Today’s blog is written by a guest, Philip DiDio
After a setback during the financial crisis, hedge funds have resumed performing well and attracting assets. Hedge fund employment and compensation have grown in tandem. How can you participate in the resurgence?
I’ve been a hedge fund investor for over ten years, both personally and on behalf of well-known institutions. I’ve also worked as a consultant within a multi-billion dollar multistrategy hedge fund. In these roles I have interfaced with all aspects of hedge fund organizations: senior management, investment staff, marketers, lawyers, operational professionals and service providers (auditors, administrators and prime brokers).
http://www.linkedin.com/in/philipdidio
State of the Industry
Today hedge funds are enjoying a renaissance, beneficiaries of several favorable trends. The financial crisis eliminated weaker hedge funds that had poor performance and/or capricious investors. The survivors were generally larger, more conservative funds with less competition from smaller upstarts.
The 2008 tornado also scared off weaker investors who couldn’t endure the pain of unforeseen losses. The remaining investors have been larger, more conservative institutions with a longer-term perspective on performance. Stable capital from pension funds, endowments/foundations and insurance companies now represents a dominant share of the hedge fund investor mix.
Larger institutions prefer to invest with larger hedge funds. This means growth for the largest funds, with more employment opportunities in the front, middle and back offices: in research, marketing/investor relations, trading, technology, operations and accounting.
The partnership between large funds and large investors has been a success, thanks to exceptional returns generated during the market rally of 2009-11. With equities, bonds and emerging markets all soaring simultaneously, it’s unclear whether the excellent hedge funds returns have been due to skill or luck. In any case, both hedge funds and investors deserve praise for staying the course during an extremely uncertain market environment. As human nature chases success, investors will keep adding to funds, and the industry will keep growing.
The current trend is for investors to “re-discover” smaller funds neglected during the post-crisis rally. Many studies reveal that smaller funds outperform their larger competition. This effect has been attributed to the “hunger factor”, to the ability to invest in smaller cap ideas with less market impact. Also, smaller funds better embody the hedge fund ethos of a private partnership generating incentive fees through good performance instead of relying on management fees from a large asset base.
Hedge fund office environment
Hedge fund careers are less likely to follow a linear path of climbing a ladder and acquiring better titles on the way to senior management. Most hedge funds are too young and in flux to offer predictable development. Instead, these organizations are generally focused on finding people who can provide immediate solutions to urgent business issues. Hedge fund professionals learn and grow by doing.
For the financial professional breaking into the business, a few guiding principles will help you sharpen your search and speed results. Most of my examples will draw from the investment research function.
For example, a junior investment analyst will build models of company balance sheets, talk to other analysts and company managements, make recommendations and defend their views. Confidence and preparation are important qualities, as well as the ability to accept criticism. Good analysts win the trust of the portfolio managers and get more responsibility and maybe their own carve-out of the larger portfolio to manage.
Junior investment staff come from investment banking, sell-side research, MBA Finance programs, mutual funds, private equity, bankruptcy law firms. Strong candidates may be investment club leaders, poker players, journalists, lawyers.
Starting a hedge fund job search
Hedge funds cannot advertise, so identifying funds is a challenge. Here are some lists of the largest funds:
http://s.wsj.net/public/resources/documents/TOP100-HEDGE-FUNDS-BA-100524.pdf
http://hedgefundblogman.blogspot.com/2009/08/top-100-largest-hedge-funds.html
http://media.ft.com/cms/02fd5a42-f338-11db-9845-000b5df10621.pdf
To find funds not on these lists, try to use contacts at prime brokers, investment bank research departments, money management firms, financial journalists and recruiters.
Interviewing
Each organization has a different concept of the ideal candidate. Typically the leader is looking for people who resemble him or herself at a younger age. To prepare for the interview, you should learn the leader’s background and talk to people who have worked with him.
Hedge funds take on the personality of their founders. They can range from bureaucrat, playboy, computer geek, diplomat, poker player, quiet leader. This makes it harder to generalize, but easier to find a firm that suits your identity.
Hedge funds prefer obsessed investors who read 10-K’s, trade their own portfolios, play games of chance, take risks in their personal lives and dream of running their own funds. The interview may include a case study where the PM asks you to research and model a company and present your findings a few days later.
For interview advice, check out
http://howtogetahedgefundjob.com/category/interviews
For older professionals breaking into hedge funds, your advantages are your network, your maturity, and your ability to solve problems and work independently. Hedge fund management is notoriously unrefined. Hedge fund PM’s are investors, not motivational gurus. You best embrace the “eat what you kill” mantra that permeates hedge fund organizations.
Keeping up with the business
These websites attract hedge fund managers and their staffs:
Value Investors Club
http://www.valueinvestorsclub.com/value2/
Distressed debt investing
http://www.distressed-debt-investing.com/
The payoff
A few years working for the right fund in the right market environment can earn you enough money to last a lifetime. John Paulson (Paulson) and Phil Falcone (Harbinger) each earned over $1bn in 2007 betting against sub-prime mortgages. For their staffs, even a tiny slice of those bonuses made for a happy holiday season.
Fortunes can quickly reverse. Today investors are fleeing Harbinger, and Paulson’s largest fund has returned -20% during the first half of 2010.
Many hedge funds are becoming more institutional, resembling established firms like Blackrock, PIMCO, Fidelity, Vanguard. Some say hedge funds are losing the innovative spirit that made them special. Nevertheless, there is still plenty of variety among funds, so a careful search should uncover the right firm for you.
Conclusion
Fresh graduates should tout their achievements, instead of their degrees. Tell the interviewer how you can contribute, with examples from your coursework and summer employment.
To make a mid-career switch into hedge funds, it should be motivated by pure desire, not idle curiosity. Hedge funds are a place to perform, not explore.
Other resources