Investment Banking to a Hedge Fund… You Got What it Takes?

Overview and Landing an Interview: The career path to working at a hedge fund is less defined than that of investment banking, but at the junior levels the majority of opportunities are available to those with backgrounds in either research or investment banking.

The best way to land a hedge fund interview is through networking, but… a large portion of the recruiting process is outsourced to headhunters, who primarily target bankers and research analysts in their searches (management consultants are also successful).

The job responsibilities are not exactly the same, but the skillset and intelligence necessary to be a junior banker serve as a baseline for the kind of work that is expected of hedge fund personnel. Hedge fund managers are busy people, so they recruit from pools of bulge bracket bankers for the same reason that bankers recruit from target schools.

This post will assume that you have secured a hedge fund interview and will focus on the interview process from the perspective of a junior investment banker.

Part 1: What you need to Demonstrate

So you got your foot in the door.

Great.

Now it’s on you to show them what’s in it for them by demonstrating the following:

1) Passion and Ambition: They want to know that you love the markets and investing. Unlike banking, they want people who are both capable and enjoy what they are doing. You have to live and breathe it.

2) Creativity:  Can you think about things in ways that others may not have thought of? Can you take a view based on that? Hedge funds live and die on information. Creativity is necessary to uncover what others overlook and come up with ideas, so they want to know how you think and that you can rationalize your opinions.

This can be a nightmare for many bankers who were stuck working in a group where they are primarily processing mundane information that does not allow much room for thinking for yourself.

3) Cultural Fit: They are going to be working side by side with you for upwards of 12 hours a day. They want to know if they can get along with you.

Unlike in banking or private equity, hedge fund cultures tend to vary a lot because they are almost entirely dependent on the portfolio manager (similar to equity research where an associate is tied to the Senior Analyst/Managing Director).  Cultural fit can be much higher on a hedge fund’s priority list than it would be for a private equity shop.

It’s also important to remember that cultural fit is a two-way street. If you can’t get along with an interviewer you during a 30 minute meeting, then once you start working with them your life is going to be miserable. Don’t worry many of them are incredibly good at faking their personalities so it will be impossible to tell which one to work with… But as they say you can’t win them all.

Part 2: Preparation

Now that you’ve got the basics down, here’s what you need to prepare specifically for a hedge fund interview:

Basics: Size, location, history, anything you can find on their website, profile of employees on Linked-in, etc.

Strategy: Equity Long Short, Distressed, Merger Arbitration, Event Driven, etc.

Mandate: Are they restricted to investing in particular security-types or sectors?

Investment Philosophy: How do they think about investments?

Investment Horizon: Typical holding period, structure of their capital base, do they have lockups? Can they take volatility?

Culture: Talk to the head hunter or the person that referred you to see if they know anything about what to expect from the interview or to get insight into what the culture is like. You can also use networks to see if you can talk to someone who might have extra insight into how the fund operates.

*** Resources you can use for research: research reports, CapitalIQ / Bloomberg, SEC filings, networking connections who may have insight, the Company website and of course you should always do a heavy Google search***

Questions: Based on the research you did on the fund, come up with intelligent questions to ask them about their strategy, culture, recent investments, etc.

Market Knowledge: Be up to date with what’s going on in the general market and trends in the specific sectors / areas that the fund invests in.

Investment Ideas: You are going to be asked to talk about an idea you are currently thinking about, so come up with at least two investment ideas / stock pitches.

The process for doing this is explained below

Part 3: The Interview

The exact structure of the interview will vary across funds, but in general the process will consist of two or more rounds, we’ll stick with two rounds for simplicity:

Round One Onsite: This is the actual “interview” portion of the process. It will usually take place at the fund office. They will have anywhere from 2-10 of their current employees (depending on fund size) each interview lasts for ~30 minutes to 60 minutes each. For the first round you don’t necessarily have to have to go as far as building a fully baked model and investment memo (that will come in the case study) however… You do need to be able to articulate and defend your idea verbally though.

Cultural / Fit: These questions are about your background and are designed to get a sense of who you are and assess your cultural fit with the fund. Most of them are going to be exactly the same as those asked in investment banking interviews. By this point you should have a firm grasp of your story and be able to explain why you want to work at a hedge fund.

They are going to evaluate your cultural fit and personality throughout the entire interview. Your personality should show through via body language, attitude, communication skills and general demeanor. They’ll want to see that you are positive, excited, enthusiastic and hungry.

You will also need to demonstrate a certain amount of humility and be open to criticism – it’s not uncommon for interviewers to take a viewpoint counter to yours and argue with you just to see how you handle disagreement.

Having a good sense of humor never hurt anyone either.

Technical / Thought Process: The technical part of the interview will take up the bulk of it. It is much different than for banking. They are going to assume you know how to do things like build a model or spread comps, so you won’t get any “walk me through a DCF” type questions.

Instead, they want to see that you are able to use whatever information and skillsets that you have in order to develop and explain opinions and ideas. They want to know what your thought process is like.

Questions:

Walk me through a deal you worked on / What are you working on currently?

This is less about explaining the process of a deal than it is about seeing if you can form opinions about them. Tell them whether you think X deal that you worked on was a good idea for XYZ client and be able to explain why you think that deal was good for the firm long-term. Remember to switch your mindset to that of an investor, it is also smart to state a possible risk to the deal as well.

Walk me through how you would form an investment idea.
This means broadly explaining the steps that you would take informing and evaluating an investment recommendation. This is the same framework that you will use to describe your investment idea (see below).

How would you value XYZ company based on XXX information?

They may ask you to explain how you would value a company based on very limited information. This is where you have to think past the usual DCF / Comps / Precedents and figure out the best way to approximate how much something is worth when you don’t have much to go on. Keep in mind that it’s better to be approximately right than exactly wrong.

What do you have in your personal trading account?

Unless you somehow managed to become a millionaire in your junior stint on the sell-side, it’s unlikely that your PA is going to be anywhere near the size that would be necessary to invest like a hedge fund. This is therefore not necessarily the time to pitch the investment idea you prepared.
Instead, take opportunity to talk about your big picture investment philosophy based on your personal circumstances and goals – you can talk asset allocation, broad market trends, why and how are you investing for yourself. Your investment idea can be included here if you want, but should be positioned as a speculative investment that you have made as opposed to a significant part of your overall investment strategy.

Give me an idea that you are thinking about.

As mentioned, in your preparation you should put together at least two investment ideas or stock pitches to have ready to go… Here is the set up:

1) Tailor at least one of your ideas to the fund’s strategy (e.g., if it’s a L/S shop, have a pair trade ready to go, if it is a Merger Arb fund you should have a few pending deals in your back pocket… you get the idea)

2) The second idea that can be anything. It could be based on a recent deal you worked or something going on in your coverage area, or something you read in Barron’s/a research report last weekend. Of course the more work you do the better off you are… The harder you work the luckier you get.

3) Presenting the idea, you want to walk them through the process and explain your decision making at each step:

4) Inspiration / how you came up with the idea

5) Model the company (details are better but errors can ruin your chances – a balance)

6) Conduct background research about the company

7) Refining the original thesis based on research and model

8) Coming up with a valuation for the company

9) Making an investment recommendation based on that valuation (buy / sell)

10) Listing any possible downsides / risks, along with any mitigating factors

Be prepared for the interviewer to poke as many holes in your idea as possible no matter how airtight you think it may be. They want to see if you can defend your idea or admit to overlooking any issues they may bring up that you didn’t anticipate.

What else are you thinking about?
They may also ask you about any other general themes you have been following, so be able to discuss some other trends and your general thoughts on them.

Part 4: The Case

If you pass the first round, the next step is the case study. This entails evaluating an idea in more depth than your investment idea. Typically, case studies will involve coming up with an idea and presenting it to them in the form of an investment memo.

Case studies can be both on-site, where you will be given space in their office and 3-4 hours to work on it there, or take-home, where you will be given anywhere from 12-36 hours to come up with your idea.

Case studies should be approached in the same way as your investment idea, but should be completely fleshed-out. That means building a model and knowing whichever company you pick cold. You can also get extra points if you can think of a novel way to uncover public information about the company that others might not.

Once you have put your model together and finalized your research, you want to put it into an investment memo. This can be either a PowerPoint presentation or a word document.

A general outline for an investment memo would be:

1. Recommendation: Lead with what you are recommending and why so they know what conclusion you are working towards

2. Company Overview: You should have put together plenty of company profiles in your time as a banker

3. Investment Thesis: Explain why you made the recommendation you did, and be able to back it up with evidence

4. Time Frame / Catalyst: Explain and support how and when you think your thesis will come to fruition

5. Valuation: Use your model to provide an overview of whatever method(s) you used to arrive at your valuation (DCF, SOTP, etc.)

6. Risks: Every idea is going to have downside potential. Explain any possible risks and why you think your idea has a risk / reward profile that mitigates them

Part 5: Eat Sleep Rave Repeat

Assuming you pass the case study, the final step will be checking references… Get ready to chug vodka tonics and black out after signing the dotted line (joke… sort of). Once you’re signed feel free to let loose before the grind begins.

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Updated for 2016 and beyond.

Comments

  1. Analyst says

    Great post, just what I needed to see have a few interviews lined up thanks so much!

    Probably asking a lot… But is there any information on PE that you can provide?

  2. Josh says

    What is the career trajectory like in a hedge fund? I know that private equity firms usually have rules where you go 2 and out or you go to corporate/B-school/another PE shop but how do you move up in a hedge fund?

    • Wall Street Playboys says

      The best way to describe it is unstructured. Essentially, you are tied to your PM. This is similar to an equity research associate being tied to his/her Analyst.

      In an ideal situation you work under an outstanding PM who outperforms. He then sees that you were a major contributor to the success of the firm and quickly promotes you.

      If your group/PM fails… the leverage is immediately on the downside.

  3. AC says

    1. What are the best hedge funds to work for ? There’s a lot of talk about working for a smaller fund where you are under sort of a mentorship. Or are the bigger sized funds $5B+ still the best despite the larger number of employees?

    2. How can an investment banking analyst decide which is right or what they are more interested in PE or HF?

    3. You mentioned networking is the most important for hedge fund recruiting. Can you provide a quick outline on this? Similar to other networking stuff like LinkedIn, informational interviews, etc.?

    • Wall Street Playboys says

      These are good questions.

      1. Yes bigger is better. Ie: it is always easier to get a job if you get laid off from Citadel versus a smaller $500M hedge fund. However… this is a big However… You should also agree and enjoy the work of the strategy deployed.

      For example if you enjoy merger arb work (analyzing a deal that may fall apart etc.) you should apply solely to those firms. If you enjoy long short equity.. well apply to those strategies. The worst thing in you can do is work for a firm where you don’t even believe in the strategy.

      Finally, culture. It is taboo to say on Wall Street but if you hate the guys you work for and you ahve two offers each from a $2-5B fund… bite the bullet and go to the guys you liked more.

      2. PE vs. HF is again transaction work versus market work. “Navigating Wall Street” is still one of the most important posts we have on here. If you enjoy deal processes you will likely enjoy PE more. If you enjoy following every day of the market.. HFs are for you.

      PE = longer processes, HF constant grind during the market hours fast paced.

      3. Would check out our post on Standing out as a non-target. This is a good question but can’t be answered in a quick response would have to come up with a post.

  4. Todd says

    I wonder how people like you guys sleep at night. Making all this money not deserving a penny and adding ZERO to the world.

    Criminals.

    • Wall Street Playboys says

      $100 says you don’t have the credentials to work on Wall Street in the first place.

      You won’t get anywhere hating on the success of others.

  5. A.W-T says

    Great overview, wish there was more detail on the types of questions asked. There has to be more than 4-6 questions right?

    Also PE would be cool!

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