Hedge fund internship advice / keys to success

Hi All, I hope you’re all having a nice summer so far. I just finished my first year of business school and recently started my summer internship at a long-short equity firm. I’m responsible for primarily doing analysis on and generating new investment ideas in healthcare and consumer sectors. I have prior experience to these sectors through my experience in sell-side equity research and private equity, but this is my first time working at a hedge fund. I’m sure my roles and responsibilities will evolve over time, but some of the things I’ve been responsible so far are the following: - Financial modeling - New investment idea generation – for the last few days, I’ve been tasksed with taking a “first stab” at evaluating a company, i.e. assessing investment merits, risks, opportunities, areas of further diligence, and first glance at valuation – typically 1-2 page single spaced memo and basic excel model – for 1-2 stocks per day - Sit in on meetings with sell-side analysts - Participate on calls with other buy-side investors Given the information above, I had a few questions for any other buy-siders that can give some advice: (1) What are the most important skills I should aspire to develop this summer, in order to improve my own investment acumen along with my positioning for full-time recruiting? (2) When you guys think about “successful MBA interns,” what are some skills they’ve accomplished during the summer or what are the things they have done for your firm? (3) The internship is fairly unstructured, so I have the opportunity to define some of my own goals and success benchmarks. At the same time, I started without necessarily having a concrete idea of what goals and objectives would be necessary for the team to think I had a productive summer. Thus, what would you say are some goals I should aspire to accomplish, and what is the type of training and feedback I need from my portfolio manager / senior analysts to ensure I am on track to accomplish these goals? (4) What are some key challenges that you’ve seen with people who started their careers on the sell-side and then transitioning to a hedge fund environment? Thanks in advance for everyone’s help.

Hi numi, glad to hear you’re doing well. As you know, every fund is different, but I’ll throw in my two cents. Basically your “goal” is to be a sponge. Learn everything you can abt your firm… how they do business, how it’s different from other firms similar to yours. Reasonable EQ L/S questions you should be able to answer down the line: … what is their investing universe? Why? … what is their investing horizon? Why? … what risks do they take? What risks don’t they take? How do they neutralize unwanted risk? Are they long-biased? Are they dollar neutral? Beta neutral? Sector/Factor neutral? Which factors? Why? … how methodical/repeatable is their investing process? How do ideas get generated/researched? How are ideas vetted? Do they have alpha or are they getting lucky? Are you sure? … what do you think of the way they do business? What do you like? What would you change? Why?

Identify your weaknesses as an analyst and keep trying to venture outside your comfort zone.

You’ve had quite some experience already - out of interest how old are you? Could be useful to know what age hedge funds still take interns until. I think the key thing to take away is the style of the the most successful managers with the longest track records. What do they consider to be the most important factors in putting on a trade. Are they value oriented? Momentum based? Use statistical factors? Trade on macro trends? Supply and demand factors? Do they need a catalyst? What screens do they take? Would you be able to employ the same strategy and generate sustainable returns for you and your investors? That’s where you want to be.

not to be a d!ck, but it sounds like your asking for the best way to make this pad your resume instead of just being straight forward with the guys and asking them what’s expected. you say you’ve been thinking of “what goals and objectives would be necessary for the team to think I had a productive summer.” my question is - why would they need to ‘think’ you’ve done a great job if you have? ask them what’s realistic and go from there.

Hi everyone, thanks for your thoughts. I have specific replies as follows: Justin88 – Regarding the questions you’ve posed, granted these are things that I can ask the PM – and perhaps I should. But at the same time, it also sounds like through my own experience, I should be able to figure out the answers to these questions myself, is that correct? Would you say that every fund has easily definable answers to each of those questions? Dude_CFA – I’m in my mid to late 20’s. I just started business school this year, and I think that the MBA was a good hub for me to make the transition from private equity to hedge funds. Granted, I think there are certain skills that are transferable at any point in time, but I do feel that the alumni network helped, as did the fact that the summer is basically a trial run for both me and the firm (hard to give someone a 3-month job when they’re already employed full-time). Anyway, I think your questions are good ones, especially the final one where you talk about whether the fund would be able to generate sustainable and repeatable returns. As a follow-up, is it more important to have a well-defined *process*, and then a strong long-term track record (knowing that returns will often vary from one year to the next)? And just curious, what type of fund do you work at, and what were some things you did when you started that made you confident you could have a long-term career in this space? Mar350 – I’ve already had a conversation about what’s expected. I think expectations and goals can be very different things. First, I would say that if you’re just meeting expectations, you’re already under-delivering. From what I can tell in my prior roles in ER and PE, meeting expectations is really the bare minimum – the industry is full of people that are driven to succeed. That leads me to the second point, which is goals – ultimately I want to do what I can to position myself well for full-time prospects, so sure, you can look at it as “padding my resume,” but at the end of the day the resume is just a reflection of my personal story and competencies. I want to be as competent as I can, and what I’ve often found helpful is speaking with people outside of my immediate workplace (such as on AnalystForum). It gives me a broader perspective of what it takes to do well in the industry, and also gives me the opportunity to go “above and beyond.” In order for me to deliver a positive surprise, I need to know what people in the industry value beyond the immediate expectations.

I thought asking the question about whether a fund can generate sustainable long term returns would be good, but be careful, it can backfire in an interview because some people think that by asking the question, you are questioning their talent, and they may want someone who does their job unquestioningly. Of course, you can argue that you shouldn’t want to work for someone that isn’t able to ask themselves honestly what their source of sustainable alpha is (assuming they are not an indexer), but that doesn’t make it feel much better in the short run if they decide not to offer you a position.

I thought asking the question about whether a fund can generate sustainable long term returns would be good, but be careful, it can backfire in an interview because some people think that by asking the question, you are questioning their talent, and they may want someone who does their job unquestioningly. Of course, you can argue that you shouldn’t want to work for someone that isn’t able to ask themselves honestly what their source of sustainable alpha is (assuming they are not an indexer), but that doesn’t make it feel much better in the short run if they decide not to offer you a position.

Numi - Maybe I’m missing this or it’s not the point of your post but what’s not apparent in your post is what you want to do and what interests you. As you say it’s a good idea to pad your resume and position yourself for recruiting, but shouldn’t all that be a result of what you want to do? IMO, focusing on what you’re interested in will lead to developing the skills and experience you need for a role - not the other way around. GL.

numi Wrote: ------------------------------------------------------- > Hi everyone, thanks for your thoughts. I have > specific replies as follows: > > > Dude_CFA – I’m in my mid to late 20’s. I just > started business school this year, and I think > that the MBA was a good hub for me to make the > transition from private equity to hedge funds. > Granted, I think there are certain skills that are > transferable at any point in time, but I do feel > that the alumni network helped, as did the fact > that the summer is basically a trial run for both > me and the firm (hard to give someone a 3-month > job when they’re already employed full-time). > Anyway, I think your questions are good ones, > especially the final one where you talk about > whether the fund would be able to generate > sustainable and repeatable returns. As a > follow-up, is it more important to have a > well-defined *process*, and then a strong > long-term track record (knowing that returns will > often vary from one year to the next)? And just > curious, what type of fund do you work at, and > what were some things you did when you started > that made you confident you could have a long-term > career in this space? > Thanks for your response, you’re younger than I thought! I invest in HF managers so I have seen plenty. Your PM (or IR person) should have given investors this spiel a billion times. You could ask for an informal presentation in the way a client receives it - if not from the PM, from the IR or right hand man. It will give you a chance to ask more questions. They will have been asked every question under the sun on this. What will be illuminating I suspect is the subtle differences you see in terms of the polished presentation and what happens at the coal face. I bet there is a lot that diverges away from that. Trade & cash misallocations, missing target purchase prices, fat finger errors and so on. I’m sure every manager has some great stories. Moreover, this is a great experience for you and I wish you all the best. Nothing beats sitting next to these guys and I am sure you will strike the right balance between doing whatever needs to be done workwise and getting on alright as a regular stand up guy (ie dont be the gofer and look like an over eager puppy on heat to please). One very important bit of this assignment is building a rapport with all the guys there - have fun and be a person these guys would like to hang out with if you can. It might prove to be the most enduring thing if you move on and open up opps later down the line. It’s never hurt my career and if anything, has helped me out more often than not. Good luck.

LPoulin133 Wrote: ------------------------------------------------------- > Numi - Maybe I’m missing this or it’s not the > point of your post but what’s not apparent in your > post is what you want to do and what interests > you. > > As you say it’s a good idea to pad your resume and > position yourself for recruiting, but shouldn’t > all that be a result of what you want to do? IMO, > focusing on what you’re interested in will lead to > developing the skills and experience you need for > a role - not the other way around. GL. LPoulin133 – at the heart of my post is that although I know what interests me, I also want to know what matters towards developing a successful career in this field. It’s a win-win situation if those things are aligned. Maybe this wasn’t totally clear in my first post, but the reason I’m reaching out to more experienced professionals here is because they know better about what matters in this industry than I do, and based on what motivates them on the day-to-day, I’ll try to see if those are the things that also excite me most.

Hey Numi - great to hear you are interested in hedge funds. Are you going to get back into the CFA program or do hedge funds even care whether you have the CFA? I guess with a top MBA under your belt and 5+ years of excellent work experience, the CFA is probably useless at this point in your career.

numi Wrote: ------------------------------------------------------- > Justin88 – Regarding the questions you’ve posed, > granted these are things that I can ask the PM – > and perhaps I should. But at the same time, it > also sounds like through my own experience, I > should be able to figure out the answers to these > questions myself, is that correct? Would you say > that every fund has easily definable answers to > each of those questions? Some funds have definable answers to these questions, but not all. Most of it you should try to figure out on your own, though asking a few questions is nbd. Be careful though; few people are happy to tell you what their source of alpha is…

Dude_CFA – thanks for your advice. I definitely want to soak in as much as I can but also establish a social rapport with people around the office, not only with my immediate team. Also, it must be pretty cool for you to get the perspectives that you can – are you at a FoF? In any case, would love to keep in touch and can keep you posted on my summer, and potentially thereafter. Feel free to drop me a line if you’re interested.

bchadwick / justin88 – good point on “sustainable alpha” – I think the answer to this may become more apparent as I put in my time here but it’s definitely something worth thinking about on my own, and also conversing about with the more senior folks here maybe after I’ve gotten up the learning curve a bit.

thommo77 – nice to hear from you. I don’t plan to resume the CFA program at least in the near-term. Although there’s a lot of stuff I could learn, at this point the ROI on the program won’t be sufficient for me. One thing I notice most about CFA is that it teaches you a lot about the mechanics of fundamental analysis, but so much of the buy-side job is just being immersed in the market, and having a practical sense of how stocks move and when to invest. I recognize I’ll be able to improve my accounting and knowledge of portfolio management with the CFA, but I also think that I can learn some of that stuff as I go. Generally, I feel that my own approach towards investing is becoming increasingly top-down at first and then bottoms-up later, so I guess you can say I have more of a “strategic” view of companies first and foremost before really scrutinizing the numbers (which I think is where more of the CFA knowledge comes in). What have you been up to these days? How are things with work, tennis, etc.?

General question for all of you buy-siders – how do you get up to speed on a company really quickly? One thing I’m noticing between hedge funds and sell-side research is the breadth versus depth aspect. On the sell-side, you have several weeks or even months to become well-informed about a company. Same thing in private equity – the deal process can take several months to complete. However, on the buy-side, you’re often expected to come up with an initial impression on a company within a matter of days, and sometimes hours. I get that the key to doing this is figuring out what the “key drivers” are, but can you guys go into a bit more detail on what exactly you do to arrive at that? Also, how do I get over my personal insecurity about not knowing enough? I realize one thing I’d like to improve on is being able to form quicker impressions, and being satisfied with making decisions based on incomplete information.

It really depends on the sector. Some sectors like healthcare could take weeks to fully learn. Trying to figure it out is impossible, and even if you call a sell side analyst, you’re getting one opinion, which could be radically different from another analyst. Just look at past EPS estimates on any home health company, consensus hasn’t been worth a crap for the last 2 years. A lot of buy siders I know come up with an idea or see something that peaks their interest, then call analysts to talk.

numi Wrote: ------------------------------------------------------- > – how do you get up to speed on a company really quickly? Primary Global Research?

numi Wrote: ------------------------------------------------------- > I feel that my own approach towards > “investing” is becoming increasingly top-down at > first and then bottoms-up later, so I guess you > can say I have more of a “strategic” view of i see what you did there… nice work.

numi Wrote: ------------------------------------------------------- > Also, how do I get over my > personal insecurity about not knowing enough? I > realize one thing I’d like to improve on is being > able to form quicker impressions, and being > satisfied with making decisions based on > incomplete information. on a more productive note, one thing to realize in trading/PM/research is that you’re not going to be correct 100% of the time, and more importantly, that you don’t have to. even 60/40 is quite good. for people of many educationaly backgrounds (say science/engineering/arts), this requires a marked transformation of one’s thought process and, generally speaking, perspective on life. it takes time.

I’ve made fair a bit of recommendations and investments in hedge funds in the last few years, every fund is different. However, one common thing discussed in almost every meeting I had was preserving capital i.e. avoid loss in a bear market. Ask them how they do it, how they manage risk on security level and portfolio level, how they hedge risk, how they price risks. I would even go further to say that generating upside isn’t difficult. The difficult thing would be to take rewarded risk and to ensure you don’t deliver negative return. Other than that, just enjoy the experience and see if you like a career in HFs. Just my 2c.

I find the quickest way to get up to speed on a company in a short time span is through sell side research. Somebody previously mentioned that the problem with speaking to a sell side analyst is that it’s only one person’s opinion, but when I talk to the sell side I’m not really interested in their opinion. I’m interested in facts; learning about the company, the products, which markets, management strategy, and the key drivers so I can form my own opinion. You can also get a pretty good understanding of the company by going to their IR website and looking through the annual report and investor presentations. And you’re right, it’s important to understand that you are going to be making decisions without knowing every minor detail. Depending on how small your firm is, there are just too many companies to cover to become fully immersed in any one company. But unlike the sell-side (with the caveat that I’ve never worked on the sell side), it’s not important to be able to predict the EPS down to the exact penny. It’s more important to understand the general long term direction and valuation of a company.