Top Long Only vs Small SM HF
Between the two roles, which would you choose and why?
a. Top Long Only (Fidelity/T Rowe/Capital). Sector-specific coverage focused solely on equities. Structured 3-5 year program with ~20% chance to get promoted after. Starting all-in comp range is $160-$200k
b. SM Distressed/HY Credit Hedge Fund. $3-7bn AUM with a 7-12 person investment team. Sector specific and focused on high yield/opportunistic credit with flexibility to invest across the cap structure (both debt and equity). Starting all-in comp range is $250-300k.
Currently in the recruiting process for both (would be my first buyside gig). Upfront HF pay seems like a clear winner in my books with pretty favorable AUM/head economics, but I’ve seen a lot of discussions claiming top long onlys are the holy grail for buyside seats (lower comp as a junior, but unlocks more doors w greater earnings as you progress?)
any and all feedback would be appreciated.
I’d think the kicker for the LO would be: how feasible is it to actually stay there beyond the 3-5 years? Places like Capital and T Rowe only promote 20% of associates in those programs and like you mentioned LO pre-PM comp is at a discount to HF.
So if it’s just a 3 year contract, sounds like a kind of large opportunity cost by not going w HF imo, especially given the AUM/head and $300k for a first year buysider sounds top notch.
A $5B SM is not small in any way, and at 9 IP that's a great structure with a lot of potential upside. LOs are great, but you should probably go in with the assumption that you will need to leave once the program ends. More importantly, decide what you want to invest in; a SM focusing on distressed companies and credit is very different than a LO doing vanilla equities w/ a five-year buy and hold strategy. Finally, your personality and goals are important: HF will be faster paced, longer hours, more stressful, but you could become extremely rich at a young age. LO will be slower, better WLB, less stress, and while your median outcome will probably be better than HF median, you lose the extreme upside potential (can still get rich, of course).
I’ve been where you are and struggled with the same decision. I think the prior comment is spot on in that you need to do your diligence on how feasible it is to stay on at the LO after the 3-5y program. For most LOs, associate —> analyst conversion is low, maybe 10-20% make it if I had to guess.
I also drank the kool aid on this site that LO is paradise. For many that started in the business 10-20 yrs ago, that was largely the case. But I’d caution you to think critically about where the business is headed. Fee compression, outflows and perpetual underperformance vs benchmarks are all real headwinds. If you are joining a LO with the hopes that you’ll hit it big once you make partner or become a PM in 10-20 years, you are really making a bet that the industry will be as lucrative in the future as it is today. I would personally take the under and we already seeing comp compression at many LOs.
It’s a tough decision to be sure. But I think the SM HF opportunity is the clear choice. Higher pay upfront, probably a better experience (more responsibility and reps), and an opportunity to develop a differentiated skill set investing across the cap structure. $5bn AUM across 9 IPs is incredible economics. Congrats.
Appreciate the feedback here - I definitely agree with your take on LO's structural headwinds moving forward and feel like the industry can be overhyped on this site. At same time, I can see the argument that these LOs are so gigantic that even in 20 years, comp at the senior level should still be solid (assuming you make it there of course).
But in terms of future optionality, how do you think the LO brand name vs HF experience would stack up against each other?
To be clear, the HF is pretty much off the grid in terms of LinkedIn page, marketing presence, etc. That said, the AUM base is funded entirely by legitimate institutions, and the HF has also been around for 20+ years so imagine returns have been decent.
Obviously, the LO is more of a brand name so i imagine it could set you up well in 3-5 years even if you're shown the door, but I'm struggling to grasp whether its worth the pay cut. I would certainly think you get a better skillset at the HF, so maybe still as compettive for future opps even if its relatively small brand.
The only scenario where I imagine branding would make a material difference is if you decide to go to business school or
leave the industry.
Otherwise, I don’t see how an analyst seat at a $5bn SM will preclude you from future investing roles. At the end of the day investing is a performance based business and if you’re good you’ll have no shortage of opportunities to pick from.
At the end of 3yrs, do you think you’ll learn to be a better investor as a LO RA or HF Analyst?
Why do you think comp will compress? Assuming AUM compounds at 8% with no in/outflows and 50% fee compression implies that the compensation pool will be 2.3x larger 20 years from now. The math changes to 1.47x larger if outflows are 3% of AUM per year (I don't think it will be that large).
It's my view that, like everything, it is a swinging pendulum. For decades, the pendulum has been swinging in the direction of passive and other alternative asset classes. As the alternative asset classes and passive funds saturate, the returns will deteriorate and the pendulum slowly begins to return to active management.
Would really enjoy to get your thoughts on the structural issues facing the sector or if my math is wrong.
It won’t be outflows from redemptions, it will be outflows from disbursements that are not reinvested. The 8% is wrong.
If this was an analyst level position at a top LO then it would be up for debate, but given that it is an associate role, the HF role is clearly superior (even if you want to focus on equities long-term)
Take neither and go apply to the night shift drive thru assistant manager position at your local Wendy’s.
No one has mentioned the bleeding obvious.....do you want to do credit or equities?
No preference
Show me the money, show me the money, show me the money
If it's true that LO associate > analyst/PM conversion is only 10-20%, it seems clear that you would need an MBA to climb there. In that case, I would take the SM HF and collect the checks. You can always reassess in a few years if you are willing to leave, pay for MBA, and settle down in Baltimore (lol)
On the HF side, what you are describing (9 person investment team, 25+ years old, $5bn AUM, credit / distressed focused) describes like 3-4 firms and most are pretty good name-brands so I wouldn't be super worried about branding. Question is still whether you want to do credit or equities, and potentially opens a third door which is take neither.
What would you take instead if your ultimate goal is public-markets buyside (assume no pref between debt /equity)
I don’t think there’s a single HF that meets the criteria you laid out except for Redwood. If it’s just a HY fund that occasionally dabbles in equities (probably bad equities that lose money) then it’s less desirable. I’m also highly skeptical of the implied AUM per head. Very, very few funds have that. You’re probably not asking us for help if you could have gotten a few at one of those places.
To give more info, the fund is more credit focused than equity for sure. Total headcount is like 25 ppl but around 10ish sit on investment side.
I would describe the structure as single manager since it’s basically run by founder w a few partners, as they make final say on buys/sells
And to reiterate, this fund is very very low key. But confirmed manages $5bn+ AUM
I’m still skeptical simply because so funds meet that description, but if you’re right then it’s clearly a very good place and an easy decision. Feel free to message and I can give you actual color.
Depending on how much OP is obfuscating numbers for anominity Chatham, Caspian, VR Capital all also pretty close to this. If it’s redwood it’s a no brainer, though redwood definitely pays more than 250-300, but other three have pros and cons.
Yeah. It’s more open if including funds that have mandates that are almost exclusively credit. Still not sure the aum per head is as good as implied.
Is redwood really a no brainer? Curious your thoughts on them. See lots of departures from there recently (for their headcount)
FWIW, know someone who lateraled from one of those top LOs as an associate to go to L/S HF.
Said they left because there was no chance of getting promoted without getting the MBA + luck (and this is coming from a person who had top BB + Ivy undergrad resume)
If you don’t mind me asking, what kind of HF did they go to?
Pod shop
I’ve also seen a number of RAs exit to pod shops. A “good exit” from an RA role would be considered a SM HF Analyst role or an Analyst role at the LO.
Said another way, if you took the LO AM RA role in 3-5yrs you would be lucky to have the same SM HF Analyst offer you have today.
HF over LO, no brainer
$3-7 billion is not small. Distressed/credit funds generally have lockups so capital and hence your job is much more stable than a similarly sized L/S manager
You will have exposure to all parts of capital structure, actively investing, and be involved in a multitude of different transactions. You learn much more and the skills are more portable
You will have a faster progression if you do well. In the extreme upside case you can have your own firm. LO is more of a cushy highly compensated career track
We are in a part of the cycle where there’s a lot more to do. Highly leveraged companies abound, rates are high, something has to give. You will deal with PE funds getting wiped out, other creditors on creditors committees, convert debt into equity and hire / replace management, and catch the part of the cycle where fortunes are made
If you have at least an ounce of ambition and any sense of market dynamics, the choice is obvious
Franklin Templeton (one of the top LO firms) is downsizing its public equities team and expanding into private markets. That should tell you something about the future of AM
The HF without a doubt. I’m at a top LO right now and conversion to analyst is sub-20%. I’ve gotten great feedback but my sector is saturated so they don’t need folks and I’m forced to look elsewhere, trying to interview right now
the HF gives you exposure a task the entire cap structure and it’s highly inefficient in HY and distressed. The flexibility to move anywhere after this is enormous. If I had both those options I’d do the HF without a doubt, LO has been disappointing in a lot of ways. Still a decent seat if you convert but increasingly worse job security and less comp, so the balance is shifting away from LO as an attractive career vs alternatives
Could you elaborate on how it’s been disappointing?
I'll list a couple:
1) Very low ability to move up given extremely low turnover. You geo mobility quickly becomes trash, often being forced to places like Milwaukee to get a shot
2) Active is structurally declining but within that is the rub -- the more interesting roles tend to be at smaller shops (broader coverage, wearing more hats, being closer to decision making) which are losing share to the gorillas (T Rowe, Fido, etc)
3) Purity of LO investing is nonexistent in institutional money -- most of us entered the space idolizing Buffet's approach but it's amazing how short-sighted so many PMs are. 0-10% turnover is probably the wrong answer, but I don't think 80-100% turnover is the right answer either (in a 5yr investing context)
4) You realize how stupid many sr. analysts / PMs are -- guess that's the more meritocratic element of HF world where losers are weeded out much faster vs. LO. I actually wonder if many of these PMs have a brain sometimes, even at so-called top well known boutique where I work it's amazing how easy it is to sell a mediocre biz as a great one to a PM (which gets into the portfolio) while they either don't really consider the best ideas. More about pitching ability than anything else. I genuinely think you could train up most above avg RAs over 10yrs and put them in a PM seat and they'd on avg outperform the overwhelming majority of PMs in this industry
The single-manager will give OP WAY more flex in moving around afterwards from distressed / private or public credit / public equity / private equity / etc...and he's an analyst from the get-go so new opps will be easier to find (much harder to go from an associate to analyst internally or externally)
So where are you looking into now mate? L/S?
Also interested to hear your thoughts on why LO has been disappointing, other than its secular decline which has been rough for all LO juniors.
I assume you are an RA? Did you feel that you were able to grow as an investor?
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