Hedge Fund is Paradise

Investment banking was never your passion, you felt. After seeing your MD & VP shove blatantly dilutive M&A deals down client’s throats, you knew you’d have a greater purpose in your career than being an investment banker. In fact, you’ve always regarded yourself as a sophisticated investor, not some deal flow machine.

After all, your one big investment in Apple stock at age 16 now has handsomely quintupled the S&P 500’s returns since you’ve finished up your analyst stint. This track record alone has assured you that your resume has more upside than being a TMT Associate at Goldman.

You’re Heading to the Buyside.

While all of your peers at GS have made arrangements to switch over to private equity, you’ve decided against it. No, Private equity is just banking 2.0, and only cowards hide their true risk-adjusted underperformance behind years of illiquidity, homegrown return-smoothing, and solicited “Me-Too” fairness opinions from Big 4 plebs. In fact, you believe that all prospects who biblically refer to PE as “the promised land” are no different from a herd of sheep ready to get slaughtered by God Almighty himself.

Couldn’t be you. No, instead, you’ve spent your time courting with a top-tier hedge fund. You’re willing to take a chance on yourself that your investing acumen (Apple stock ‘Buy’ at 16) will be far more lucrative at a long-short fund than being chained to a leveraged buyout desk. You’re planned to start on the buyside next month.

Meanwhile, it’s been hard for you to keep your plans to yourself the last few weeks at Goldman. Instead of grinding out time-sensitive slide decks, you’ve decided to start watching HBO’s drama series called, “Billions”. After all, it would be smart for you to learn more about the hedge fund culture so you can hit the ground running when you start. As you continue to watch “Billions”, you become even more fixated, and perhaps obsessed, with one character in specific. His name is Bobby Axelrod, the series protagonist and CEO of Axe Capital. You often smile while watching him, surmising that you and him aren’t all that different in life.

Last Day in IB

Finally your last day at investment banking came. You realize that you’ve only felt more excited once before in your life — the day you updated your LinkedIn profile to “Incoming Investment Banking Summer Analyst at Goldman Sachs (“NYC”) your sophomore year in college after you got your official offer letter. Time flies by. However, today, now that you’re much older and mature, you’ve decided not to alert your LinkedIn network as pompously as you did when landing Goldman. No, instead this time, you decided to change your job title to “Analyst at NYC-based Hedge Fund”. That way, you don’t seem as obtrusive at surface level. You’d rather subtly prompt all of your friends and colleagues to ponder over exactly what NYC-based hedge fund you work at. If there’s anything you learned in banking, it’s that secrecy and confusion are the greatest forms of prestige.

This is the way.

First Three Months at the Fund

During the first 3 months at the fund, you are completely stoked. You feel delighted in the fact that you get to keep telling your friends and family that you work at one of the big brand-name hedge funds. Also you get a kick out of telling people that you’re an “ex-Goldman” employee (which clearly sounds even more prestigious than actually working at Goldman). You consider your Portfolio Manager (PM) to be a prophetic wizard, as everything he tells you is nothing less than God’s command. “I’ll be just like him someday”, you think, as you do a quick calculation in your head estimating how much he’d be worth assuming a 2-20 fee structure.

You spend most of your time analyzing data and reading sell-side research reports. Your PM seems to prefer the reports published by the analyst at Bank of America. But you can’t stop thinking that the only thing that sell-side analysts and second-class citizens have in common is that they both start with an “S” — “S” for “sissy”. You laugh at the sell-side since they don’t trade or invest on ideas, only write about them like some little girl’s diary. Couldn’t be you. You also learn what a Sharpe Ratio is and you find out that your PM has a 1.9 Sharpe this year, reconfirming your conviction that you are working for the industry’s next Steve Cohen.

This is the way.

Six Months In

Your PM starts to trust you and gives you a small book to trade. Using your top tier IB + AAPL ‘Buy’ knowledge, you’re able to make a little coin in the markets by longing FAANG stocks and shorting Utilities. You got this idea from watching Jim Cramer’s Mad Money show the other day. He went to Harvard, after all, so great minds think alike. You also learn that your PM’s Sharpe rose to 2.2 this quarter. You start laughing, thinking about how absurdly wrong your college professors were to teach the “Efficient Market Hypothesis”. That’s probably why they’ve been rambling on in academics while you’re about to triple their total comp as a first year analyst. They’re the only group of people that you pity more than the sell-side analysts.

This is the way.

One Year In

You learn that your bonus will only be 5% of base. What!? Even though your small book did well, you realized that your team ended the year flat. Apparently your PM’s Sharpe dropped to 0.59 at the end of last quarter off a few missed earnings and weaker-than-expected management guidance. You initially feel worried about this but your PM promises that it’s just a hiccup and that next year will be much better. Meanwhile, in order to gain self-approval over your decision to join a hedge fund, you look at LinkedIn to see what your peers are up to. It looks like most are still on the buyside. However, you find yourself spending more time looking at your other college friends, the ones who took jobs at Big 4 audit and consulting. You notice they got promoted to second-level. Initially you fear something dangerous but after a quick Glassdoor search at their new salaries, your trepidation swiftly subsided. You exhale and sleep soundly at night, confirming that your base salary alone is doubling their entire income.

This is the way.

1.2 Years In

The fund has been off to a great start for the new year. Your book is beating the market and you start salivating at the year-end when you clear that mid-six-figure bonus. This feeling overrides your subtle concerns over the fact that you’ve noticed quite a few people at the fund have recently disappeared. Even the other guy from your Goldman analyst class suddenly left. However, after seeing this, you soothingly explain to yourself, “They must’ve gotten poached by Bill Ackman. Good for them.” Also during this time, you’ve realized that your PM’s trading strategy is entirely based on the recommendations from BofA’s sell-side analyst. Suddenly, you no longer believe your PM is the market guru you initially thought. “I could do better than my PM”, you say as you realize your Sharpe clocked out at 2.1 last quarter. From now on, you look at your PM with utter contempt whenever he asks for your help. Your contemptuous demeanor elicits a questionable face from your PM, but only for a fleeting moment as he is too dialed in on beating the market to care for your disdain.

1.5 Years In

Things have taken a turn for the worst. Your portfolio was not positioned correctly for some high volatility, macro event and the pod is now hemorrhaging money. You see your PM constantly on the phone with BofA’s analyst, seeking comfort. Compliance meets with your group to scale back the risk and your fund is trying to stomach a drawdown. Apparently, the news of your fund’s situation leaked to a few of your PE friends. Trying to maintain the status that you’re more sophisticated and lucrative than them, you regurgitate the career-saving axiom, “Well, we’re long-short in the market so we’re supposed to underperform the S&P 500.” You fail to provide anymore color into what’s going on.

1.7 Years In

You arrive at the office and notice that your PM isn’t at his desk. Weird, since 2 of your holdings are supposed to report earnings today. During lunch, HR notifies you that your PM has been let go and they are trying to find another seat for you at the fund. Immediately, you start thinking this fund is doomed to blow up. You begin reaching out to as many other funds as you can to see if you can get a role there.

1.8 Years In

You were able to land a promotion at another fund. You meteorically change your LinkedIn title to “Senior Analyst at Greenwich-Based Hedge Fund”, making sure you switched on “alert my network of new job change”. You’re excited that you now have a junior that works under you and believe all of the bad things are in the past. The junior seems to admire your investing acumen. This is the way.

2.2 Years In

You’ve been able to maintain a Sharpe of 1.3 the last quarter. Most of your success has been around shorting the utilities stocks. However, one day, WSJ reported that Carl Icahn showed interest in taking a minority stake in FirstEnergy (FE), your biggest short position. For the first time all year, this Ohio-based electricity stock actually moves more than 10 basis points and shoots up 15% within 15 seconds from the Icahn news. That same day, Home Depot missed earnings (even though your favorite UBS analyst was bullish) and Elon Musk tweeted that Tesla’s stock was too high in his opinion. Suddenly, your book is down 25% and Sharpe bleeds to a 0.7.

2.4 Years In

You are jobless and start to think, it wouldn’t be so bad working on the sell-side. They have better job stability and you’d love to cover your sector. However, it appears all of the sell-side is already aware of your career downfall and would prefer candidates with better resumes. “Who needs Wall Street?”, you proclaim in disgust, “I’m done with high finance. The markets are efficient anyways.” You begin reading Eugene Fama and reach out to your college professors frequently, asking them about any assistant teaching opportunities in the finance department.

This is the way.