Hedge fund case studies can be challenging, especially if you have never worked at a hedge fund before and do not have prior investing experience. If you want to break into the industry, the case study is the most important step to master as it differentiates those who understand investing versus those who don’t. It also helps the interviewer understand how you think about investing and whether you are easy to get along with.

The majority of case studies will ask a simple question about a specific company. The interviewer will ask you to look into XYZ company and tell them what you think, basically asking would you go long, short or do nothing, and if do nothing, what price would the it be interesting on the long or short side. Usually there is not a lot of guidance given, as the interviewer will want to see how you go about completing the case study.

Most hedge funds will give you around a week to complete the case study at home, while a few funds may ask to do a six hour in person case study. This guide will walk you through the take-home case study from start to finish. You will learn what documents to download and read, how to build the model, how to choose what position you should take, how to write the case study memorandum, and common mistakes to avoid.

Hedge Fund Case Study Examples

The step by step guide below has been used by numerous analysts who then received offers at different hedge funds.

Before you read on, make sure to get access to example case studies that were used in interviews (get access here). These are real examples of written case studies and a full Excel model that were used in actual interviews.

Trust me, reading these examples and the Excel model will make it much easier to complete a case study, especially for those who have never worked at a hedge fund before.

Steps to Finish a Hedge Fund Case Study

Follow the six steps below in order to begin your case study. You want to focus on finishing the easy tasks first (i.e. taking notes and building the model) before spending time thinking about how you want to frame your positioning.

1. Download and organize all relevant documents
2. Build the model in Excel
3. Read filings and take notes
4. Search for industry trends and metrics
5. Reach out to investor relations and / or prior employees
6. Write the case study memorandum

1. Download and organize all relevant documents in a folder

Key websites to use for company filings are:

• www.sec.gov/edgar/searchedgar/companysearch.html – for direct access to filings
• www.Bamsec.com – access to filings in an organized fashion
• Investor relations website of the company
• Other sources if you have access to them: Bloomberg, CapIQ, FactSet
  • You want to save down (at the very least) the latest 10K and the prior four 10Qs, last four transcripts, earnings releases, investor presentations and supplements
  • Sell-side research – sell-side research is how you gauge market expectations and quickly understand the business. Most initiating coverage reports will give a good overview of the company, its strengths, weaknesses and competitive landscape. Ask around for others to send you research if you don’t have direct access
  • Other write-ups online – read all of the articles on Seeking Alpha and look at ValueInvestorsClub.com. Research on Seeking Alpha is usually very bad, but there may be articles that do a good job summarizing any fundamental pressures / tailwinds

2. Build the model in Excel

Before reading about the company and understanding the fundamentals, it is best to do as much of the model as possible so you get it out of the way. You can spend a ton of time reading about the company and thinking about what your position should be, so best to get done with building out the excel model first and think about your positioning and optimize estimates later.

Grab the historical financials by quarter for the last two years

• Start with the income statement, then balance sheet, then cash flow statement – cash flows are not presented as quarterly but as year-to-date, so you need to calculate the quarterly cash flows based on the data in the filings
• Build to the reported Adjusted EBITDA and determine whether any adjustments need to be made to calculate a true EBITDA figure. A lot of companies these days adjust their reported Adjusted EBITDA substantially, so you need to determine what deductions need to be made to get a real EBITDA figure that you can rely on for valuation purposes
• Calculate key leverage and working capital metrics (DSO, DSI, DPO)
• Calculate unlevered and levered free cash flow
• Grab all the key metrics the company

Build out projections

• Start with the revenue drivers. Take the metrics that the company discloses and build out the drivers to calculate an implied revenue figure. See how closely this methodology calculates historical revenues. If there is a large difference between your calculated revenue figure and the reported revenues, then figure out how to optimize the revenue drivers to get a closer estimate
• Build out the cost drivers. For most companies this is easier than the revenue drivers as you just need to look at historical margins and apply assumptions going forward based on your view of whether margins should contract or expand.
• Build out year over year growth metrics to see what your projections imply relative to how the company has performed historically.
• Depending on the type of fund you are interviewing, the model should project out at least the next two years of financials. At a multi-manager hedge fund, most interviewers only care about the next year or so, but at longer-term oriented funds they will probably look two to three years out.
• Your projections should support your thesis. If you are advocating for a short position, then your estimates should be lower than the consensus. On the other side, if you are advocating a long position, then your estimates should be higher than consensus.

Build out valuation metrics

• Start with the capitalization table of the company and understand the valuation through EBITDA, EBITDA-Capex and price to earnings.
• Compare these metrics versus comparable companies and precedent transactions.

3. Read filings and take notes

Create a new word document to copy and paste anything notable that you read. You can create sections in your notes for company overview, revenue / cost drivers, fixed versus variable costs, industry tailwinds/headwinds, key questions for items you don’t understand or need to follow-up with management on, etc.

The most important part of every 10K/10Q is the management’s discussion and analysis section (MD&A). This is where the company talks in detail about how the business has performed over the quarter/year relative to prior year’s performance. You should focus on the sections of the MD&A that talk about the revenue and cost drivers. Make a table in Excel and copy and paste commentary every quarter on what impacted revenue growth and margins (COGS and SG&A). Once you lay it all out in Excel, the fundamental picture of the Company becomes clearer and you can see what has had a major impact on recent results.

The most important thing you should read are the transcripts and investor presentations. Management usually gets into more detail on the overall strategy and key tailwinds / headwinds of the business. Additionally, you can gauge what the sell-side is most focused on in the Q&A section at the end of every transcript.

Lastly, read the risk section of the latest 10K to note what the Company finds to be the biggest risks to its overall performance. Pay close attention to the top few items listed here as you want to see what the structural/secular challenges are to the business. With more research, you can gauge whether these are real risks that could have a near-term impact on the Company’s results, which will be good for defending a short position.

4. Understand industry trends / metrics

Once you read everything there is to know in the filings and transcripts, then you need to understand what is happening in the overall industry. If you do not understand what is happening in the industry that the company is in, you will not know if there are any big picture headwinds or tailwinds that are directly impacting the company.

Would look into investor presentations of competitors or initiating coverage reports from sell-side research as they will do a good job explaining what is happening in the overall industry and who is best positioned.

5. Reach out to investor relations and / or prior employees

There are some funds that like to see analyst take initiative and try to gather more research through conversations with investor relations teams and prior employees. Reach out to IR and prior employees via email – they probably won’t respond, but if asked you can say you sent an email to whoever and tried. You can usually figure out a person’s email address with their name and the company’s email structure

6. Write the case study memorandum

What you present to the interviewer is the most important part of the case study as it summarizes your views and key arguments to support your position. Read more about the case study memorandum section on the following page.

Case Study Memorandum

The written portion of your case study should be at most three pages, excluding the exhibits. If you can’t get your point across in two to three pages, then it is not a well written case study. Nobody on the buyside wants to read a massive case study, so you need to make sure it is well organized and summarizes your main arguments. Some places may ask for a presentation instead, so you can follow the same structure outlined below.

Company Description

You need to summarize what the company does in around five sentences. The interviewer already knows what the company does so no need to go that much in depth as you can describe more in person if asked. Make sure to describe how the company makes money (a revenue breakdown), where they make money (what markets drive the most revenue), who their customers are (customer concentration), etc.

This is the easiest section as you can open up the latest 10K and within the first few pages there is a business description section that outlines what the company does. You should also check the latest investor presentations (if available) and sell-side research initiating coverage reports as they usually give good overviews of the company.

You need to make sure you yourself understands what the company does and what the revenue and cost drivers are. Anybody can copy the business descriptions written by the Company and sell-side research. You should make sure you know the company well enough to be able to talk about it without looking at your notes.

Background

The case study will usually be about a company that is either beaten down or has risen in value significantly over a short period of time. You need to go through and summarize what events happened that led the company to the position it is in today.

Go through all the transcripts over the past year and outline what exogenous or company specific events made the biggest impact on the company’s P&L. You can also read the Management’s Discussion and Analysis section (MD&A) in the filings, investor presentations and sell-side research to understand what has impacted the company.

Position

Here you describe if you want to go long or short the stock. You should form your view after doing your research and reading all those documents you saved on the company. If you are interviewing at a long-only shop that does not short stocks, then your position should be as follows: the company is an attractive investment and you should go long or the company is not an attractive investment at the current price.

If the company is not attractive at the current price, then you need to take it to the next step and talk about at what price does the company represent an attractive investment. You need to think about this on both the long and the short side (i.e. at what price is this an attractive short or at what price is this an attractive long). You should never say the company is not an attractive investment without also talking about at what price it becomes attractive.

A thesis that based entirely on your view on valuation is a bad thesis. If a company is cheaper than peers on a multiple basis or based on some discounted cash flow analysis, that does not necessarily mean that it is good investment. There is a reason why a stock is more or less expensive than peers. Figure out why that is and build arguments to support whether that valuation gap is justified or not.

How to tell whether to go long or short

Your view on whether you should go long or short depends on the investment style of the fund you are interviewing at. A multi-manager hedge fund cares more about upside / downside to street estimates while a tiger fund or long-term value shop cares more about the company’s fundamentals, structural tailwinds/headwinds and competitive positioning. Long-term shops still do care about estimates and expectations, so make sure you have a view.

Qualities of a good long position

• Structural industry tailwinds
• Stable predictable earnings and cash flows
• Underearning financials relative to historical earnings power
• Upside to street estimates / expectations
• Strong competitive advantages versus peers
• Attractive valuation relative to peers
• High short interest
• Good Co vs. Bad Co (i.e. where the street is underappreciating a fast-growing aspect of the business because it is masked by the performance of the rest of the business)
• Transformative M&A

Qualities of a good short position

• Structural industry headwinds / changing industry conditions
• Historically cyclical business that is overearning
• High commodity exposure
• Bad business model (analyze Porter’s Five Forces as discussed below)
• “Fraud, Fads and Failures”
• Negative rate of change in growth (i.e. deceleration in growth relative to prior performance)
• Downside to street estimates / expectations
• High leverage / bad balance sheet
• Regulatory / legal changes
• Transformative M&A – sometimes companies that are not doing too well try to shake things up and take on a large merger or acquisition that ends up failing

Thesis Points Summary (AKA Investment Highlights)

You need to summarize why you are taking a certain position with around five single sentence bullet points. Nobody is going to read in detail your entire write-up. They will likely skim through it, so you need to summarize up front why you believe you should go long or short.

Here are some example points that you should cover:

• First Point – Potential upside relative to current share price
• Second Point – Industry trends impacting the company
• Third Point – Any fundamental competitive advantages or disadvantages
• Fourth Point – Sellside / buyside sentiment and commentary on street estimates and earnings power of the company
• Fifth Point – Valuation levels relative to historical levels and comparable companies

Market Misperception / Differentiating view

A thesis is not a good thesis unless there is a differentiating view relative to market consensus expectations. Think about it. If everyone is long a stock and believes estimates are too low, then the share price most likely bakes in the high level of optimism. For the share price to continue grinding higher in the short term, the company needs to release earnings or guidance that is even better than everyone’s expectations.

Be very careful of advocating for a thesis that is already priced into the stock. If everyone believes what you believe, then earnings estimates most likely reflect your position. Being on the side of the consensus can get you in a lot of trouble if something unexpected happens. You can get destroyed in a stock that misses expectations if everyone is super bullish on it heading into earnings. The same holds true if everyone is extremely negative on a stock, which can cause a big short squeeze during earnings because everyone is short.

That said, you should not be a contrarian for the sake of being a contrarian. But if you can figure out a differentiating view that becomes true over time, that is how you make a lot of money in a position. You need to have a well-developed, rationale thesis that is supported by good arguments.

Thesis points

Each thesis point that you mentioned above needs to be explained with more detail and facts. Take each point and create its own section so you can provide reasoning to back up that point. This is where the meat of your write-up is

First Point – Potential upside relative to current share price

Outline the assumptions that were used to get to your target share price (i.e. multiple and EBITDA/Earnings). Each case should incorporate different projections depending on assumptions around topline growth and margins. Make sure to explain the reasoning behind your assumptions.

• Upside Case
• Base Case
• Downside Case

The downside case is especially important as it helps you understand the risk versus reward. For example, if you think there is 15% upside and 15% downside, then the risk/reward is 1x, not attractive of an investment opportunity. But if your risk reward is 2x+, then the stock becomes more attractive.

Second Point – Industry trends impacting the company

Talk about any industry tailwinds or headwinds that affect the company. Here you can talk about the total addressable market (TAM) and the overall growth rate of the industry. A higher industry growth rate implies that multiple players can grow even if competition is higher. The inverse is true as well, a contracting growth rate means you need to gain market share to keep the topline growth stable.

Sometimes the company experiences exogenous events that increase or decrease demand for a temporary period of time. You want to outline what those are and take them into consideration when discussing whether the company is currently over earning or under earning relative to its true earnings power.

Third Point – Any fundamental competitive advantages or disadvantages

Use Porter’s Five Forces to determine what the company’s true competitive advantages are.

• Supplier Power – is there a small number of suppliers or large number? Is the company able to easily change suppliers or source product from others? What is the risk that suppliers can raise prices? For example, Walmart has huge power over its suppliers since most consumer-packaged goods companies generate a quarter of their sales in Walmart’s stores.
• Buyer Power – does the company or customers have an advantage when purchasing products? Same as above but looking at it from the buyer’s perspective.
• Threat of Substitution – How easy is it for a new competitor to come in and take away business? Think about impact Netflix had on the DVD / movie theater industry. Another example is the impact of private label products on the CPG industry.
• Threat of New Entry – how easily can competitors enter into the industry? Are their large capital expenditures that are needed for a new business to start? Are there large economies of scale that prevent new businesses from entering into that industry? Are there logistical / technological complications that stop new competitors (i.e. Amazon with its large distribution network, network effects of large social media platforms)?
• Competitive Rivalry – is this industry commoditized? Is there any customer loyalty? Are there low switching costs?

Fourth Point – Sentiment and commentary on street estimates / earnings power of the company

This section is especially important if you are interviewing at a multimanager. Given the strategy at multi-managers is very short term oriented, the interviewer most likely wants to understand where you think earnings are versus expectations.

Long-term oriented value funds and those funds that invest with a private equity type mindset care more about competitive advantages and longer-term growth prospects. Consensus estimates still matter at these funds, but over a longer-term time horizon (2+ years).

The goal here is to gauge how aggressive or conservative the street estimates are versus your own expectations. Your thesis and differentiating view should drive the assumptions in your model. Once you have your own estimates, you can compare with street consensus to determine why your estimates differ.

If you are interviewing at a multi-manager fund, always look at the next quarter and year-end estimates versus street expectations. At a longer-term oriented fund, look at estimates over the next few years. The ultimate goal is to develop a good thesis that is differentiated and results in estimates that differ substantially from the street. If the thesis is proven correct, then the stock will likely move in your favor.

Always be cautious of “buyside” versus “sellside” sentiment, especially when investing over the short-term like at a multi-manager. For example, street consensus may be calling for 3% same store sales for the next quarter, but the buyside may be expecting 5%. You will notice that stocks can go down during earnings even if a company beats top line sell-side estimates. That is because the “buyside” was already expecting a beat and raised their own expectations heading into earnings.

You should develop a view on true earnings power of the company as well. For example, if there were some events that were one-time in nature that impacted earnings, then point them out. Think about whether they are truly one-time in nature and how long you think it will take for earnings to return to normal levels. Few examples include temporary commodity price headwinds impacting margins, price increases that have yet to flown through the topline, exogenous accidents that impact consumer demand, sales force / strategy changes, etc.

Fifth Point – Valuation levels relative to historical levels and comparable companies

Always look at where the company has traded historically. Pull the next twelve months earnings over the past 10 years and compare that to today’s levels. Here you need to gauge if a company seems overvalued or undervalued relative to historical levels.

Grab a list of the most comparable companies as well and create a table to show valuations, margins, size and topline growth estimates. You can go in the proxy of the company to see what it identifies as its most comparable peers or read sell-side research. Knowing where peers trade and their margins levels will help you understand how a company is doing relative to others in the same industry. Make sure to understand why the differences exist between the company and its competitors.

Catalysts

Having a view on near-term catalysts is especially important if you are recommending to short the stock. Think about what is going to cause the fundamentals of the business to change. Describe any near-term events that would cause the market to start to believe your thesis. If interviewing at a multi-manager, then you want to describe any catalysts that would happen within the next year. It could be that earnings for the quarter or year are understated / overstated, changes to the fundamentals in the industry or from competitors, company specific changes in strategy or realization of cost saving initiatives, etc.

If you are interviewing at a longer-term value shop, then talk about any catalysts over the next couple of years.

Risks

Here you talk about the main risk factors and any potential unexpected events that would cause you to lose money in the investment. Look in the Risk Factors section of the 10K to see what the company identifies as the main risks to the business. Analyze the most important risk factors to see if they have any merit and the potential implications to your thesis if the risk factor is realized. Examples of risks include technology disruption, realization of synergies / other cost savings initiatives, commodity price changes, changes to the economic cycle, changes to regulations, M&A risk (if you are advocating a short position), etc.

Exhibits

The end of your case study should include any exhibits that backup key numbers and metrics you reference throughout the writeup. During the interview think about what will be discussed and what questions the interviewer may have. You will not have a computer and will not have your entire model to go through, so you need to include paste ins that you can reference to support your main thesis points.

Key exhibits to include are the three financial statements, assumptions behind revenue and cost drivers, top-line year over year growth and margins over time, company disclosed metrics, valuation methodologies (i.e. comparable companies, precedent transactions, sum of the parts) and the calculations behind your upside/base/downside cases. Throughout your write-up make references to your exhibits (for example… “see exhibit [x] for analysis on comparable company analysis”).

Key questions for management teams

Identify the top five questions you would like to ask management teams if given the opportunity. What are you still unsure about that is not clear in publicly available information? What is the likelihood that certain events could happen that would go against your thesis? If a company is changing its strategy, how has demand changed relative to prior periods? Has the company done a large merger or acquisition? If so, how is the integration process going? What levers does the company have to increase price / volume or margins and how long would it take for those benefits to be realized?

The key is to figure out how you can gain conviction in your thesis and your estimates. If you can figure out a material aspect of the company that is not baked into consensus estimates, then you have arguments for a good thesis. Don’t ask questions that would constitute material insider information, like what earnings or top line sales going to be this quarter or year? If you are talking to management teams, then they will not respond to these types of questions.

General tips and common mistakes to avoid

Don’t just restate the consensus view

A thesis that is based on the consensus view is not differentiated and will likely not impress the interviewer. You will not be paid to rehash what everyone else is saying about a certain stock. Your portfolio manager can read the consensus view himself if he wanted to. Your job is to find a differentiated angle that nobody is thinking about or paying close attention to. A lot of risk is created when everyone believes that a stock is going to go up or down because of the same reason. If something unexpected comes out, then that will cause a large decline or short squeeze.

That said, if you have identified a good business that has declined because of an overall sell off and is not impacted by whatever macro events that caused the selloff, then you can build a thesis that restates the longer-term consensus view with arguments supporting why current macro events do not negatively (or positively in the case of a short thesis) impact the company.

Understand the fund’s investment style and tailor your case study to match it

Every hedge fund has its own investment style. Whether it is long only, market-neutral, deep value, distressed credit, etc. you need to make sure you analyze the case study in the same way that the hedge fund you are interviewing at thinks about investments.

The case study should be tailored to the strategy of the fund you are interviewing at. Before beginning the case study, make sure you understand the investing style of the fund. For example, multi-managers care more about quarterly earnings and estimates over the next year while deep value/distressed funds care more about value and downside protection. Spend time researching the style of the fund before beginning the case study.

Backup your thesis with hard data

Do not just take whatever management or sellside research says at face value. Investor presentations present the company in the best light possible. That is the purpose. Listen to what management teams say and then verify if what they say is the correct view. Read other types of market research and competitor transcripts to gauge whether management is bending the truth.

Spend time properly formatting the case study

A lot of people on the buyside especially at hedge funds say formatting is overrated, however, this can’t be further from the truth. There are a ton of people applying for the same job as you are, so you need to figure out a way to differentiate yourself. If you were previously or currently an investment banker, then you should have no problem properly formatting the Excel model and the memorandum. If not, follow the formatting in the example case studies provided in this guide.

Memorize key metrics

When discussing the case study in person with the interviewer, make sure you are an expert in the company and can answer questions on the spot without having to reference your written case study. Key metrics you should know off the top of your head include EBITDA, capex, interest, margins, market cap, total enterprise value, leverage, valuation metrics, valuation metrics versus peers, etc.

Don’t lie or try to bullshit if asked a question you do not know the answer to

The problem with a lot of smart people in this industry is that they are reluctant to say “I don’t know” and tend to talk as if they know what they are talking about. Interviewers will easily see through the bull shit as they likely know the company well and have heard others talk about the company.

Be a “straight shooter.” Be honest if you do not know the answer to a question and say you will follow-up with the interviewer. That said, you should know the company and industry inside out before presenting the case study and be confident when you speak about facts that you know are true.