The Long and the Short of it
Before I dive into the day-to-day, let’s quickly run through what a hedge fund is and where long/short equity fits in. Modern hedge funds were effectively started by Alfred Jones in 1949 who devised a “market neutral” equity investing approach meant to reduce volatility due to general market swings and allow investors to outperform the market by picking stocks that would outperform/underperform their peers (here is a great read on the history of the hedge fund industry for those interested). By constructing a portfolio of both long positions and short positions the performance of the overall fund will be “hedged” or protected against the general movement in the stock market since gains from the long positions will be offset by losses from the short positions in an upmarket and vice versa.The idea then is to pick the right stocks such that the longs outperform the market and shorts underperform the market – then the portfolio effectively will capture the spread. Since the portfolio is hedged (and thus less volatile in theory) hedge funds often employ leverage (borrowed funds) to increase their returns. Today hedge funds have multiplied many fold and the term now covers a broad range of investing strategies and asset classes including equities, credit, distressed/restructuring, macro, quantitative, and yes even crypto!
Where do I Come In?
Simply put, the key to a fundamental long/short equity investment strategy is picking the right stocks and managing the portfolio to successfully capture steady returns from your picks. A typical long/short investment team will have a Portfolio Manager (the team leader and “quarterback” who is managing position sizing, execution, and risk exposure) and several Analysts/Associates responsible for coming up with investment ideas and staying on top of any changes in the business fundamentals of existing positions.As an analyst, your job is to become an expert in each company you cover. This means understanding how the business makes money, the company’s competitive position, secular trends, any macro or microeconomic factors affecting the company’s ability to operate, and most importantly, how all of these factors roll up into the valuation of the business and thus its stock price.
The great thing (in my opinion) about being a long/short equity analyst is that there is so much variety in the day-to-day activities and priorities are frequently shifting based on market conditions and upcoming events (i.e. earnings, conferences, management meetings etc.). Unlike banking or PE, there are rarely any hard deadlines or strict processes to follow (no more creating timetables and updating distribution lists!). Instead, the challenge is to find the most productive way to spend your time in the aim of maximizing idea generation and idea quality. While there are some routine maintenance type of activities, this structure allows for more creativity and variety in the type of work and research you conduct as an analyst. It’s all about what best helps you and your team effectively come up with good ideas that generate positive expected returns.
A Day in the Life
All that to say, a typical day as an analyst can vary greatly. On any given day you may find yourself:
· updating models to fine-tune scenarios and price targets with new forecasting methods
· talking to management teams
· attending (now virtual) conferences
· speaking with sell-side research analysts to discuss ideas and gather market intelligence
· speaking with fellow buyside investment analysts to trade idea and insights
· speaking with industry experts or private companies in your sectors
· screening your coverage list for new ideas and writing up summaries to discuss with your PM
· conducting data analysis to better understand current industry trends and/or business dynamics that the company may not directly disclose
· reading research reports, SEC filings, and earnings transcripts
As mentioned above, there are some routine activities such as getting ready for earnings season (and updating models once earnings have been released) and attending conferences (typically a week or two after each earnings season), but beyond that, this is a less structured role. Your success as an analyst really depends on your ability to spend your time effectively rather than on efficiently working through deal processes and having precise estimates or clean formatting.
So Why Pick Long/Short Equity?
In my view, the trade off between HF roles and PE/IB roles is one of risk appetite and work style preference. PE/IB tend to be highly structured – your senior managers will hand you down tasks to be completed and you will have a finite set of things to get done with a clear deadline. Consequently, your compensation is generally more fixed and there is only so much you can do to excel as a more junior employee (i.e. you can have a high-quality work product, good communication, and maybe suggest some ideas, but you can’t really bring in business or directly generate revenue). L/S Equity roles are much less structured, especially as you get past the first year or so. While most firms generally provide a floor to junior analysts comp (so you don’t have to worry about a down year), your upside can be significant and is more or less directly tied to your ability to come up with good ideas that generate profits for the team/firm.
To me, this is a much more motivating place to be. If I work harder, conduct more research/analysis, and thus come up with better ideas, the team and I will both (hopefully) make more money and be rewarded with more opportunities for advancement. It’s more like being an athlete and honing a skill rather than working on an assembly line. On the flip side, when things aren’t going well (and believe me, you will have bad ideas and even good ideas that lose money!), it’s harder not to feel responsible for the weaker performance.
How to Get Started
To summarize – long/short equity roles can be a great place for financial professionals who are fascinated by the market and love learning about how businesses work. It is a role that will allow you to learn more about the world around you, meet with management teams and industry experts, and apply creative thinking to come up with profit-generating ideas. If you prefer structure, certainty, deal process, and advising clients, long/short equity is probably not for you.
If you think long/short equity might be for you, I suggest starting by spending more time following the markets and reading up on how to invest in stocks. If you find yourself enjoying this work, consider picking a few companies that you are honestly interested in and conducting your own fundamental research and valuation work to decide whether or not they are good investments. If you’re up for it, you can even start putting some of your own money behind this work through a brokerage account (Not. Investment. Advice.). And of course, if you are ready to make the jump or are just curious about learning more, myself and the rest of the awesome folks at OfficeHours are here to help or Submit your Application directly here and we’ll be in-touch!