Hey all – I’m looking to head to b-school and break into the sell-side on my way to the buy side. Assuming I just passed LIII, I should have my charter soon as well. Ultimately, I want to work for a fundamentals-based hedge fund. The question is, what is the best way to get there from the SS: equity research or IBD (M&A, etc)? Pros to ER: Work with BS clients and hopefully make some contacts. Also may be better suited toward my skill set (CFA + strong writing skills). Cons to ER: Ultimately no “skin” in the game and you take a different approach to the analysis. Pros to IBD: Work on transactions and special situations. Slightly better pay (assuming deal flow). Probably more jobs available overall. More exit opps? I’d like to hear you guys weigh in on what the best route to a HF gig would be, considering my situation; THANKS!
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HF’s are in a bubble.
ASSet_MANagement Wrote: ------------------------------------------------------- > HF’s are in a bubble. HF will continue to thrive as long as the public markets continue to struggle.
i’m bearish on hedge funds, quant finance, structured products, exotic prop desks in banks, and world peace
justin88 Wrote: ------------------------------------------------------- > HF will continue to thrive as long as the public > markets continue to struggle. I disagree. Consider that HFs are viewed as “risky” investments and that investor risk aversion generally increases during market downturns. So while you might see some decent % returns among hedge funds during market downturns (particularly those that employ volatility strategies), the dollar gains might be limited by lower dollar investments. But anyway, to the OP, I would recommend taking the most prestigious job at the most established firm. So much of finance recruitment is based on prestige. Plus, who knows? Maybe your goals will change. Having a generally badass resume will open doors in more fields.
In either case I would probably recruit aggressively at BB firms. However, in the case of having to go one way or the other with my efforts, which would you suggest. All Re search function: there isn’t as much on this particular topic as I would have hoped.
ohai Wrote: ------------------------------------------------------- > I disagree. Consider that HFs are viewed as > “risky” investments and that investor risk > aversion generally increases during market > downturns. So while you might see some decent % > returns among hedge funds during market downturns > (particularly those that employ volatility > strategies), the dollar gains might be limited by > lower dollar investments. Yes they are “risky” but are they riskier than the market? For the good funds, the answer is no.
in the case of having to go one way or the other with my efforts, > which would you suggest. > IB, if you don’t mind the work. More money and more future opportunities.
justin88 Wrote: ------------------------------------------------------- > ASSet_MANagement Wrote: > -------------------------------------------------- > ----- > > HF’s are in a bubble. > > HF will continue to thrive as long as the public > markets continue to struggle. I’m sure individual HF’s will, all most of us hear about are the top 10% of HF’s. There is such a glut of HF’s out there right now, “there cannot be that many super intelligent 20 and 30 somethings out there, that all want to start HF’s.” If you look historically, the most sought after jobs for MBA grads are usually into sectors/industries/fields that are in a bubble.
Good call Assman. MBAs were flocking to tech firms in 1999-2000 and real estate in 2005. Justin: 2007-2009 revealed that a great deal of hfs were charging 2/20 for beta. The “good ones” are actually generating alpha but they are few and far between. In fact, many hf’s are FAR riskier than the market in terms of extreme downside risk (the risk of losing everything). HFs will be a around for years but the zenith has come and gone. HF’s will have a much tougher time getting clients to pony up the 2/20.
joemontana Wrote: ------------------------------------------------------- > Justin: 2007-2009 revealed that a great deal of > hfs were charging 2/20 for beta. The “good ones” > are actually generating alpha but they are few and > far between. In fact, many hf’s are FAR riskier > than the market in terms of extreme downside risk > (the risk of losing everything). Well, there is zero chance of the “market” going to zero, so that’s not saying a whole lot. But there’s also a very small chance of a FoF or HF index going to zero as well. Your beta analysis is unfair. Almost every risky asset had a high beta in 2008; correlations went to one in the deleveraging bloodbath. Nonetheless, while the S&P500 was down 37%, HF indices had the industry losses at ~20%. It’s hard to bunch HFs together since they’re really quite diverse, but nonetheless I’d say HFs did a much better job during this time frame than the market and the banks (lol) did. > HFs will be a around for years but the zenith has > come and gone. HF’s will have a much tougher time > getting clients to pony up the 2/20. Zenith measured how? AUM is back on the rise but still below the HWM.
Uh… markets do go to zero now and then. Russia 1918, Germany 1945, China 1949, most of Eastern Europe. I’m not sure, but Iran is another candidate. Yeah, sure, it’s hard to imagine it happening here, but I suspect the Russian and German investors didn’t think it was very likely until the end was pretty much upon them and there was no way out. It is true that a market index has a much lower chance of going to zero since it’s basically a structured bundled security (bundled because there are lots of companies, structured because the composition of the index gets changed now and then depending on the ‘structure’ of the index rules. As for zenith, I think JoeMontana means the day and age when people could just hang a shingle, start trading, and investors would just start throwing money at them and accepting the 2/20 fee structure. We may see another zenith in a decade or so, but I expect it will be a while. “every risky asset had a high beta??” Uh… you realize that that’s nearly impossible, unless one really really big asset had a very low beta (like zero). I think what you mean is that every risky asset took a big dive compared to its historical performance, but that’s not the same as every asset having a high beta. I guess what you could say is that since correlations increased, the betas increased over their historical average, which makes sense. So you could get away with saying that everything’s beta went up, but that may simply mean that a beta of 0.24 went to 0.50, which isn’t exactly high. (BTW, I’m not intending to be mean; I just think you’re engaging in a bit of exaggeration here)
bchadwick Wrote: ------------------------------------------------------- > Uh… markets do go to zero now and then. Russia > 1918, Germany 1945, China 1949, most of Eastern > Europe. I’m not sure, but Iran is another > candidate. > > Yeah, sure, it’s hard to imagine it happening > here, but I suspect the Russian and German > investors didn’t think it was very likely until > the end was pretty much upon them and there was no > way out. It is true that a market index has a > much lower chance of going to zero since it’s > basically a structured bundled security (bundled > because there are lots of companies, structured > because the composition of the index gets changed > now and then depending on the ‘structure’ of the > index rules. Please give us order of magnitude estimate for the probability that the S&P500 goes to zero before June 11, 2015. > As for zenith, I think JoeMontana means the day > and age when people could just hang a shingle, > start trading, and investors would just start > throwing money at them and accepting the 2/20 fee > structure. We may see another zenith in a decade > or so, but I expect it will be a while. When was this zenith? HFs’ AUM peaked in 2008, which clearly was a difficult time to start a fund. You make it seem like it was easy for anyone to start at hedge fund and get investors. > “every risky asset had a high beta??” Uh… you > realize that that’s nearly impossible, unless one > really really big asset had a very low beta (like > zero). I think what you mean is that every risky > asset took a big dive compared to its historical > performance, but that’s not the same as every > asset having a high beta. > > I guess what you could say is that since > correlations increased, the betas increased over > their historical average, which makes sense. Yep, exactly, high relative to previous values, not on an absolute scale. This is what’s important for beta neutralization. > So you could get away with saying that everything’s > beta went up, but that may simply mean that a beta > of 0.24 went to 0.50, which isn’t exactly high. In 2008 this would have been catastrophic for a portfolio. A beta shift from 0.24 to 0.50 means your beta hedge was incorrect, and your portfolio was exposed to beta risk during the shift. Even worse, portfolios where the historical beta had been near zero suddenly exhibited betas during flights to quality / liquidity.
I work at one of the best hedge funds in the U.S. (by 20 year track record) and have a CFA (it’s a noun, biatch!). A few things: 1) Hedge funds are not in a bubble. Not “real” funds, anyway. There were a bunch of bet-the-farm and amature style leveraged beta funds that have gone belly up (or at least under performed and seen funds flow out) since the recession started (i.e., hedge funds WERE in a bubble). Short of some overly dramatic regulatory or tax changes, hedge funds will be around forever. I’m personally not worried about the regulatory front since there is too much money involved in hedge funds for anyone to want to wipe out the industry (which would serve no purpose anyway). 2) IBD is irrelevant for fundamentally-based buyside work, making ER the much better route. IBD is slaving way over formatting changes at two in the morning and endlessly filling out comps tables. How is that going to help you pick stocks? The best way to work at a hedge fund is to know how to generate alpha through stock selection, of which there are many ways (contrary to the CFA curriculum, which is mostly wrong from what I have seen). The sell-side isn’t exactly known for its prowess in generating alpha, but it’s still probably the best route (assuming you can’t directly get into a hedge fund which is hard to say since you didn’t post your background info. and most funds aren’t hiring right now, anyway). I wouldn’t stay on the sell-side for more than a year or two though: it’s definitely possible to learn invest “the wrong way” (i.e., overly obssessed about next quarter’s EPS number), and if you stay in that system too long it can become hardwired and hard to unlearn.
Bromion: thank you so much for the insight!