rejects and probably also students who didn't get any investment banking offers.

It's quite natural why bulge bracket investment banking analysts place well at hedge funds, given they are elite performers versus your average equity research associate who is a dumb f******* nutskull and a reject.

Finding any real talent in the equity research talent pool is like finding a needle in the haystack There I said it.

 
wikileaks:

Considering that most people who want to get into the buy-side in equities/fixed income get there out of undergrad at Fidelity or Goldman Sachs AM (or another fund), that means the equity research associates out of undergrad are essentially buy-side rejects and probably also students who didn't get any investment banking offers.

It's quite natural why bulge bracket investment banking analysts place well at hedge funds, given they are elite performers versus your average equity research associate who is a dumb f******* nutskull and a reject.

Finding any real talent in the equity research talent pool is like finding a needle in the haystack
There I said it.

you know it's not sarcastic Saturday yet, right?

 

From my impression, people that work in ER are more industry experts and spend a ton more time considering industry landscapes and drivers than cap structure and financing questions.

Which is also likely why product groups are more coveted in IB.

I think it all matters on what the fund is looking for. If it's a purely event driven modeling finance star, then probably IB. If it's someone who knows the ins-and-outs of an industry and its drivers, then likely ER.

People demand freedom of speech as a compensation for freedom of thought which they seldom use.
 

The guys crapping on ER have a point. This isn't the 90s anymore. Sell-side ER has been a second-rate division ever since Spitzer's crusade.

And while you may get a lot of industry contacts, sticking an overly optimistic price tag on a stock for a living is definitely not the same thing as research at a HF. The same applies for IB in some sense, but that's where the 'talent' factor comes in.

 

I work in "research", turned down banking offers......I'm obviously second rate because i didn't follow the prestige.

"After you work on Wall Street it’s a choice, would you rather work at McDonalds or on the sell-side? I would choose McDonalds over the sell-side.” - David Tepper
 
GoodBread:

Relax dude, I could care less about prestige. It's just a comment on the fact that research has been a bit of a black sheep at investment banks ever since the crackdown on analysts at the end of the tech bubble.

But the OP is asking about why HFs seem to like IBers better than ER guys. That's probably part of it.

I was joking dude, i don't give a shit about what WSO comes up with.
"After you work on Wall Street it’s a choice, would you rather work at McDonalds or on the sell-side? I would choose McDonalds over the sell-side.” - David Tepper
 

I have no doubt that after 2-3 years in ER, you will learn to model and learn to copy-paste press releases into reports. The funny thing is the work you do in sell-side is actually counter-productive to investing.

A lot of buy-siders HATE modelling, and a lot of them HATE "no-value add reports" which was done on the sell-side and those buy-siders who did banking, HATE sell side ER.

 
wikileaks:

I have no doubt that after 2-3 years in ER, you will learn to model and learn to copy-paste press releases into reports.
The funny thing is the work you do in sell-side is actually counter-productive to investing.

A lot of buy-siders HATE modelling, and a lot of them HATE "no-value add reports" which was done on the sell-side and those buy-siders who did banking, HATE sell side ER.

Just to clarify, I do not work in ER. I am not looking for advice - go talk to the undergrads.
"After you work on Wall Street it’s a choice, would you rather work at McDonalds or on the sell-side? I would choose McDonalds over the sell-side.” - David Tepper
 
wikileaks:

The funny thing is the work you do in sell-side is actually counter-productive to investing.

That's incorrect. I guess I know what you mean but making a blunt statement like that makes you look silly. Only spent a limited amount of time on the buy-side but we always went through every piece of research no matter how big or small from the sell-side. It's like they are almost a part of your team, indirectly. Example, you can't meet the company so next best thing is speak with someone who has, i.e. one of the sell-side guys. There are things which only sell-side guys are aware and that comes with experience. This business is also about relationships and parties understand each other over time - if I was on the sell-side I'm sure I'd know so much more about how a CFO thinks by meeting him a number of times 'in person' compared to a buy-side analyst who might see him once in a blue moon. This is a trivial example for most I guess but these intangible things matter in investing. I've highlighted tons of interesting points to my PM after reading sell-side research. We just had to be a lot smarter though - so never cared if it was buy, hold, sell, or any other recommendation. Final decision was ours when acting on a position.
 

Honestly, who cares which one is better for hedge funds? In the end it depends on the individual. If you're intellectually curious, actively build contacts on the buyside, and demonstrate actual critical thinking skills it really doesn't matter if you came from IB or ER.

Hedge funds are not interested in what a junior hire knows but rather his propensity to learn, accept criticism/learn from mistakes, and have high conviction in his ideas.

 

The initiation is probably the only semi-decent piece that is put out. Everything else is pretty much garbage, and regurgitated from the Q, K and SEC Filling

AVN Award Winner
 

The people who outright shit on ER are simply band-wagoners of the idea that's being spread around on WSO. The fact actually is:

1) You do much more exciting and direct work in SS ER vs. IBD (at least you're not making PowerPoint presentations 75% of the time) 2) The skill set has significantly greater overlap with what you would do on the BS (public) vs. IBD 3) Somebody pointed out modelling - it's actually the IBD guys that over-model everything largely due to the fact that they can (have private information) - not saying it's a bad career though, it's still great 4) This fictional distinction of one set of people being stupid and another set of people being brilliant is quite moronic - how can this be any decent gauge of one's ability? Most of the people from the SS end up on the BS, do they then instantly become great but prior to that point they are utterly useless?

Not to say that I care about what people on WSO say, but it's quite painful to see such misinformation floating around.

 

NO ONE is saying people in ER are stupid. But when Eliot Spitzer cracked down on securities analysts in the late 90s, early 2000s, equity research departments on Wall Street lost a lot of their luster. ER departments were the main feeder for L/S funds for a long time for obvious reasons but they have been passed up by IBD because of the sheer number of IBD analysts and, yes, to a degree, the slightly more competitive recruiting process for some top groups. Some Tiger Cubs are prestige-whores, nothing we can do about that. And it doesn't help that while the buyside reads plenty of sell-side research, it is almost never taken at face value.

This is not a 'WSO view.' I have zero vested interest in promoting the attractiveness of IBD over ER. This thread is looking like some sort of troll trap from hell.

 
GoodBread:

NO ONE is saying people in ER are stupid. But when Eliot Spitzer cracked down on securities analysts in the late 90s, early 2000s, equity research departments on Wall Street lost a lot of their luster. ER departments were the main feeder for L/S funds for a long time for obvious reasons but they have been passed up by IBD because of the sheer number of IBD analysts and, yes, to a degree, the slightly more competitive recruiting process for some top groups. Some Tiger Cubs are prestige-whores, nothing we can do about that. And it doesn't help that while the buyside reads plenty of sell-side research, it is almost never taken at face value.

This is not a 'WSO view.' I have zero vested interest in promoting the attractiveness of IBD over ER. This thread is looking like some sort of troll trap from hell.

You pointed out the flaw quite nicely - "some".

 
GoodBread:

NO ONE is saying people in ER are stupid. But when Eliot Spitzer cracked down on securities analysts in the late 90s, early 2000s, equity research departments on Wall Street lost a lot of their luster. ER departments were the main feeder for L/S funds for a long time for obvious reasons but they have been passed up by IBD because of the sheer number of IBD analysts and, yes, to a degree, the slightly more competitive recruiting process for some top groups. Some Tiger Cubs are prestige-whores, nothing we can do about that. And it doesn't help that while the buyside reads plenty of sell-side research, it is almost never taken at face value.

This is not a 'WSO view.' I have zero vested interest in promoting the attractiveness of IBD over ER. This thread is looking like some sort of troll trap from hell.

You pointed out the flaw quite nicely - "some".

 

Lol this Gcredit guy is hilarious.

"I'm not an expert but there have been funds that did very well by ranking analysts and trading accordingly. Many failed who copied this idea but the main once (think one of the first being Marshall Wace) was a success."

Hahaha

"But if after reading hundreds of sell-side research reports if I can find just one discrepancy I'd say it's worth it if I can act on it and make money. Remember, I was not just trying to be good. Wanted to be the best so went that extra mile, always."

So a ER division is very valuable. Makes sense. I also love the jargon. Be the best. Go the extra mile. Four on the floor. All bets are off. Impossible is nothing.

"But so many times I've gone through research from 15 analysts on the same name and tried to understand why they differ and it has helped massively"

Uhhh why would they differ? You'll usually see 14 buys and 1 hold out of those 15. The big issue that other posters have already stated is that the 14 buy recommendations all write the same thing in the same way so there's no need to talk to all 15, you just need to talk to two analysts (1 buy and 1 hold).

 

Has anyone actually had a sell side analyst send over his team's working models? THEN you'll understand why hedge funds don't recruit out of equity research.

My senior analyst actually punched the table because he was so frustrated at the assumptions being made in the models, which had no comments on how the hell the assumptions were arrived at.

This isn't to say that bankers are any better. Most bankers bullshit too much and fuck up the modeling test. The funds I've worked at tend to lateral from buyside shops.

Pennies from JcPenny
 
jcpenny:

Has anyone actually had a sell side analyst send over his team's working models? THEN you'll understand why hedge funds don't recruit out of equity research.

My senior analyst actually punched the table because he was so frustrated at the assumptions being made in the models, which had no comments on how the hell the assumptions were arrived at.

This isn't to say that bankers are any better. Most bankers bullshit too much and fuck up the modeling test. The funds I've worked at tend to lateral from buyside shops.

We don't explain every assumption because we don't have time to. Same as you don't have time to build models with the same level of detail that we do. I mean I could write a paragraph on every assumption I make in a model, but how many people are going to read all of those for every company? When the buyside guys have questions, they call us up and we talk through the assumptions we made together. We're more than willing to do that. I don't see how leaving out explanations for all of the assumptions we make in all of our models for every quarter would cause HF's not to recruit out of ER. That's a ridiculous claim to make.

 

The basic research process at fundamental shops involve slapping together a working model in the first 2 days based on historics and projections. Then the next 2-4 weeks is spent critically attacking assumptions. The dudes at certain value shops (the buffet type ones with equity research guys take price signals to justify value. I'm certain various BB ER desks changed their forward assumptions because a stock doubled in the last X months and now their previously frothy price target is below the trading price. They gotta justify that buy rating and maintain it.

Finally, there is always a conflict of interest at large ER desks in BB's. Sanford and the smaller ones are cool but sometimes a buy rating is introduced just so a BB client can unload an inventory.

Pennies from JcPenny
 

sellside models tend to be poorly built and poorly thought through, because sellside analysts tend to be really bad at finance (not just modeling, but all of finance).

That's why ER associates are not that valued -- their bosses tend to be really bad at finance, and so they're never taught how to think properly -- add that to the fact that ER candidates tend to be 2nd tier, and that's why they are not the prime ground for analyst recruiting.

That's not to say that ER seniors have no value; they're actually quite plugged into their industries, know a lot of the drama going on behind the scenes at companies, etc. They're also extremely valuable because by default their numbers and views tend to reflect the consensus on the buyside because they are continually talking to everybody on the buyside.

Of course, nothing is universal, and there are some sellsiders whom people really respect. That being said, over time, most sellsiders who really are good at stockpicking leave for obvious reasons.

At the end of the day, it's easy to give a really smart kid industry knowledge, but hard to train a dumb one how to think. That's why it's generally safer and easier to recruit out of IBD...but if you have the right credentials otherwise, ER is fine too.

fwiw, Steve Mandel was a sellside analyst for several years at goldman...

 
mbavsmfin:

If Bernstein's conclusions are so "wrong," then why do buyside firms pay a lot of money to get their black books? Bernstein's research is so well respected that their associates have their pick of buyside firms.

One poster above hit the nail on the head - buy-siders don't necessarily buy SS research for the conclusions. Although also don't believe those that say that all SS research conclusions are wrong. Everyone seems to grossly exaggerate.

 
mbavsmfin:

If Bernstein's conclusions are so "wrong," then why do buyside firms pay a lot of money to get their black books? Bernstein's research is so well respected that their associates have their pick of buyside firms.

One poster above hit the nail on the head - buy-siders don't necessarily buy SS research for the conclusions. Although also don't believe those that say that all SS research conclusions are wrong. Everyone seems to grossly exaggerate.

 

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Pennies from JcPenny
 

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