Finally made it to the buyside. After working grueling hours in banking for two years, it is finally time to start working market hours while making more money than you could ever dream of.
Ah, if it could just be that easy. Before I joined my first hedge fund job at a large multi-manager (think Citadel/Point 72/Millennium/Balyasny/etc.), I truly thought my hours would be a lot better than my time in banking and the work a lot more interesting. Little did I know how wrong I was…
There is a lot of confusion out there about how a multi-manager is structured, what lifestyle is actually like, what the fund limitations are, how compensation works, etc. Time to set the record straight.
Hedge Fund Case Study Examples Used in Real Interviews
This article goes through the basics of how a fund is structure, how everyone is compensated and what the investment style is actually like. Torwards the end, you can find out what a typical day is like at a multi-manager.
What I describe below is based on my experience as a fundamental long-short analyst at one of the largest multi-manager hedge funds, which can be completely different than those who work at other types of hedge funds.
How is a multi-manager fund structured?
If you already know the basic structure, then you can skip this section. For those who do not know, a multi-manager is a platform that seeds dozens to hundreds of portfolio managers (“PMs”), depending on the size of the fund. Each PM is allocated between $100MM-$2Bn of capital depending on experience and is allowed to operate independent from anyone else.
There is usually a level of autonomy given to the PM to make his/her own investment decisions as long as they do not step outside of the bonds of the risk parameters. Aside from limits on various factor exposures, the main limit is the amount of drawdown the fund can experience at any point in time (usually ~2.5-5% depending on the multi-manager).
This means that if a team is managing $1Bn, then the most they could lose at any point in time (regardless of how much you are up for the year) is $25-50MM. Limits of 2.5-5% may seem pretty strict, but you have to remember that these platforms are levered and a 2.5% loss is a lot more at the platform level. Each fund runs a relative neutral strategy, so there is no exposure to the market (ie. the same $ amount of longs in the book as there are shorts). So, $500MM long + $500MM short = $1Bn of capital, with some room to go ~10% or so outside those bounds.
If a team had their capital fully deployed, then it is a lot easier to hit those drawdown limits. Most PMs only deploy ~60% of their allocated capital so there is less of a chance of the fund blowing up quickly. This also makes it harder to generate $$.
How does compensation work for both the PM and the analyst?
In general, most teams aim to make about 1% to 5% per year, which is $10MM to $50MM assuming $1Bn of capital. You may be thinking there is no way these teams target such low returns, but you need to remember that each fund has to abide by all the risk limits. That means the teams usually have just 60% of their capital deployed and run a relative neutral strategy. If you are in a bull market, your shorts will likely lose a lot of money, offsetting your profits.
Remember that the platform is significantly levered, so a 1-5% return is substantially greater at the platform level.
Each PM is paid based on the performance of solely his/her book. So, if the overall platform is down for the year, but the PM is up, then the team still gets paid. Typical pay structure for the overall team is ~15% of the P&L (net of the team’s salaries/expenses), with analysts receiving a certain percentage of the P&L depending on the size of the book.
No matter your experience, salaries are usually capped out at ~$150K-$175K, even if you are a PM.
To make it easier to understand, let’s go through an example on the bonus structure, assuming a team of five managing $1Bn of capital with a 3% return for the year:
- P&L is $30MM
- Deduct expenses for salaries, Bloomberg terminals, various data providers, health/other insurance, office rent, travel/meals, etc. (for simplicity, assume $2MM per year)
- Net P&L before bonuses is $28MM
- Overall bonus compensation is ~15% of the net P&L, so $4.2MM to be allocated
- Team of four (two junior analysts, one senior
analyst, one PM)
- Two junior analysts get ~$125K bonus (so all in comp around $250-300K)
- Senior analyst gets a $350K bonus (~$500K total comp)
- PM left with remaining $3.45MM for himself
Obviously if you were the analyst that helped generate the most P&L, you would get paid more. Sky is the limit if you are a beast that can generate good ideas. Of course, the opposite is true as well.
Now a 3% return would be a good year for the team. What if your team makes no money for the year? Well tough luck. Nobody gets a bonus and you end up making only the $115-150K base salary.
Unlike a single-manager fund that can still pay out bonuses in a down year due to the management fees, teams that do not generate P&L at multi-manager shops do not get any bonuses and will get laid off pretty quickly.
What are the top hedge fund interview questions?
Interviews at hedge funds and multi-managers can be very different from those in private equity or investment banking. They are usually less structured and most of the questions are framed in a way to figure out how truly passionate are you about investing and what skillsets do you have that would be good for the job. For a complete list of the top questions, read Most Frequently Asked Hedge Fund Interview Questions and Answers.
Every hedge fund interview has a case study where you are usually given a week to research an idea and give your thoughts on it. This is the most crucial part of the interview and identifies candidates who don’t know what they are talking about when it comes to investing. If you are interviewing at a hedge fund and reach the case study round, be sure to read the Case Study Guide for a step by step guide to finishing a case study.
What is the investment style like?
When I landed my first job in the hedge fund industry, I did not think much about the type of work or the investment style of the fund I was joining. I figured that all I needed to do was to break into space and that I would be happy to learn whatever style I was taught.
Little did I know that the investment style turned out to be the #1 most important aspect when it came to what I wanted to do longer-term.
During my time in banking, I read all the “classic/must read” investment books out there and really attached to the traditional value investment philosophy.
The investment style at a multi-manager could not be any more different.
Value investing teaches you not to speculate on where stocks are going in the short term and to make sure there is a significant margin of safety with little to no chance of losing any money. On the other hand, investing at a multi-manager is a lot more like trading. You are betting on where stocks are going within the next three to nine months.
In order to recommend an idea to my PM, I had to describe where my estimates were for the next quarter and over the next year relative to street estimates. The thought process would go as follows:
- Go long if you think a company is going to beat earnings estimates and raise guidance
- Go short if you think a company is going to miss earnings estimates and lower guidance.
Now every PM has a different investing/trading approach, but usually it all comes down to your expectations on earnings relative to the street’s and why your estimates are different. Neither valuation nor the business model really matter. If a company is going to beat earnings, then stock will likely go up. If they miss, stock will likely go down.
You can see how this type of analysis gets extremely repetitive each quarter and is highly speculative. To be successful, you only need to be right ~55% of the time to generate P&L.
If this type of investment approach is interesting to you, make sure you have the stomach for being wrong 45% of the time and losing a lot of money during certain periods. I certainly did not.
Read Life on the Buyside at a Multi-Manager Hedge Fund to learn about the day-to-day lifestyle.
Hedge Fund Case Study Examples
The examples below are real written case studies and a full Excel model that were used in actual interviews. If you have to complete a case study at some point during the interview process, reading these examples and the Excel model will make it much easier to ace interviews, especially for those who have never worked at a hedge fund before.
Hedge Fund Case Study Examples Used in Real Interviews
In addition to using these examples, make sure to also read through the Hedge Fund Case Study Guide.
How are research distro and conference access cost accounted for in the math above? Thanks
“Deduct expenses for salaries, Bloomberg terminals, various data providers, health/other insurance, office rent, travel/meals, etc. (for simplicity, assume $2MM per year)”
They are considered brokerage commissions. There is a small cost for every trade you do. You don’t pay for research/conference access directly.
Is it common for analysts to get direct P&L cut for their coverage at single-manager fund? If so, what’s the usual %? Say an analyst with 5-7 years of total experience (2-3 years of banking/research and 3-4 years of hedge fund experience).
Not really unless you become a sector head or have worked there for some time. Someone with 5-7 years of experience at a decent size single manager ($1Bn+) should get ~$300K-$600K a year. Highly dependent on the fund’s performance of course. But I do know people who work at distressed shops (fund vehicle is structured more like a PE fund), and they get ~2-2.5% of the carry at a $500MM-$1Bn shop.
Hi BuySideHustle,
I am a 14 year old student who is really interested in investing and hoped to one day work for a large multi-manager hedge fund. In one of your articles, you said that one of the main things you do while working at one of those firms is finding companies that will beat earnings. What techniques and methods do you use to find those companies that will beat earnings when working for a large MM Hedge fund? Also, what are some other common strategies used at those firms? What else do you think I can do right now that will help me become a successful hedge fund trader one day in the future?
Sincerely, Pranav
There are a number of different data points you can look to to see if a company will miss or beat earnings. For one, these large multi-managers subscribe to large data sets of information, like point of sales information at retailers. You can use these large datasets to gauge whether a company is more likely to not to miss or beat earnings. You can look at competitors and how they are performing. You can talk to management and investor relations multiple times per year to gauge how they think their business is doing. You can try to figure out a differentiated view on a company’s strategy, something that the sellside / other buyside analysts aren’t paying much attention to that could be a big driver or detriment to earnings longer-term.
You are starting super early in preparing yourself for an investing career (already 7 years ahead of most people). Read as many investing books you can get your hands on. Use whatever you have in savings and start finding and investing in companies. Figure out why their stock prices move throughout the year. One of the biggest reasons people can’t break into the hedge fund industry is that they can’t show why they are interested in joining a HF to begin with.
Ok, thanks for the information. What are some investing books you suggest that I read for the type of investing career I want to pursue? My parents gave me $1000 to invest with so that I can learn how to do it properly, when making decisions, should I stick to the strategy of trying to predict earnings or is there some other strategy that I should use which would teach me more?
Read all the investing books I mention in my must read investing books. Read those first and start researching companies that you can understand (probably consumer/retail is best bet to begin with). Don’t worry about losing the $1K and overtime you will see why certain stocks outperform or underperform the market.
Hi BuysideHustle,
You mentioned that the research process is basically just go long if you think company will beat earnings and short if they miss. Do you guys take the position the day before the earnings announcement and sell right after the announcement? Also, academic research shows thats 40% of positive earnings news is met with a negative move in the stock price, so I am curious how exactly this strategy works, thanks.
Usually don’t take positions right before earnings and sell after earnings. You normally would risk manage before earnings and either trim a position or increase a position depending on your view of the quarter versus expectations. Normally you would take a 3-9 month view. It is all about risk management when working at a multi-manager. You try to minimize as many blow ups as possible during earnings. Wouldn’t focus on what academic research says, it’s meaningless.
What do they base entry points off of, in other words how do they determine if they should they a position in a trade or not? When do they know it is time to exit the trade?
Hi BuySideHustle,
I am Rohan from Mumbai,India. I have a Masters in Accounting and I am a candidate in the CFA and FRM programs.I plan on CAIA and an MBA in the future. I have all the computer skills required( Excel, VBA Macros, Financial Modeling, Python) I can Read Charts very well. I currently work in sell side as an analyst. I want to work on Wall street as an analyst eventually becoming a hedge fund manager . How should I go about it?? Is there something I am missing. Or am I on the right path?Please guide me as what I should be doing or I am doing wrong!? The Finance markets in India are not that developed, jobs are very hard to find if there are any.
How should I go about applying there? ? WSO proved to be useless.
Please guide me. I will forever be in your debt!!!
Pretty hard to do in your current seat. Best chance is to move to the US and get your MBA, then get a sellside research job.
Thanks Buysidehustle for atleast answering the question!
How about any other markets Singapore?? London?? Are there more jobs in London after Brexit??
MBA in the US is going to cost me tons, I don’t have that kinda money. Is there any other way to get a job there??
Thanks a million for your help
Not sure about other markets. Easiest way is to go get an MBA in the city you want to work in. Otherwise hard to break in from another country without relevant experience.
Thank you for this insightful post. I currently work at a long/short growth mutual fund. I joined the firm as a research associate last summer. I’m getting really great training on investing and generating long short ideas, and the way my firm invests is similar to a hedge fund (high turnover, very earnings oriented). But even though the work/culture/hours are similar to a HF, I’m definitely paid similar to what I would get at a mutual fund or even below that. I was wondering if you had any insight on how I could transition to a multi manager hedge fund from a mutual fund (I’m mostly motivated by HF’s higher pay). Should I reach out to headhunters? If so, which headhunters are best to break into the HFs? Also, what are the different types of investment strategies? since HF interviews are less structured, I’m not sure how to prepare for the interviews other than preparing long/ short pitches. If you could point to resources that could help me prepare for HF interviews, I would really appreciate it!!
A lot of questions here. Would google around for who the recruiters are. They are a few that are well known (DSP, Henkel, Ratio, Mercury, etc.). Reach out to them set up a call explain what you are looking for. Read some of the other articles on this blog that I have written on how to prepare. There are a number of HF related posts.
Thank you for the post! What do you think about working in these HFs for a business development role (screening PMs externally)? If by any chance, you came across working with the team.
Don’t have much insight here. Personally I’d find it a bit boring if the whole job was to just screen for PMs. Try to target a role where you do more than just that and learn a skillset that would be seen as valuable across other biz dev jobs.
If a portfolio manager of a multi-manager hedge fund takes 15% of the p & l of his AUM annual return for himself and his team, how does the hedge fund firms executive or founder make money from the fund annual returns?
At the multi-managers, the funds are levered. So the GP makes more money at the fund level. The $$ that are allocated to each team are levered.
Hey there,
First off, thank you very much for the detailed breakdown here and all the awesome content you’ve put out on the site.
Similar to you, I’ve also read and very much align with the value investment philosophy and find it conflicting to want to join and work for a fund/multi-manager that is focused on short-term quarterly earnings. Have you or did you consider to move to a hedge fund or investment firm that embraced a more long-term value investing oriented approach?
Yep, that is exactly what I did. Worked at a multi-manager a long-time ago and quit after realizing it wasn’t for me – can read about my experience overall in the about me section. Moved to a fund that has a long-term value oriented approach and have been much happier ever since.