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Making The Transition From Private Equity To A Hedge Fund

Private Equity

Nearly every private equity associate considers making a shift to public markets, especially when staffed on multiple live deals and while dealing with active portfolio companies. If you are thinking of making the jump, there are many factors to consider including hours, lifestyle, day-to-day work, career volatility, and, of course, compensation. The differences between roles can be either positives or negatives depending on work style, personality, and appetite for risk.

At a hedge fund, hours tend to be more consistent. Typical hedge fund hours start a couple hours before the market opens and end a couple of hours before the market closes. Hedge fund analysts know when their busy seasons will be every quarter, structured around public company earnings schedule. Outside of earnings season, you meet with companies, but all of these events are planned well in advance.

In contrast, in private equity, you can either be working day and night on a live deal for weeks straight, or if you’re just staffed on portfolio company work, your hours can be very reasonable. However, you never know when you’ll be staffed on a live deal or when a deal will go live, so you have less control over your work schedule and hours in private equity.

Team Structure
Hedge funds are typically more flat organizational structures and more meritocratic than private equity funds. Typical hedge fund analysts either report directly to the PM and/or to their senior analyst(s). Analysts are expected to find, research, and pitch their own investment ideas directly to the PM or investment committee.

In private equity, associates are generally part of larger teams that all collaborate on the same investment idea and pitch it to the investment committee as a group. The team structure at a hedge fund results in analysts taking more ownership over the successes and failures of their investment ideas than their peers in private equity.

Like public markets, compensation at hedge funds is more volatile than in private equity. At hedge funds, annual compensation is typically determined by the performance (P&L) of the team during that year. In strong performing years where analysts contribute a lot to the P&L generation, you can get paid well that year. However, if your team is down that year, your bonus may be smaller or you may not see one at all. In private equity, the ownership in the fund is based on carry and that can take 5-10 years to realize the bonus payouts from.

Pay is more volatile at hedge funds but you can start earning more money earlier if you are a standout analyst on a strong team. I would note that compensation works differently across hedge funds and can vary at single-managers, multi-managers, and start-ups.

Conviction Level & Idea/Investment Velocity
Since hedge funds operate in public markets with only public information, the conviction level of your positions will be lower than in private equity. Hedge funds do not typically invest in the same level of resources that private equity firms do to diligence potential investments. At a hedge fund, you will not have access to consultants, accounts, lawyers, bankers, advisors, full management teams, etc. to help you turn over every stone. Hedge fund analysts must learn to be creative with the data and resources they have to build interesting and differentiated pitches.

Conviction level and creativity are some of the biggest hurdles of making the transition from private equity to public markets. New analysts need to get comfortable with being wrong. This is why the “What is a time that you failed” question is very important for interviews. Some of the best hedge fund analysts are right only 55% of the time, which means you will be wrong almost half the time. Since you will have lower conviction and will be wrong a lot, the velocity, or how quickly you must come up with new ideas, has to be quicker at hedge funds than private equity. To come up with new ideas more frequently takes more creativity.

Exit Opportunities
Depending on the style of hedge fund or public markets you go to, exit opportunities out of the public markets can be more limited than from private equity firms. Public markets investing is a more niche set of skills. Once analysts are at hedge funds, they tend to exit to other funds, long-onlys, or other public markets roles. Analysts can also on occasion exit back to private equity or investment banking.

Private equity professionals typically have a broader range of skills by not only analyzing potential investments, but also sitting on company boards, helping run the companies, working with management teams on strategy, and many other corporate development tasks. Private equity associates are commonly asked to work directly with the CFOs and other managers of the company to help with analysis. They sometimes even take over the role of CFO or other financial and strategy positions if there is a need! Through their work with portfolio companies and management teams, private equity professionals make professional relationships that can lead to job opportunities at companies.

In conclusion, it is tough to find a job that solves for every variable, and both hedge funds and private equity are fantastic career paths. However, if you enjoy flatter organizations, thrive in dynamic and volatile environments, like being creative, and want more consistent hours, hedge funds may be the right path for you.


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