Today we continue the conversation with our investment industry veteran, who began telling us the story of investment banking to the buy side. In Part 2 here, we’ll talk about what it’s like to work at a mutual fund vs. hedge fund. Working at a mutual fund vs. hedge fund has a lot of similarities on the surface. After all, it’s all about investing!
However, as we dig deeper into the comparison, we’ll see that there’s are significant differences in the lifestyle, nature of work, compensation structure, and career trajectory. Some of the answers might surprise you.
Without further ado, let’s get right down to it and continue our conversation. If you haven’t read the first half of the conversation, I recommend you start with Part 1 here.
Mutual Fund vs. Hedge Fund
Buyside Focus: Now that you are at a mutual fund, what are the biggest surprises of working at a mutual fund vs. working at a hedge fund?
Work life balance is definitely better at a long-only vs. hedge fund.
Also, mutual funds are less concerned about short-term stock performances, i.e. quarterly company earnings. Hedge funds tend to be more short-term focused and trade around more.
For example, at my previous hedge fund, I always try to better understand short-term trends and investor expectations for each of my positions going into quarterly earnings reports. I would preview the quarter in detail and recommend trades and hedges if necessary.
We were very focused on quarterly releases, even though we took a longer-term view on investing than the typical hedge fund. We had long-term holdings, but also hedged around quarterly releases if we saw potential positive/negative surprises. We tend to make adjustments to positions going into a quarter.
At a mutual fund, it’s more long-term focused. There’s very little trading around the quarterly releases. Mutual funds are not as nimble due to larger asset bases and do not encourage excessive trading, which would incur extra costs for clients. If a stock goes down a few percentage points in the short-term, it’s not a big deal as long as the long-term investment thesis remains intact. So it’s definitely less trading-oriented at a mutual fund.
Lastly, the big difference is resources. In general, hedge funds want to conduct in-depth primary research. So they use expert networks, credit card data providers, specialized research providers, build detailed financial models from scratch, and develop good relationships with bulge-bracket banks.
They also go on many field trips and tend to be more plugged in on the short-term trading drivers of stocks. Hedge funds can do this because they tend to have higher research budgets due to higher portfolio turnover. More frequent trades leads to higher commission dollars for banks. This is how hedge funds can get access to all of those resources at bulge-bracket banks.
Resources on the mutual fund side are more limited. With the exception of the mega mutual funds like Fidelity and Wellington, mutual funds typically do not have the same resources as a multi-billion dollar hedge fund.
I think there are two reasons for this. Research budgets are limited due to lower portfolio turnover. Also, mutual funds tend to take a longer-term view on stocks, so intra-quarter data points and checks are not as important.
Buyside Focus: You talked about having longer investment horizons at mutual funds. Is your investment analysis different at a mutual fund vs. hedge fund?
It depends on the investment style of the fund and it’s hard to generalize.
At the hedge fund I worked at previously, they were very concentrated, which means they had fewer ideas with high conviction. So they were focused on in-depth analysis, modeling, and developing thorough presentations.
Nature of the Work
For each investment idea, we would conduct a lot of primary research. We’d talk to the management team, talk to consultants, customers, and competitors, build a detailed model from scratch with various scenarios, and put together a detailed powerpoint presentation.
Take a technology investment as an example. I would go through financial filings like 10Qs and 10Ks, as well as press releases to populate 4 years of historical financials on both GAAP and non-GAAP basis.
Then I would construct a detailed bottoms-up unit economics, segment by segment forecast. Separately, I would put together a top-down industry model to back test my revenue growth and market share assumptions. Then I would layer in scenario analysis and stress test my model under different cases.
So it was very modeling intensive working at my last hedge fund. They were very focused on drilling down on each key business driver to understand the company in greater detail.
There were also multiple layers within the personnel structure. There were a Director of Research, Senior Analysts, and Analysts. I would go back and forth through a few rounds of questions with senior analysts and director of research before the idea gets to the PM. To take an investment idea from start to finish, it could take as long as one to two months. It’s very involved. After doing several iterations of the original presentation, it could end up being around 70-pages long. That was the process at my previous hedge fund.
At my current mutual fund, our holdings are more diversified. In terms of work, the emphasis is less on the quantity of work, it’s more about getting to the key points and coming to a conclusion in a timely manner. We believe the market is fairly efficient, and mispricings don’t stay around for too long. If I take a month or two to develop an investment thesis, I could have missed my opportunity.
Here, we are not focused on building models from scratch and doing detailed presentations. We put together concise 3-5 page write-ups that get to the point. On the modeling side, I usually take a good sell-side model and build on top of it. I have a lot of autonomy, and it’s really up to me to determine how much work is needed to arrive at a conclusion in a timely manner.
What I like most about my current fund is that the structure is very flat, and I communicate directly to the PMs. I think the investment process here is very efficient, and it works very well.
Buyside Focus: With the difference in the amount of work, what were your hours like at a hedge fund vs. now at a mutual fund?
At my hedge fund, I worked from 8AM to 8PM generally. Though during earning seasons, it’s more like 7AM to 9PM. That’s the typical range at a hedge fund. For earnings, the PM would expect me to send out notes right after the earning call finish and before the sell-side reports come out. There was definitely a sense of urgency around an earning season.
At the mutual fund, it’s 7:30AM to 6:00PM, and pretty consistent regardless whether it’s during earning season. When an earning season rolls around, I can send out my earnings summary notes whenever I’m done, as long as it’s before market open the next day.
The mutual fund is not trading around the clock, so the schedule is more flexible.
Buyside Focus: How about the stress level of working at a hedge fund vs. mutual fund outside earning seasons? Where you more stressed at a hedge fund overall?
It really depends on the performance of your stock picks and your PM’s reactions. If you are at a fund covering a sector, you would be stressed about your P&L if it fails to meet expectations. This is true for both hedge funds and mutual funds.
The stress level was higher for me at a hedge fund. I was making a lot more active short-term bets. That’s not to say that working at a mutual fund is a cakewalk. At the end of the day, we are at the mercy of the markets.
Buyside Focus: How about the difference in compensation? What are the differences in base and bonus structure at a hedge fund vs. mutual fund?
On this topic, I think people tend to think that hedge funds pay really well, which is not true across the board. It’s highly dependent on the fund. I have friends at smaller hedge funds who get paid exceedingly well, and I also have friends who work at mega funds who don’t get paid as well as smaller hedge funds. It depends on a lot of factors – fund size, performance, partnership points, etc.
Hedge fund bonuses are also volatile. Depending on the fund’s performance, some years you could get a nice figure, and other years you could get literally $0 bonus.In terms of making millions of dollars a year as a hedge fund analyst, I think it’s rare unless you are working at a top-tier mega fund with great performance. I get the sense that many people think hedge fund bonuses are higher than what they actually are.
On the flip side, given that hedge funds have underperformed in recent years and bonuses are probably coming down, mutual fund pay is probably very good on a risk-adjusted basis. You would likely get a higher base salary at a mutual fund and still collect a bonus even during market downturns.
Buyside Focus: So mutual funds could offer a higher base salary and less volatile bonus ranges than hedge funds?
Right. Also, hedge fund analysts switch firms quite often, on average every two to three years. If you switch mid-year, you would lose half or all of your bonus.
Buyside Focus: Is there a difference in your career trajectory at a mutual fund vs. hedge fund, especially if your goal is to become PM?
Mutual funds have different structures, ranging from hierarchical to flat. At my current place, the structure is quite flat which is good. There’s an active effort to launch a new fund, and I was told that I have the opportunity to take on PM responsibilities down the road.
On the hedge fund side, if you work at a top-tier mega fund for a few years, you could potentially raise money and start your own hedge fund based on your pedigree and experience. This is especially true a few years back. But this is only if you worked at a very well-known fund with a stellar track record.
At my previous hedge fund, the trajectory for me was to become Senior Analyst, which would come with partnership equity. But I would’ve stayed at the Senior Analyst level.
There are definitely hedge funds where analysts would stay at the same level for the entire career with no potential of making PM.
Buyside Focus: It sounds like your trajectory to PM is actually better on the mutual fund side than it was at a hedge fund?
Yes. It’s better at my current mutual fund than at my previous hedge fund.
Great to hear. One last thing: what’s your advice for people who are trying to get into hedge funds and mutual funds?
Investment Banking to Buy Side
If you are a couple years out of college, rely on headhunters and stand out in interviews. Recruiters generally have a lot of opportunities for people with 2 years of experience because they are frequently trying to fill junior roles at hedge funds.
To get the junior hedge fund analyst role, focus on developing long and short ideas going into interviews. Know your industries really well, and understand what’s going on in the market. Impress the recruiter with your knowledge.
MBA to Buy Side
For MBAs, recruiters don’t really like to place MBA students because there are other experienced candidates who are easier to market to hedge funds. MBA students need to rely more heavily on their own network.
Hedge funds are filled with alums, so tap into that network. They also host investment competitions for MBA students to pitch stocks. Participating in these competitions would set you apart. Many hedge funds hire participants in those competitions.
Outside the stock pitch competitions, hedge funds are also happy to receive stock write-ups for free. Try to do as many internships as you can while still in school. Overall, definitely rely on your MBA network. Networking is super important. It will be a lot more effective than relying on recruiters for you.
Great. Thank you for taking the time!
No problem, glad to do it!
Is working at a long-only more interesting to you than at a hedge fund? Or is the flip side more appealing to you? Leave your comments below and we’ll get back to you.