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So, Many goons over the years know that I am 1. A royal rear end in a top hat in most video games 2. I tend to work alot In what very much could be a top of the market post, I really wanted to explain to other goons about finance. Or at least what I have learned sofar about finance and life both on the Sell-side and now, the Buy-side both being a portfolio manager and a owner of a large (around US$X00MM AUM, and counting) advisory practice. The number has been masked upon further thinking, because that would give out our peer group and trade bracket. Why am I doing this ? Well for one, SomethingAwful and the spinout communities enabled me to develop an excellent network of relationships. My first big deal was actually financing a goon spinout while in 3rd year university which recently was sold to a larger retail company. Of those goons I played with in goonswarm and KIA many of them I still consider good guys and while they are all now industry mid-tier executives I do bat-phone on occasion. Some of those goons now are advisers, regarded as sector specialists at third party advisory shops or major Zug & New York trading shops. When I was in a really hosed up period of my life, and drinking alot in early university I stumbled into SA. As a lowly plebe in 0.0, I found out that I really hated engineering and loved trading game time cards for game currency, and then back to cash; which is how I got the itch in the first place. So this thread may inspire a goon out there to go buckle up, corner a market and then hustle their way into finance; and after 10 years in the pits, they too may make it to Ira Sohn Conference (sort of the E3 for fund managers seeking to make it big with major global pension funds, by showcasing your ideas). Why now ? Why not. Because I sure as gently caress would have found it pretty swank to have had someone explain this poo poo to me Before or during my goon years in early undergraduate and/or when figuring out what to do as a junior investment bank analyst. A famous fund manager named Dan Loeb did something similar a few months ago with his old Poker circle at his surf club, which was where he got his poo poo together while dreaming of being a beach bum off third point california (hence the name of his fund: Third Point). Off this idea, a very well regarded Canadian hedge fund manager also tried this with his video gaming group on Reddit via a AMA post a few months ago and was very pleased with the results. It's also good karma, and the post thread can act as a psudo-journal for the next few months while me and my plucky band of geeks race towards either a.) the final fiscal cliff as the US Fed begins forcing an asset class collapse or b.) as I race my fund to the "sound barrier" of institutional investing. I'll explain what that means in 12 months, if this thread lasts that long and so I do not jinx my trade desk. I'll check the thread every few days or so to start, and if there is lots of feedback I'll check it more frequently. If not? Eh, the best intents of mice and neckbeards. Few ground rules: 1. I can't DOX myself, and also it's illegal to give stock tips or trades on an open forum without a big "safe harbour" clause. Sorry. Any directed questions about buy/sell I can at best preface with a case study or direct you to a research portal for the retail brokerages I think publish good stuff. Those goons who do know me, keep the embarrassing stories to a minimum (or not, whatever). 2. More than happy to share stories about my 3 years in equity research as a research analyst (won an award, boss stole it from my cube, then fired me after the market crash to have enough money for a cocaine binge and engagement ring for his woman at the time), investment banker and as a portfolio manager 3. More than willing to explain the basics about the world of funds, buyside or trading. Basic ecosystem questions (what is the difference between a HFT, an event driven, a macro, a long/short fund etc etc) or the terminology 3a. Any questions about back office,trading mechanics or basic reading lists I'm happy to share the books I used. Asking for free CFA or Series 11 exams I can't do; I think they ban you for that now, but I don't feel like finding out. When we started me and my COO literally did every job together, like all early fund managers do. So if you ever really wanted to know about payrolls, hiring forms, 301-B's or US/UK passthru forms, it's a horrible, horrible memory burned into our minds. Never take for granted your CFO, or anyone in your middle or back office. Ever. Even the secretary that shows up late because she wanted to get botox and plastic surgery at lunch the day of a corporate due diligence fire drill. 4. While I have placed goons at jobs in both New York, Stamford and London in the past 4 years; no do not send me or ask to be hired. More than happy to share or explain what a hiring process looks like for each side of "high" finance, and what every niche looks for 5. Happy to answer questions about the industry, or take a stab at anything related to current market outlook/legal outlook on the general global economy. About what I do: - I write for an investment column on a major global website, and I do guest contributions for a investment journal under a ghostwriter. It's important while you are a "small" fund to learn your style and hone your communication skills. As a rule, we do not give investment advice in that column, nor do we do guest spots on CNBC, Bloomberg or any other major stations in keeping with best industry practices. Back in the day, unless your last name was Buffett/Soros, talking your book on national TV was seen as weak-sauce (think of it on par with roleplay posting on the EVE or WOW forums; only lamer). Corporate activists are a whole different species and take to the airwaves for getting froth up in the markets; so happy to explain when and why you see guys like Einhorn, Ackman, Ichan or Jana Partners do their thing: and when it is important to stick up for your rights as a shareholder. Also happy to share my own experiences with doing a "bear hug" and corporate takedown on a company which went really, really REALLY, horrible; and we managed to fix it. - I mostly do energy (everything from solar to nuclear and all the oils inbetween), applied science (aerospace to automotives) and technology (no social media anymore, gently caress that poo poo). Russia is a horrible place to invest. If anyone has a serious question about these sectors I at least pretend in front of the employees and corporates to know what I am doing. My greatest fear is that like every executive to have ever signed a payroll, someone will finally call me out on my bullshit. So I will share what I know, and am happy to have a smarter goon curbstomp all over my insights. - I run a long/short flagship equity fund, however also do event driven trading and computer trading. Not HFT or Algo per se, (like Viola or Renaissance Technologies) but I can speak about those areas a bit; many have strong views on what is front running an exchange and what is a legitimate trade in these areas. Happy to talk about the whimsy that is Prime Brokerage margin limits, risk tolerances and Value at Risk metrics (and when it all is just timey wimey stuff). - We are registered and have set up the fund to be registered under Canada, US and UK law. Currently reading up on Chinese and mainland-Euro registration, so if I say something really stupid: just accept Hal's talking out of his rear end more than usual. What is is like to market your fund, what it is like to market to Cascade or other mega-offices, and how long/hard it is to make it to even the early investment stage (50 million AUM). - I am not Batman: On average a hedge fund does not take all the big cheques you read about in the news and buy fancy toys. Most of the bonus is expected to be reinvested into the fund (just like any other normal public company's executives do, to keep them aligned with stakeholders) or we donate to charity. On average we donate about 60% of our pre-tax profits to an endowment or basket of donations each fiscal year. Some who follow the Soros model distribute most of their garnishments to the charity baskets. Difference between a hedge fund, a mutual fund and a private capital pool: Many claim to be a hedge fund, that's cool. Traditionally a HF was simply a vehicle who was allowed to short stocks and could make up their own investment policy/risk profiles to match they investment style. In fact some of the largest funds in the world today, like Blackrock's equity standard or Franklin Magellan are some of the oldest hedge funds around; they just changed their roles as they grew up to be over 1,000 billion AUM (assets under management; the size metric for our industry). Today a Hedge Fund basically means an asset manager who sets out a series of rules and regulations that govern their investment structure (what kind of investors we take in, how we solicit them, how they get their cash on redemption of the funds we invest for them, how we track our performance, how much we pay ourselves). The industry while it seems to be very un-regulated compared to our mutual fund brethren (which are known as "open" funds) is actually very policed and monitored, just not in the way Dodds Frank applied to main street risk trading. A Hedge Fund today usually is more identified from mutual funds by the fees we charge and the covenants placed on redemption/monetization of your partnership stakes in the fund for hard cash than any other sort of metric. That open ended definition is one of the good things about the sector, because it enables you to generate a trade strategy and then put it to work; it's sort of the closest thing the world of finance has to the "dot com" phenomena, however this is sadly changing. I poo poo you not, I have gone before some of the legends in the business and they straight up have told me that it I may be the last generation of funds due to the increasing fixed costs of regulation and closed barriers limiting capital formation in "new rich" countries like Russia and China, where most of that money is managed by oligarch trusts by state governments. Since I started my fund 2 years ago, over 60% of the exempt dealer registered institutions (the fancy classification for "hedge fund") have went bankrupt, or as we say in our industry "wound down" or "shuttered". It very much feels like that whole scene in star wars 3 when the Jedi are getting their poo poo pushed in by everyone at once, and the Jedi are just standing there like "the gently caress?!". Not fun, but it does add another level of awesome to the mix when your team is pulling together and the next quarter you realize your peer group went from 200 funds worldwide to 60. It very much gives me personally the same thrill as Bob War 1, knowing that the entire financial world (literally) wants me and my team of nerds dead, but somehow we keep going day to day, mostly for the lulz. Our most famous trade was codenamed "Hotdrop" due to how we structured the payoff matrix: the funny thing is everyone to this day in our sector thinks it is a reference to a lyric in a rap song. Go figure. "one more thing": Post SAC capital, Galleon and Madoff, the industry also has serious agency monitors in place. It is not uncommon for a fund to hire ex-regulators or even hire the same guys as the NSA/CIA monitoring desks to observe your trading pit. Our shop for example, I made a clear choice on day one to use the same monitors which are used by the 3 largest casino operators in the world. It's expensive, but as I learned early on, and as Warren Buffett said: a reputation can be built up over 5 years and lost in 5 seconds. As a research analyst my boss also covered the Galleon and SAC accounts. So I'm happy to speak about those situations, what different types of buyside cultures are and when/ what was wrong in "specialist" networks as Galleon tended to use them. I'll never trash another shop, but edge can often lead you to make subjective calls on what and when not to use information found in the field. Personally I will use everything up to the public databases, and yes: using scouts and even satellites is fair game (and common practice right now). Where I draw the line is using private investigators or corporate insiders, but many will seek out ex-insiders and hire them to work on plays or projects just outside their "gardening periods" to glean knowledge that can then be backfilled into a "mosaic theory" for investment targeting. It's on par with BOB using dev codes, but more on that for another post. In Steven A. Cohen's defense, I honestly doubt he knew his Sigma unit was doing dirty trading. When I first heard the news, as a banker I was skeptical as to his initial claim he did not know; but now being in the big chair, it really is a chore keeping on top of everyone. Imagine all the Drama of leading a Goon guild, now imagine you have real dollars and shady expense to keep track of: welcome to mid-size startup's in finance. How did I get my start ? Networking, which is kind of the point of the thread. Also, a great way to get noticed is the same way David Einhorn got noticed, start a seeking alpha account; even if it is just a journal tracking your understanding of a sector you are interested in (hell it could be video games). You never know who reads what these days. Think of it as an art portfolio for quant jocks and balance sheet geeks. Hal_2005 fucked around with this message at 07:48 on May 27, 2014 |
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May 27, 2014 07:40
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Do you think your clients benefit enough from your services relative to the high fee?
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May 27, 2014 08:37
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What're your hours like? Is the compensation worth it? And do you love your work?
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May 27, 2014 13:52
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Who do you dislike more high frequency traders or Elizabeth Warren?
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May 27, 2014 14:26
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How many analysts do you employ? I'm curious to also hear more of your story of your time in equity research.
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May 27, 2014 21:24
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How does your trading, or trading in general, in the energy markets influence what we pay for energy? I mean I see a barrel of oil go up and down and gas prices stay the same or follow or go the other way. The same with natural gas, coal, etc how much does this affect power purchase agreements that utilities have in place?
spwrozek fucked around with this message at 02:57 on May 28, 2014 |
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May 28, 2014 00:21
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It all sounds fascinating, but I have zero questions to ask just yet.
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May 28, 2014 01:39
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What kind of fee structure is the current trend these days given 2 & 20 seems to have died off a while ago? What percentage of your personal assets are invested in this fund? What about the board members? Managing partners? Are most of your trading positions going through the major exchanges or are you dabbling into some emerging exchanges too?
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May 28, 2014 01:55
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What is "timey wimey stuff"?
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May 28, 2014 02:58
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I'm a new software developer and I want to make a lot of money. Working at a hedge fund seems like the best way to do this. Can you confirm/deny?
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May 28, 2014 03:19
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Xandu posted:Do you think your clients benefit enough from your services relative to the high fee? Fees are variant and it depends on the strategy. Back in the day I was told (like Tudor Jones & Peter Lynch era: 2 & 20 was derived from the standard deviation expected from market returns (ie: you would do 20%+ in all markets). As most spreads have collapsed from 100 basis points to 40 basis points or, for large volume equities 5 bp, the comissions and alpha generated is very very rare. For high alpha vehicles, yes the fees are justified because the active managers provide under normal market conditions absolute return generated by both market education to the limited partners (the investors in the closed end fund) and insight origination which is not supposed to be found in a passive indexing or ETF product. Sector returns have fallen for 2 reasons, and in turn many funds claim high fees which are vestiges from when higher returns were achievable in low-technical barrier to entry sectors (retail, manufacturing, standard gordon growth model type financial analysis): 1. Asset pools have grown while the number of securities have stagnated or shrank since 2000. So if I am say, a generalist event driven fund (ie: I have no real "niche" and just buy on price to earning growth ratios and other fundamental data points), I am chasing ever fewer investment ideas and each trade is growing ever more crowded. This forces abnormal risk reaching, which was one of the reasons why we saw a huge bloom in credit-arbritrage funds post 2003 and again, post 2009. Sadly, as the market chases these crowded trades the assets inflate, and all those funds tend to "beta" each other. If that makes sense, which means the ability to outperform your peer class is practically impossible. As such, most shops pay 2/20 or 1/20 to 40, but in reality never really hit their high watermark post 2008, and simply negotiate with their LP's for some fraction of the performance fee (say 2/9.5 on a weak year). SO in short, they are basically charging the same as a trailer, front loaded mutual fund (aka a Fidelity product, ironically). 2. Adding to that crowding effect due to misallocation of human capital to very few industrial "growth" sectors (tech, biotech for example) you have a compounding effect where quantitative easing has made all assets inflate at a single fixed currency & bond arb rate. So picking shorts are meaningless. Since half of your return is now lost to market indexing; that is why funds have significantly underperformed simple indexing over the past 10 years. Even if you are short a horrible dogshit company, the company will just bob along so it trades in lockstep with their index weighting, and ETF/passive funds will be required to buy it, since the cost of default is 0% in a zero bound interest rate policy. This being said, 1 & 2 really do not affect many "picking" funds, which is why you have small pockets of talent still surviving because of the information arb. that exists in some sectors of the economy. For our fund, when I intially launched I thought I was a loving rockstar like Warren Buffett and set stupidly high hurdle rates. After 1 year, our LP's actually told us going to a higher performance fee structure would be better so that we could use the fees to invest in R&D technology and more analysts at the fund. While 2 & 20% was the norm, the average now is 1 & 30% or 1 % 20% depending on your last 3 years performance. Pension funds, due to the horrible mismatch in assets to long term liabilities have been the key drivers in pushing down generalist fund fees, but that has had the inverse effect of many star managers taking their money and starting up private pools (aka. family offices). So in the end, I suspect the market will seperate into a two track, much like all other sectors: There will be a big pool of active managed products which are basically "smart" mutual funds, which is ironic because that is what you basically buy from Manulife or US Global anyways; and the other guys who are bespoke MIB's who operate very much like old merchant banks pre-financial industrialization in the 1920's. Time Wimey? Dr.Who joke, I'll explain that sometime later but basically a bunch of technical stuff that is kind of boring to type and read (at least to me and I fear most who are curious on the sector at first blush). My personal assets? 100%, plus 90% of my extended family's net worth ex-our family company. I can't say our fee structure but it we have a high water mark (we dont get paid poo poo until we grow the assets), a hurdle rate (meaning we gaurantee a X% each year or we dont get paid poo poo) and we charge a basic assets under management fee below 200 basis points and a performance fee above 30000 basis points post hurdle. Which compared to our peer class of funds that have returned over 40% for the last 3 years is stupidly good given our sector peers are down between -10 and -20% for the period. All funds must have some form of board of directors, a chief operations officer, a chief investment officer, a chief compliance officer, an independent financial secretary/treasurer, usually a marketing agent, and a board or group that monitors the portfolio (usually partners or bound/aligned portfolio managers); that's just something all institutional investors require you to have, as well as it's common practice when you have non-family investors in your fund. If you go beyond $50Million under management, it's pretty much given to you (or you have 90 days to get the hell off the prime brokerage platform) by your prime broker; prime brokers are where you store all your securities and custody chains. Edit: since we are on this train of thought, every asset manager or advisor also has to have a clear break in both the pool of assets, a custodian/monitor for the performance tracking and securities held in escrow for the limited partners/unit holders. and an asset manager who then manages the pool of cash/securities for a fixed and agreed fee term. Thats big word soup to say, a really expensive savings and trading account setup; which is why you don't see asset funds sprout up on every store corner and kiosk like the 1970-2001 period when a small time brokerage was easy to set up (and what led to mr.Madoff's adventures in "fade-trade arbitrage"). On average ? The fixed costs for a bleeding edge setup (well, our lawyers claim it is) has about 1 million in fixed costs for a single country, and for a really complex operation about 19 million in annual fixed registration and filing costs. If that sounds like alot, it is; thats just the costs to keep us from being shut down: fees to registrations, paper work, custody monitors and other legal poo poo post Dodds Frank. So that is why there are so few start up funds these days, for better and worse. See the Star Wars, last of the Jedi Knight analogy. Good luck running sub-50 million, where every year between 0.3% and 1% of your administration fee just goes to keeping the lights on. But that is life. Trading positions are all done via a common platform which ties into basic price data feeds you subscribe to each exchange for. Think of it like buying sub's to a bunch of MMO's and then paying people to play them for you. Quote pits can be either over counter, main board, upstairs (block or cross) or dark pool/flash pools (all different types of methods to move ever bigger volumes without being scalped or coupon clipped). The traders use that common position UI to make or set their orders, which are then routed. Like any set of tools each exchange has a certain method and use, which does not ever get enough air time. I 100% agree with Michael Lewis's flash boys book, which I encourage all goons to get and read; because watching your clients money get sapped sucks, and does happen alot. This of it like gankers in 0.0, they do it to survive, but it's annoying to have to deal with them. The common platforms used are either 1.) proprietary built ones (like what Citadel or the major HFT guys use) 2.) bloomberg 3.) reuters ikon. Trading in general is nigh impossible to corner a market. A good example of when a trader can (and its illegal) to corner an energy market is when a guy called Brian Hunter tried to corner the natural gas market. Long story short, given the market daily volume and pit information it is very hard to control a price or affect something as a "small" fund. In some cases, when liquidity dies up (nobody wants to buy at your price, or wants to dick you around on a trade quote and scalp your returns) then yes; moving large volumes can disrupt prices in securities. This is what happened to JP Morgan in the "london whale" fiasco, but he also was a dick and did some illegal poo poo in addition to being caught "out of water". In those cases, it is possible to see the price move, but this is rare and is limited by something called the "next best bid order" or NBBO. NYSE has a good explanation on when and how we are allowed to move, think of it like a transport truck which must yield to local traffic when turning. Cornering markets however and manipulation does sometimes happen; and there are some famous cases where people have cornered the market or done bad tricks to push the market a general direction but to pull that off one needs over 100 billion dollars in notional market purchasing power to effectively "buy the stack" ie' buy out all the orders possible to force the price a direction, usually up. Same way it used to work in EVE Online when some dick would buy all the Zydrene. The other way is manipulation of the average price of the market by doing statistical manipulation of the average vs. the mean by using order stuffing. But more on that for another post (investopedia has alot on this type of manipulation, which is illegal in all formats). On Elizabeth Warren or HFT ? neither really. Met Elizabeth when I went to new york for an energy conference and she was at the Waldorf chilling with some guys from SEC; alot of her rules add a bunch of more paperwork but most of those rules are related to retail investment products, that we don't classify under. Many of the guys who shut down or went family office because of the Dodd frank rules on exempt asset vehicles did so because they would have had to disclose their expenses or fund structures, which would have placed their families or charity networks under scrutiny. All I have to say on that point. HFT? There is good HFT and bad HFT. Every algo; ie every scott trade or E-trade you do is using a HFT algo, so HFT is good because it enabled many to learn the fundamentals of security research vs. simply playing pachinko in the pits or growing fustrated when their orders were stopped out. Guys like Citadel and RenTech are also good HFT because they are paid to clean up the bid/ask spreads which means that everyone pays less commissions on locating and selling securities. They are basically the blood cells of the US Economy, bumbling along bringing cash (liquidity) to where it's needed by participants. Bad HFT is when you pretend to be a liquidty source but in reality you are only waiting to jump in front of a legitimate order to scalp a bit off the price. If you say want to buy 10 million dollars worth of say, Exxon Mobil and a fund can see your order placed 1 pico second before the exchange, can get to the exchange first, and then purchases the order ahead of you, then goes back and sells it to you for 12 million dollars; then they are basically stealing 2 million from your trade. Which is a dick move. Sadly 99% of HFT is this these days, and that is why we have flash crashes when real orders like mine step away and the HFT's all fight like sharks against each other to scalp each other; leading to a resonance cascade and a "buy the stack" event; either limit up, or limit down (a flash crash). I love the work, many do. Best story is when a small energy company I literally had to hand hold while finishing my MBA at the time finally went public, then was taken out by a larger company. I got to see it grow from a 5 man shop into a 300 man corp. What was cool is that during that time I also learned to see the company's families grow; kids who's parents could not afford a game cube were now able to send the kids to university. Many funds do it for those small moments, at least thats what we tell ourselves at night. I still have a file in my office, beside my registrations and licenses which is the thank you notes from the corps we invest in. I know Reid Hoffman and many other guys do also, Warren Buffett actually has a wall where he hangs them on. It's important to keep morale up, esp when on any given day your shop may be in or out a few million dollars on a trade or a few ten million on a blown hedge. The compensation is worth it on paper, but to be honest may (if any) I know do it for the money. Some like to keep high score, like those who send in their Roth/IRA forms to Forbes to see if they make the 400 list but most do it for the fun of growing a company and playing with numbers. Capital gains taxes, which is what our bonus and fees are paid on when they return to partners would make 60% of our compensation become tax surplus, so most never see a dime of their big "fees". It's just put back into the trades or donated to charity. Which is good too, because personally I feel better about it. That is a 100% serious answer and many guys like Bill Ackman or Loeb would totally stand behind that comment, because like that 1 company you get to see not get "curbstomped" on the way to victory, that you argued day in & out still was a "screaming buy", it is warm and fuzzy to fix up your old university wing & poo poo. Without dox'ing myself I really like neuroscience and financial literacy and we make enough to live on. Average salary for a principal is about 300,000 a year, so on par with a junior executive. Portfolio managers take home 180,000. Juniors about 90,000. Bonus varies with the shop; on average you make about 120% or 100% or 0% of annual salary for your pre-partnerhsip stake. And then it's a feeding frenzy vs. the boss and compensation board for performance at partnership level. More oft than not, it is expected 50% of take home is reinvested, and on average 10% additional is given to the charity trust. So on that 2 billion dollar take home you read about on Bloomberg news ? Maybe less than 30% of that will be what you actually move to the personal savings account, and then get taxed on personally. You still get taxed and penced on the big cheque too. Bill Gross of Pimco (when he was done fighting with his ex-best friend) wrote a good writeup on the real "buyside" life is like in bloomberg week a month (or two?) ago. Basically, you get up 3 hours before your home market. So if you are on the west coast, and the market opens at 9.30 am in New York, your looking at a 4.00 am wakeup call. It's standard at every shop to have a huddle, like the "X up for pos destruction" usually 1 hour before the bell, where junior line traders or analysts review their work, and present ideas up the food chain. Partner and strategy meeting is usually 30 min. before trading. During trading, unless you REALLY need to leave the trading desk, it's expected you stay there. During really bad times, such as 2008; my old head of trading pissed his pants vs. leaving the trade desk: that was a 40,000 USD brinoni suit he threw out that day, but our bank lived through the subprime adventure. In short, unless you need to meet a company or use the washroom/get a drink it is very rare you will leave your desk for over 19 hours a day. So imagine the most long rear end POS operation in your MMO career, now imagine that if you gently caress up; it's a 100 million dollar "whelp". Good motivation to be alert. This is the key reason for burnout, and one reason why many shops invest in great gym memberships and have strict drug policies in place. There is always one "loving new guy" who thinks he is bud fox and will overdose on caffeine tablets + redbull + 2 hours of sleep per season. Thankfully, nobody at our shop is that stupid (yet). Even if you make it to senior partner, expect to still be working at least 6 days a week from at least 3 hours before the bell, to 2 hours after the bell; so net net ? about a 17 hour day until you retire (or sell your trade book/portfolio). Passive funds or commodity desks are slightly more laid back due to the intensity of their due diligence and hours of trade operation. Commodity pits like Centurion, Glencore or Mercuria are equally as brutal as any bond or equity shop. Analysts ? Classified. Yes: i loving poo poo you not, you can tell who is out there just by saying the number of research guys per pit per trade these days. But its more than 5 analysts and less than 40. plus back office and trade support. Equity research ? When I was in investment banking we used to call it "club research" because in equity research as an analyst you usually leave around 1 hour after market to go home, while sales & trading will be schmooing with buyside or corporate accounts and bankers are either pitching or jamming on ideas to support the whole place. Research is mostly about pitching ideas, and is like a half breed between investigative journalism and engineering. Before my time, around the 1995 heyday, research used to run the joint because a rockstar stock picker was basically a mercenary for hire; and they were paid stupidly well to promote securities or give insight. Now? It's horribly nerfed due to chinese walls and publish/perish culture. Also, you can not be paid for your insights (fixed salaries and compensation) as well many shops restrict you from profiting on your ideas. Like actuarial sciences many use research as a springboard to get to buyside if their track record or senior analyst is well regarded, or will use it to go become a brokerage manager (think of it like a MBA for bank COO/CMO's). To be fair, research is a good place, but 99% of the time you must know what you are talking about cold. If you do not have industry relevant experience you will never get a buyside account to subscribe to your idea feed, and since you are a cost center to the brokerage/banks your time in the pit will be really short. Again: where barrier to entry is becoming the last bastion of research intelligence. Find a niche and master it. The laid back, consulting-like atmosphere however works very well for those who do want to do 8 to 10 years and then jump to a CFO or Treasury position. Which is the new "go to" for analysts who do never make a "star" market call, but are tired or worn out from the 15 hour days, 5 days a week; plus road show marketing and pitching/presenting to institutional accounts. Quant jock 101: I would read about a guy called Richard Bookstabber NB Nulshit, and see if what he did is up your alley. Program trading is sort of on the twilight right now, and if the SEC rules against most flash/scalping trades goes through; it will be very lean times in the next 5 years for program engineers. When I started I originally wanted to salvage chunks of my computer engineering degree vs working at RIM or IBM. None of my year made it out the other side, with most going back to IBM or Miranda/ATI. It is very brutal, and I know many PHD level guys who did not get paid for their computer code and the dealers had the patent on their libraries. There is a famous case of a Russian guy who Goldman Sachs literally locked up everything from his PHD to his last day's code engine, and then sued him on the way out when he wanted to do a VC startup (google him, cant remember his name). Best suggestion would be to enter a few code competitions. I know ARCA/BATS/Virtu/ DE Shaw (or one of the ex-Knight Capital shops) and IEX hold hackathons. If you have a PHD in computer science or a really good grasp of cryptography/neural networks then it will be easy to get a job in the sector. Just be prepared for a life very much NOT the silicon valley experience for the first 7 years of your life as a desk coder and if you work as a main-desk support programmer then it may be a bit crushing at first. I honestly feel bad for the guys at our primary direct market access bulge bank that does our clearing and settlement. On most days it does feel like that movie Rush where your the fund pulls into the pit-lane, and your racers call some guy 20 min. before settlement, and that poor code monkey must recode an entire suite of trading programs for the next morning (or his desk will not get the commissions). I honestly do not know of a single sell-side coder who has lasted more than 2 years before either jumping back into PaloAlto life, or going back to grad school to try to apply for DE or RenTech. Sorry (but I am biased). Personal recommendation? Try to start out at a market making buyside, failing that ? work in the valley in VC at Melno Park for a bit, then backdoor into your own startup. Or enjoy life like Hoffman and Theil. 
Hal_2005 fucked around with this message at 07:15 on May 28, 2014 |
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May 28, 2014 07:06
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on algo trading: If you google RenTech, they always have a "mock" opening on their website, that general entrant skill testing question and criterion is pretty much the template I was told would be the base criterion for hiring on a trade desk either as program algo support, or for proprietary trading bench. Some good points that are the basics: - Do a few code competitions. IBM runs one where they select for the Deep Blue team, and local university groups often have tryouts for team Google & Facebook. The more you do, like advertising pitches are going to help you out when bugging under pressure/reloading your AI. - Series 6 and 7, CFA is a plus - Know Python, C# and Basic/Fortran. yes, some exchanges still use that poo poo. Insert "in soviet russia: exchange codes you!" joke here. - Be ready for a hackoff as your skill testing question: A famous question is: You have 10 min. to write a program which will search the entire hong kong telephone directory for a Chang for a certain phone number. We do not know what that phone number is, but the computer code must be flexible enough that it can parse the phone book in under 2 seconds and not only identify this Chang based on 3 of the 14 digits of his phone number, but also estimate which Chang it is based and publish to the host a list of the 5 most likely addresses. The code must also scale to do all the phone books in lower mainland china. They will then take your "proof" code that into their engine, and then test run it over something simple like Facebook or Chevron's last 10 days of all bid/ask quotes (about a billion quotes+) and see if it works. Where every Chang you fine is actually a signal for a 14 significant digit price signal they can match to a arbitrage algo. Thats pretty basic poo poo. You will be given a sheet of paper, and no compiler. You really need to be that good in your code ninja skills - Know the basics of cryptography, signal analysis (99% of modern trade programs is flash or ECCW type stuff) and neuronetworks. I honestly can not think of a single computer program that we use on our shop except the weighted average trade program which does not have some sort of "smart" or RNG function to mask the trades these days. - be ready to have a portfolio of open source trading programs which you have built, back tested and can demonstrate work if they are plugged into a trading system. I would suggest: 1 simple do loop for trade reloading, 1 simple options arb program, 1 simple sort/compiler, 1 simple google bot clone/scraper that uses a custom RSS library. - Be ready to do a fire drill debug test where you must be able to review and debug about 100 lines per min. Yes I am 100% dead serious, google what happened the day of the Facebook IPO and what happened to Knight Capital. It's really, really intense. Hal_2005 fucked around with this message at 07:35 on May 28, 2014 |
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May 28, 2014 07:30
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This is really interesting. At what age did you get started on the "path" to the financial world?
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May 28, 2014 13:55
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quote:Many of the guys who shut down or went family office because of the Dodd frank rules on exempt asset vehicles did so because they would have had to disclose their expenses or fund structures, which would have placed their families or charity networks under scrutiny. All I have to say on that point. That gave me a laugh, thanks.
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May 28, 2014 14:21
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Sephiroth_IRA posted:That gave me a laugh, thanks. Quoting because I just now got the joke of your name. I feel dumb.
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May 28, 2014 15:03
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Yeah after I made it I realized I should have capitalized the R in Roth.
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May 28, 2014 18:49
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I work on a physical commodities desk and it doesn't sound anywhere near as intense as you're describing your own line of work. Now I feel like a wuss.
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May 29, 2014 00:47
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Hal_2005 posted:on algo trading: Your description sounds puffed up, and not at all in line with what I've picked up on. Compare the above to Michael Lewis solid write up of http://www.vanityfair.com/business/2013/09/michael-lewis-goldman-sachs-programmer Sergey Aleynikov Goldman Sachs HFT programmer. And Knight Capital wasn't an issue where someone had to debug code quickly to put out a fire. In fact it was more Dev-Ops issue than one of coding and debugging http://www.sec.gov/litigation/admin/2013/34-70694.pdf quote:To enable its customers’ participation in the Retail Liquidity Program (“RLP”) at the New York Stock Exchange,5 which was scheduled to commence on August 1, 2012, Knight made a number of changes to its systems and software code related to its order handling processes. These changes included developing and deploying new software code in SMARS. SMARS is an automated, high speed, algorithmic router that sends orders into the market for execution. A core function of SMARS is to receive orders passed from other components of Knight’s trading platform (“parent” orders) and then, as needed based on the available liquidity, send one or more representative (or “child”) orders to external venues for execution. No doubt there are smart people working on things, but the story your selling of beyond full stack A-Z expected to know the world coders rings hollow to me. Usually specialization of knowledge especially in intersecting areas comes at a cost to knowledge in other areas. To be fair it isn't my world, my closest run in is chatting up a hedge fund programmer at an Ignite event, he was sharp, but nothing amazing and talked about how smashed together the systems traders used were including some algo stuff and how the other tools would break and the traders would freak out.
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May 29, 2014 02:02
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A lot of it sounds a bit puffed up to be honest. I've been heavily involved in launching fund vehicles in BVI & Lux and while the US/European regulatory regimes have had some impact on the industry, it hasn't as bad as Hal_2005 seems to be portraying. I'm guessing that since he's based in the States, he has a very US ground view on fund management. Comments on HFT were nonsensical.
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May 29, 2014 02:23
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Are there very many mid career switches into high finance? I work in math programming for a major aerospace company , but want to work wall st. I feel like the longer I work here the less sense it makes to trade a mid engineer salary for a junior finance + long hours. Have you meet anyone coming from varied backgrounds, and are they like a fresh grad or from their prior experience? Also what kind of academic credentials do you have? I have an ms in statistics am about to start an online mba. Am I wasting time on the mba? I'm concerned that it's top ten in residence or bust. I can't justify the opportunity cost of another on campus degree.
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Jun 3, 2014 15:13
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An online MBA would actually make you resume worse than nothing at all if you're trying to apply at an investment bank or a hedge fund
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Jun 3, 2014 17:31
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Vomik posted:An online MBA would actually make you resume worse than nothing at all if you're trying to apply at an investment bank or a hedge fund Tho I expect a MS in Stat is plenty for a hedge fund.
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Jun 4, 2014 01:34
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SiGmA_X posted:Would this maybe depend on the online MBA? My university offers an online, and the diploma is the same as an in person. It's ranked as one of the top small MBA programs in the country. Buy-side (and sell-side to a slightly lesser extent) front-office high finance is extremely pedigree sensitive. Anyone in one of these positions that did not attend a top undergrad school and/or MBA program is a huge exception to the norm. If your MBA program is not a top 25 (at absolute most) full-time program, your chances of getting a front-office job at a hedge fund are effectively zero. For programmers (not back-office support, but those directly involved with algorithmic trading, etc.), you will have to be able to demonstrate with your resume that you are the cream of the crop. These are not jobs that you just walk into. Pissingintowind fucked around with this message at 10:05 on Jun 4, 2014 |
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Jun 4, 2014 09:52
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I'd actually narrow it to top ten. I know my firm goes through resume books of the top eight MBA programs and only interviews candidates of interest.
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Jun 4, 2014 10:50
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shrike82 posted:I'd actually narrow it to top ten. I know my firm goes through resume books of the top eight MBA programs and only interviews candidates of interest. Agreed - was just trying to not sound like a dick. Honestly, like you said, only the M7 + maybe Tuck have a "reasonable" shot, and that's with previous relevant experience.
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Jun 4, 2014 11:21
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At the risk of generalizing, if you have a quanty background, you're probably better off sticking/moving to tech these days over trying to break into finance. The comp & work-life balance is better if you work for a tech firm/start-up relative to traditional finance firms. I got bludgeoned over the head about this during my recent commuting flights from NYC<->SF chatting to neighboring passengers. It was a bit of a shock to see the number of ex-finance people who switched over to work for tech start-ups.
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Jun 4, 2014 11:49
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shrike82 posted:At the risk of generalizing, if you have a quanty background, you're probably better off sticking/moving to tech these days over trying to break into finance. I appreciate the responses. One thing I value is work-life balance. At my current job I work a honest 40 hours a week. The rare times I work late are compensated, and I make low six figures. I guess making 200k in finance isn't really a raise of I have to work 80 hours per week. Double so if you consider the tuition and opportunity cost of an elite MBA.
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Jun 4, 2014 15:12
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Velochis posted:I appreciate the responses. One thing I value is work-life balance. At my current job I work a honest 40 hours a week. The rare times I work late are compensated, and I make low six figures. I guess making 200k in finance isn't really a raise of I have to work 80 hours per week. Double so if you consider the tuition and opportunity cost of an elite MBA. People don't sign up for finance to work associate-level hours and make associate-level wages. They do it because it's the most reliable way to reach an annual income of over $500K once you get past the grunt stage. Where other careers level off in terms of compensation, finance doesn't.
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Jun 4, 2014 15:21
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I don't know much about start-up hedge funds. OP, do you have any knowledge, experience or anything at all with those? I imagine the barrier to entry is extraordinarily high.
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Jun 4, 2014 17:13
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There's only a few jobs that don't level off much without requiring you to effectively become a business man (if you need to start a company to get above a certain point, the monetary value of your labor is capped systematically by modern capitalism's obsession with the value chain). Even doctors above the $400k mark tend to be running their own practice or are pretty much literally world-renowned experts in something... or niche specialists like Hollywood plastic surgeons. But also for tech, unless you go into the F500 as a manager or become a consultant charging $700+ / hr you can't expect to break $300k / yr without starting a company, and even then your primary compensation will become the equity rather than straight income. Twitter's CTO has a comparable base salary to mine... but his stock compensation is surely a lot higher, that's for sure.
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Jun 4, 2014 17:53
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Given that discussions about finance always go back to comp and short-term pain for long-term returns, it's too bad we don't have more granular comp statistics regarding career flow beginning from analyst onwards up the ranks I.e., how many percent of an analyst batch make it to associate and so on.
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Jun 4, 2014 23:40
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shrike82 posted:Given that discussions about finance always go back to comp and short-term pain for long-term returns, it's too bad we don't have more granular comp statistics regarding career flow beginning from analyst onwards up the ranks I.e., how many percent of an analyst batch make it to associate and so on. I know what you mean but if you are talking IB, the skills (and prestige) you learn there translate really well elsewhere allowing the individual to keep a similar or higher amount of income with much less strenuous hours. Trading has a much higher cap but doesn't switch very well.
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Jun 5, 2014 03:01
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Hey, Sorry on the delayed rebuttal and/or replies. Was out marketing the funds for the past 4 days and I'm currently at an investment conference in Montreal. ce la ve. Shrike82, happy to have you read. Nothing I have said is puffed up, and without getting into a dick waving contest you sound like a capital introduction or legal specialist who is at best a tax planner or at worst (sic) a hedge fund consultant. So, I really have nothing more to say about your opinions. If anyone in the thread needs a counterpoint to my opinions, there are plenty of books and market commentary available as to what life is like working at Buyside (pick any Steve Cohen fette, Market Wizards, The Buyside, Institutional Investor;Alpha's 2011 writeup on Tiger Cubs) writeup. As for the HFT's ? I'm not an HFT, but I do use plenty of programs and hypercube applications at my firm, and all I can speak of is from 1.) the guys who I hired, who relate to me what the hiring plans were like at the firms they came from/applied to 2.) how they work, and what their colleagues work like, at the places we work with. Not sure what else I can say ? If you have experiences feel free to add. The point of these threads is to encourage dialogue and generate "inclusive capitalism" ie: to show everyone, esp, goons that the 1% are not really 1%, and even if people think we are: We are encouraging others to learn or speak with us, and perhaps learn something about how they too can try to become a startup in the field. On a personal note: The fact someone thinks my life, and that of my crew is "larger than life" does bring a small grin to my face. Kind of like when J4G's used to cry bullshit about goons in 0.0. so tip of that hat when I say: lulz. Yes, Ideally I had wanted the thread (and intend) the thread to be about my life and experiences of 1.) starting up a hedge fund, 2.) working on all sides of the gig. I'd like to answer more of these questions because its fun, and I think it could empower more Goons to join us on the buyside. If you read Institutional Investor this week, another 5 major hedge funds shut down this week alone. So despite the big party tents you see in Montreal/Cannes/Miami this month, it is honestly getting skinny on the new names lists. Start up costs for a hedge fund: Hedge fund startup costs are pretty well documented, SEC and FINRA has a good list of the costs which relate to a standard hedge fund or any exempt market dealer that wants to be a portfolio manager. The UK has a similar set of fundamental boxes each manager must tick off upon startup. Without giving out our cost base I can estimate for you the basics which all funds must have. 1.) A general counsel who sets up your structures. Incorporation vehicles are cheap; at the best, a simple off the shelf .corp can be about 300 to 700 dollars. 2.) An asset pool company with a tax blocker (to prevent double tax or VAT/Sales Tax on the proft fees), which makes the structure capable of being managed by the .corp, which is who you will be hired by to manage the money 3.) Qualifications to operate as a fund manager: This varies depending on jurisdiction you want to solicit agents and capital for. FINRA and CSI have the laid of requirements: in short, you must have about 5 years of professional financial experience to apply for a registered portfolio manager designation (give or take 2 years), Investment Directors insurance and registration, Securities dealing clearance, Compliance Officer designation (because when you start you will be your own monitor usually), Trade and Broker designations (your series exams, take the series 87 just in case, always). So all in ? I paid about 38,000 USD in exams all in to get registered over 4 years. The bare bones ? maybe 21,000. You can tax expense all these. Most of those exams you will need to take refreshers every 1 to 3 years, plus expect your local regulator to ask you to attend (or send your Chief Ops/Compliance guy/CEO) to attend workshops and seminars. 4.) Legal agreements between your fund pool, management company and all the corporates is between 50,000 to 200,000 for the base kits. These documents are the most important, as it was explained to me because subsequent financing rounds will look at the structure of the performance pools (and if you have any sidepockets, loopholes in fees due, redemption gates, grey periods in performance calculation) that can set you back a few years should a large pension or family office want to invest in you, spot something your counsel overlooked, and put you in the time out box. It happens (happened to a major US activist fund the past month actually when they tried to go to mainland China). 5.) Asset custody and Prime Brokerage: perhaps your biggest hurdle getting on board is finding someone who will back you and then, the tricky part is paying them enough in borrowing costs to make it worth their time. Discount brokerages have been getting into the bottom end of the pool; which means if you are a sub 50MM shop, it is capable to get a bare bones custodian (like ITG) but don't expect anything fluffy like capital introduction, research access or good rates on stocks to short. You may also find your rates you pay on custody to randomly be hiked at any given moment. So you get what you pay for? On average custody is about 0.25% of assets for a small sub-50 shop, and it goes down from there. Most shops will go with one or two primes once they can, just to ensure that the Prime does not hike their fees on you. All in? assume you will pay about 1% of your total assets under management each year to a custody shop/prime agent. 6.) Office and compliance: These are a wishy washy area. You can either go with a "hedge fund hotel" who will give you turnkey services while you work in a psudo-incubator setting, but you have no privacy, or you can do it on your own. Office lease can be as cheap as you want, Trading terminals are about 14,000/unit/year. Lets say the rest of the services (compliance general agent included) is about 34,000 a year, which comes from a major incubator in Stamford for a startup quote, and about 24,000 a year in office lease. So all in ? Your cost to start up will be about 500,000 to 1,300,000 depending on the type of fund and design you start up with. At the bare de minis you can start a fund ex-office space for about 180,000.00, perhaps even cheaper if you do all the legal work yourself and then have a professional counsel work over your documentation when you get beyond 30mm AUM. Due to regulation rules, the very minimum your fund can be, to be considered an institution is $10MM. Some primes (Goldman, JPMorgan) will not even look at your account unless you are $100MM, which is why the hedge fund market is so bifurcated right now; many small guys, like small juniors really cant get the capital to get started. What David Einhorn and Paul Tudor Jones did (and one buddy who runs a successful HF out of Vancouver) is to start with a PA account. Work that up to about 5 million. Then do a club round via a private placement offering (or seasoned round) and then apply to have that PA account turned into a IM account at that brokerage. Then you can use that investment dealers platform as your base to size up. Saves you alot of costs and haggle time building it up yourself. Eventually you will have to splurge on the formal GP-LP structure or GP-GP but that's not really an issue until 40mm when compliance regulations tend to kick in. If you can not generate from subscription round 10mm, your cost base will eat you alive; and in that case I strongly encourage you to go to a discount brokerage (ITG is the go-to for most), and sharpen your track record for 2 years. Then hit up a club round via your local investment dealers network (Seek Legal counsel please before soliciting), and then take it up in size. At the early days its all about your numbers, the consistency of the numbers, your track records compliance with your models and the cash burn rate of the management corp. Don't expect a big payday for the first 2 years, or 5. For disclosure my fixed costs (including rent) are about 230,000.00 a year, which is not bad. My sales team of 5 is about 0.01% of assets under management, my base salaries are about 0.4% of my base fees, and my technology budget is about 0.20% of my base fee. Analyst pit and their staff is about 0.25%. And the admin/tech's are 0.03%. So you can use that as a base slide scale. My tech fees are a bit more than a normal long/short & event shop because I am working out a few major projects internally and needed to hire a bunch of data contractors to help us program/rewire our simulators. If you started a fund with about 10mm under management, from experience I can say your base costs (excluding my legal fees) would be about 300,000 all in. your annual fixed costs I would put around 180,000. if you did it the way I set it up. So as you can see, to keep solvent you pretty much as a start up fund have to charge 2% assets and 10% performance to keep the lights on these days. So given that, the barrier to entry is higher, which is why many are electing to move to larger shops (and the large shops are growing Fidelity "like") vs. carving out. At this stage, you pretty much have to start with over 50mm to have a serious go at it. or generate about 30% year on year performance to escape the "cash flow" trap. Online MBA: Would not do it. Here is why: The general MBA, when I did an MBA while an investment banker gave me network contacts and was mostly a resume padder. Everything you learn in an MBA? 80% of it will be junk, except the marketing classes and perhaps what is relevant to your focus. The MBA attachment and recruitment numbers confirm my views on this. What I would do instead of dropping cash on a Phoenix MBA is go take the CFA, CBV or as many Series classes you want to take. The reason? You will be 1.) having a hard qualification, similar to the P.Eng or P.Geol which will give you recognition, 2.) when you need to get your directors insurance ( as I spoke about above) it will decrease your executive insurance when you want to become partner/MD, 3.) it will teach you/refresh the key components you will be using on a daily basis to the standardized level expected by sell side and buyside. Cross switching from a veteran industry into finance: Yes. Do it. One of the best research analysts in the Applied Aerospace industry (who I talk with every second day) who is the top ranked institutional analyst for his sector did that. In fact, if you scroll down the list of the "all star" analysts for the last 6 years, every analyst comes with at least 6 years of industry related background before making the jump. Since 99% of fundamental analysis is about understanding and projecting the numbers based on your real world and industrial experiences in forecast approximation, being the guy who knows the nuances will be worth your weight in gold. Same thing I told to a private message on the topic before posting in the thread, if you are a good analyst be it in oil & gas or aerospace, because people pay you commissions for your insight and intelligence, it is not uncommon that a simple "industry insight" can net you a half-year of pay on a simple research piece. If you nail 4 or 5 good pieces ? you can easily be pulling down 4x your base in fees. A good example of this was the recent problems around the Bombardier C series engines. An analyst who knew the engine team wrote about them a full 10 months ago after doing his own aero simulations and blasted out a note to his clients. We paid for this trade and profited very well. We intend to hire him when his contract finishes up at the bank in 1 year. My suggestion ? Work for the aerospace contractor for another 2 years, and learn all you can about how the products you build and work on flow up into the top line and projections of the company. Learn about how to speculate and estimate on contract bids, and cost inflation proxies on major R&D turnarounds. During that time period, also take your Series 87, and CBV/CFA and approach the major 3 R&D research analysts for a generalist postion on the Applied Sciences teams. After 3 years of working there at the banks group, when you have built up an established "call list" who pays for your research notes, solicit a brokerage (there are 2 who do most of the trading in LMT/BA, so you can guess who I am speaking about) and see if you can go work there. After a few years there, give byside a try if you are not burned out on morning sales calls. My background: - Dual degree Economics/Biochemistry. MagSum. - Masters Economics/MBA -> Econometrics thesis. - CFA, CBV, all the series poo poo, all the director & legal stuff. Degrees I would hire in a hearbeat (and many in my clique at Grand Prix weekend also are): - Geological engineering (with hard time spent doing reserve audits), Geophysics - Neuro/Onyo Medicine or Biochemistry with at least 3 years in a research lab (taking something to phase 1 on your own or with a team) - Production engineering or mech engineering experience; with at least 1 or 2 years of shop or line experience in Asia or with an Asian contractor - Electrical engineering - Computer science with specialization in cryptographics --> how to blow through 200 TB of data in 2 seconds: the elevator pitch I gave at a university on Monday to a laboratory I was scoping out. - Bioscience with specialization in behavioral studies/predictive networks (don't laugh, I did, and the field works very very well in projecting/simulating bond market reaction functions). - Applied Mathmatics Engineering or Applied Math Generalist: Predictive topography, statistical mech. Quantitative work will still get you a job, however I feel that most of the signal arbitrage is going the way of statistical arb. trading was in the early 1990's --> to zero. Would focus on isolating a predictive subset to physical science discoveries vs. working on a new form of discrete calculus or price signalling program. On "prestige" degrees in general: Yes, some shops have a bucket culture for who and when they hire. Colombia, Harvard, MIT, University of Toronto, Oxford, ParisTech are notorious for only selecting their own and this tends to trickle down into the funds who they graduate into. I will say, with tongue in cheek if one looks at glass door or the HSBC/CreditSuisse Hedge Fund tracking books, most of those same funds are bleeding the largest number of layoffs and AUM net outflows. So take that for what you will. In 2009 I definitely would have said getting into the industry was all about who you knew, or what you could bring to the Pack, vs. your grades or insight? Now? not so much. Thanks to the layoffs, when I hired a new FX trader, we had a full ghamut of candidate, all tier 1 4/4 gpa's that had some great sob stories of being turned away from their Harvard frat fund. So as being a guy, who may literally be reviewing your resume someday; I can say that 1.) in about 10 months if we do have a major minsky moment, expect the game board to be reset, and at the moment I see no selection bias against tier 2 and state schools right now in play (in NYC or London) at the moment 2.) corporate culture has shifted at most major shops towards satellite offices vs. main shops. Unless you are required to have a main shop office, like CapWorld, the number of small shops opening up, and hiring local talent is a new trend to get closer to the "industry" action. 3.) Given the volume of rolling layoffs in the sub-performing shops this season, expect the next spring runoff in 1H15 to cast a greater net in talent. What stands out on a applicant is: - Your ability to take information sponge into actionable trade insight - Your work drive: have you set up a business before ? have you ever tried to do something on your own ? what is your story - If your grade suck, thats ok, but what did you do when you were not sucking at grade ? Have a reason other than smoking dope. Did you sell dope ? Did you corner the dope market at your university ? Did you revolutionize the way golf lessons are taught ? (someone actually did get hired at Perishing Square because of that last one). On breakdown of "presitge" of the markets: (perception/reality/what you do) 1. Private equity: the top, long duration assets means they will buy anything and sit on it if you get them to buy it, huge fees because of that high duration to when they sell those assets / lots of research, such a high IRR that it means 80% of your work will never be used and often your multiple projects will be start/stopped in rapid whims that means many pissed off banking departments and many non-paid late nights / research hours are lightly lighter than investment banking, more schmooze time for partners/principals, the pressure to monitor your investments and manage them is on par with being the owner of the business itself and you will be required to put in ALOT of face time/micromanagement depending on the size and scope of the fund) 2. Institutional Pension: long mandates, low turnover, long views means low risk investing with large positions and minimal research required to make a ratio based investment decision / research done will be required to match a stringent policy in both volatility, liquidity and asset class yield and annualized cash flow estimates, research done will be double checked with sell side sources who may not be more qualified but pay the shop way more money in discount comission trading, who often will downplay your picks, be expected to liquidate half your winning picks to cover another part of the institutions screwups during portfolio rebalancing / Hours are lighter than Private Equity, less burn-days than IBD, salary is capped as are bonus so the total upside is far less than PE or HF, however some like the lower hours and stability of pay, esp. in mid life when you have kids and a life to feed. 3. Hedge Funds & Private Capital: Cocaine Cowboys who Puff up their experiences and generally try to burn as much money as they can, investment ideas are done on quick turnarounds and they tend to pay and play for spreads or event driven quick flips in securities or momentum plays / Since most research is too expensive to commission, most research is done on your own or by specialist teams who will talk directly to field consultants to build quick and detailed models which would normally cost a few hundred thousand if done via a professional research contractor, since money is tight, research will follow a gated period where many projects will be started and one or two really good ideas will be taken to "deep dive" territory, on average you will always have about 1 or 3 big idea trades going at once, and then a portfolio of about 20 to 35 investments you watch day to day/ research hours depend on the shop, it is more intense than PE due to the timing of trades and the pressure to perform, the time is more rewarding than other buyside gigs due to the performance capture and ownership of work in the field and on the desk. I would argue hours on on par with IBD, more than Bond Research, more than Equity Research. 4. Personal Account / Investment Managers: You are either a "Muppet" or a goldbug who never will be used or given any hot new offering but will always be the one major banks/dealers will use to either dump bad product on, or pull shares out of to satisfy some Coked out hedge fund who needs short shares for collateral; which may cause your PA to randomly see sudden jerks in borrowing rates. You are a cost center, and as a wealth manager have no place in finance. / A good Investment Manager can make or break a bank, google Peter Brown who just retired from Canaccord, or Ace Greenberg of The Bear. A good wealth manager will never get in to "hot trades" but can take a lower risk view, also because of their face to face with accounts they can grow, they have an excellent cash flow stream of business and can eventually craft their own line of wealth management products and mutual funds for sales. / 60% of your time is fielding client calls to solicit new accounts, talk existing accounts off the ledge of selling everything and putting it all in on a hot-IPO they read about in Barrons, 20 to 30% of your time will be doing your own research work. It is very rare that a PA or wealth manager will be given access to research notes not from their home shop, or will be able to afford many of the pre-baked institutional only level financial models or research tools. So sadly most will rely on basic fundamental analysis to "meat their bread". Lowest hours of research/project work of the group. 1. Investment Banking: Prestige job due to face time with corporations and institutional, and seen as the natural gateway to PE/Soverign Wealth Vehicles // 1 in 200 investment analysts/year will ever make Managing Director. Let that sink in. IBD is 80% hard work and ensuring you pace yourself and do not burn out, the other 20% is political. If you are not on the deals that win, or in front of the teams who knock it out of the park, you will be turfed. It is performance driven and you are graded on a rolling 12 month review. This goes from Associates to Executive MD's. So unless you can really worm your way into every lead deal, and ensure you can always remain in the flow on your sector; its a limited run. Have yet to meet a MD who lasted more than 15 years in his gig, including those who financed the family conglomerate spinouts. / Your hours will consist on how you work and how smart you work at the start. You can work between 15 hours at a small shop to 19 hours at GoldmanSachs. I'm not name dropping GS, but I am saying with personal experience that they will work you to ensure you are working at least 18 hours a day in your first 3 year rotation. Expect even at MD level you will be working about 16 hours a day, even when on "vacation", which in reality may mean doing overseas marketing trips or new account openings while your family parties without you. 2. Institutional Sales: Failed Traders are great at Sales, Sales, like all salesmen have only 1 job; sell you stuff and then continue to sell until the jig is up, in which case they roll into another sales gig or go start a company in the sector they shilled for X years // Salesmen have a rough job because they must do a stupid amount of on the job training, and also come complete with their own insights and ingelligence market calls which may run with or counter to the market calls they are told to sell by the dealer/bank they are working for. So knowing when to push the house product and when to advise your relationships when to now buy/sell is very important. Given many are going towards direct market trading these days the death of the salesman is not far off. When I started the fund 2 years ago, we had 19 sales men calling us every day. Now? its about 7. Where did the others go? Many were laid off, simply because without a major account like SAC paying 5 cents per trade, their jobs were not there anymore at the shops. Very few pay for insight these days since insight is not tradable alpha, unless done on very specific basis; which is often outside the realm of most salesmen knowledge limits, sad. / about 10 hours a day. you will get in early before the market, then spend about 30 min pre-market on the phone with your key accounts to give them your/or the house's ideas for the day. Rest of the day is fishing for ideas or trade rumors/chatter from buysides. Evenings and relationship events are when you "work", which means the average good institutional sales guy will be out until at least 9 pm working the bars with either a.) out of town executives doing marketing trips b.) institutional sales guys who you are trying to move up their commission ladder with. Its a great life when you are young, but any head of sales will agree with me that IST is not a growth business. Good news is that anyone who is smart, and personable (and has experience in drug sales, software or any sales job in a high-barrier to entry sector; even fracturing sands for oil & gas) can make it, for a while. Which for most, is enough. Sorry Sales guys, wish I had something nicer to write here. 3. Trading: Used to be the king of the world, like Sales it's pretty slow these days as block trades are not as frequently done now, and commissions or spreads which were their bread & butter have collapsed. Most sales desks will keep a staff for large volume movements, but most do very little activity compared to even 2001 levels. This is also proven by the closing of many human aka. open pits and shuttered seats at the major exchanges. If we wrote this thread in 1996, then I would have been talking about the glory days of Griffith McBurney and Janus Funds where every night was a 3 am party. Now? not so much. / Trading is mostly about posting or helping to manage order flows. Your views on the market come mostly from what sell side research suggests will be the bullish/bear calls and who will cause the most volatility in the day; which means the best opportunities for you to collect commissions on closing the spread between bid/ask or help move large trades as buysides get spooked out of their positions. The other half of your time will be either moving volumes yourself (orders you are given by the house or your own accounts) or showing lots and volumes to buysiders who you will need to help you clean up trades or help take inventory off the dealers hands. / 1 hour in before the market bell to 1 hour after the bell to clean up your trades, settle out after-bell positions and have a debrief with your pit boss. In the good old days you would then hit the town with your boys and network with other shops to get intelligence and insight as to which buysides were loose with commissions, who is having bad trading weeks (who you can hustle to take your ideas) or how to figure out which traders are overweight their book (who is long a bunch of bad securities and you can squeeze or pressure to sell and you can profit on). Now? most of that time that used to be spent partying is spent on market research. This is because while in the old days trading used to feed buyside traders with market moving intelligence on who and what is selling, since 80% of trading has moved to electronic trading, those loose lips do not speak anymore; so to make their insight, many have become psudo-salesmen or research analysts themselves; self trained or former industry professionals who have purchased a sales desk seat for themselves and trade their PA's while they take and manage orders during the day. 4. Clearing: Your job is to make sure all the tickets are dotted and that your client is NOT Bernard Madoff 2.0, which means everything which does not fit in the box is clearly a fraud and its all your fault the account was not tracked and prevented from entering the tickets ahead of time to your bank's compliance rules. / Clearing and processing (aka the Cage) is very much the "tellers" of the finance world, just on a bigger scale. And very important to the general flow of funds process. You will be doing everything from monitoring currency crosses to ensuring settlement instructions are filled out and is one of the best jobs for both security and market demand in all economic environments. Your key role is to ensure the cash matches between both accounts, and ever order settles with delivery instructions and acceptance into inventory. For those times when it does not, you are first line in matching and tracking inventory problems. Still very much a people person job. / Never did it, no idea. 5. Compliance: Imagine a movie from 1975 where a bunch of FBI are listening to wiretaps and one of them gets all excited and busts into the den of thieves and puts them all under arrest. You are that guy. Everyone hates you and you have no friends in finance, because you are always 1.) the sobre guy at the party 2.) the guy who hates fun. // Compliance gets a bad ride but has the hardest job on the street due to the large volume of rules they need to keep on track of, they must be alert at all times to watch the sales floor for bad activity (yes the sales floors really are "bugged"), and also must constantly brief or alert people higher up (me) of when they think something fishy is going on. If they do not, they are the only line of defense between you and a trip to the Funhouse, or home arrest with your formaldehyde shark. / Compliance Officers examination and course, 3 years in compliance before you can become a compliance officer. Many have criminal law experience or agency experience. When I was an investment banker, because of my conflicts of interest I had my own compliance officer and I have huge respect for these guys. Your hours will be about 7 hours a day, with about 1 to 3 weeks a year doing briefings and legal tuneup exams. One of the best areas ex-Signals or military applicants use these days to get into Wall St. due to their attention to detail and knowledge of surveillance procedures. 6. Equity Research: Club research. You come in, write a bunch of crap which is wrong or outdated, try to sell it, knowing you have no clue what you are talking about, and get a bunch of people fired for writing about a trade, which turns out to be the exact opposite of what happens in reality. You are not allowed to make money, so you have no incentive to make the house any money, and are a cost center with your numerous "research" trips to the Tropics for "due diligence" at a 5-star hotel. // Usually you will be a main point on either giving creditable leads to research subscribing accounts on which consultants to contact for specialized research products, or how to narrow down their market research ideas into actionable trades. You will also be required at times to provide context to sales of new issues or ideas by being pulled "over the wall" however this is rare post 2001. Your ideas will be how you make your money, but your insight can not only move markets but also gain world reputation if the idea is excellent: See Meredith Whitney or Dick Bove for examples in Subprime. / Many have about 5 to 10 years of industry exp. efore making the jump to Sell side research. You will have to take, or will be expected to complete your exams within 2 years of joining a bench. Since your seat is paid for by subscriptions it is super important your support team knows how to drill down into those corporates you cover with an "edge" meaning your models should comprehensively cover and understand each company you cover better than anyone else, because you literally are competing with everyone else. If that means aerospace: be fully prepared to talk to some sperglord who reads Janes every day, and you need to explain to him why F-35 is a superior JSF to the FA-18H based upon the last Russian Top Gun youtube links, and what the F-35 order read thru from the UK budget in June will mean to the stock price, at 6 am, on a Tuesday morning. Because that's pretty much the depth you will be speaking on day in & out for the next few years of your life. Serious. Your financial models should also be that deep where you can speak on every line item or trend in your industry of coverage. If not? Don't expect to last too long, either through comission drop off when everyone realizes your just a generalist, or by bad market timing/calls. Again, because nobody thinks you are worth a trade ticket. Its a tough life. 7. Investment Accounts/Personal Wealth Management: See above, wealth management is really hard. On one side you have all the struggles of running a hedge fund, without any of the perks such as being able to manage the money on your own trade choices or leverage ratios. Most of your time will be spent taking or pitching retail or family office accounts which lack a sufficient amount of insight about what you re trying to pitch them to let you buy. So its a job of about 50% institutional sales, 30% trading timing and 20% small business management. Also, the barrier to entry to set up a brokerage or join a IA broker is very low. Which means the training and quality of joining an IA side of a bank is very hit & miss. However anything is better than nothing, and I would say if you are a good stock picker, then you can eventually turn your small brokerage outfit into a full on investment dealer. The last 10 year stock rally has been excellent for brokerages for that reason (and why there is so much retail leverage and margin in this current rally). 8. Risk Audit: Compliance's evil twin, every portfolio manager and trader, and banker, and CEO hates your guts. If you did not exist, then the world would be a better place and that 1 trillion dollar IPO for Facebook would have been launched without a problem. Everything is only your fault, including the times the company underperformed in the last bear market rally. // Never done this, however the gamut runs from former portfolio managers to professional statistical mechanics who monitor and track for your standard mutual fund/pension fund the risk and risk of each trade. The trade risk reports are then sent back to the head of the bank's trading & sales dept. the compliance office and the trade supervisors. Given the scrutiny post London Whale, Risk Audit is definitely a growth area in the whole surveillance culture on sell side these days. 9. Portfolio Manager: Sell side research guys who feel they are the next Warren B, and have egos the size of the private jet fleet they claim to rent to jet to the Hamptons. They are all jerks, and if it were not for their large assets and tickets they write, they would be the guy you would see sitting alone at the Warhammer 40k tourneys because they always try to argue the rules and whine when their 300 dollar toy gets nuked. // Huge amount of stress to perform, on par with managing director of an investment banking franchise. Like research you are only as good as your last 12 months of performance and your last big trade, constant publish or perish atmosphere of research or academic is replaced with trade or fade (do it or get out), which makes creativity a must. High stress also leads to high performance burnout, which means shops either find a "zen" where they generate a winning set of investment rules, or the PM burns out and returns to consulting/banking/industry / As mentioned before, hours can vary between 12 and 17 depending on the intensity of the shop, the depth of market intelligence the PM's are required by their boss to perform and their own ambition. Many PM's will have at least 5 years of sell side experience and at least 5 to 10 years of industry or junior PM/Research experience before being put in "the big chair". Human research was on the wane for most of 2005-2010 due to the inability to generate alpha vs. Signal funds and a ZIRP market (melting up); seems to be switching back towards human thought leaders, but then again I'm biased and also an egoist. Will check the thread again later, flames/questions welcome. Perhaps next year I'll have some psudo free goon beers at the Herjavec Group car tent or Ferrari tables as an incentive to get more Goons promoting Goons in Finance, or whatever. Hal_2005 fucked around with this message at 00:20 on Jun 6, 2014 |
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Jun 5, 2014 22:58
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How similar are the personality traits it takes to be an "elite" gamer vs. a successful hedge fund manager? Are these the same sort of creepy obsessive people+ greed and an ivy league education the way I assume?
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Jun 6, 2014 01:04
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Do prop desks run trades through their own firm's dark pool? Why do people pay for order flow from retail brokerages?
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Jun 6, 2014 05:10
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Baby Babbeh posted:How similar are the personality traits it takes to be an "elite" gamer vs. a successful hedge fund manager? Are these the same sort of creepy obsessive people+ greed and an ivy league education the way I assume? In rolling with the snarky joke, I would say MMO gaming gives you a well crafted butt and appreciation of locker room culture for 12 hour computer sessions, but no better or worse than any other "elite" activity like say, Lacrosse or other WASP teamplay which usually is attached to a successful career path. Any team where you are required to work with more than 20 people for more than 10 hours in multiple sessions in 1 day will probably cool your temperament and ego just enough to work well with others. I hear people who have problems working well under pressure or managing their opinions tend to fail on career ladders and become bitter outcasts who blame everyone else for their own miserable failure to win at life. But I could be biased having seen both the good and bad, and fired more than my fair share of both obsessive and passive burnouts. I will also say that A personalities can both be good and bad in all corporate cultures. I will get into that and how it relates to your question, but first but I will lay out what and where I feel similarities lie between organizational skills in an MMO and in starting a company. When developing a company, any company (and I encourage you Baby Babbeh to look up a new book called "the hard things about hard things" if you disagree with my points of view) you need to know when to be a strategist, a manager and a promotional developer. When you have an idea, be it a porn app or a prop bond desk, you first need to generate an idea which has an "edge" and can not only inspire others but generate enough disruptive impact to your niche that it will allow you to hire people and then raise capital to see the idea through, so you need to be and have a certain flare for promotion and people management to even get in the door. Many entrepreneurs take classes on this, such as the famous Carnige Mellon speaking program which I went into (most investment banks will either pay their principals to take it, or strongly encourage them to do so at some stage before Managing Directorship), or will attend an MBA seeking the ability to "pitch". To some this comes naturally, to others its something you work on. In most cases, it is a form of practice, which is why as investment bankers and sales men after your third year you begin to take on junior accounts to train on for pitching & marketing, like any other journeyman profession. I would say the overlay between a good promotional banker or sales/trader and an MMO gamer is about 30%. The reason is the alignment and need to close a deal vs. that of a casual MMO world. In some cases, like when I was selling Game Time Cards to the Russians to finance a large Superweapon (made by a Merc corp), it was very much similar. On average? A standard MMO hobbiest's largest concerns are the very real problems of making Mumble server rent, website lease and keeping membership up; but these are moreso HR issues vs. Promotional issues. However I will add that many "elite" gamer guilds, such as those professionally sponsored which I am a member of, but have little time for (PRX, Virgin Gaming are two) are very much online companies now, with their own HR system, marketing officer and corporate event listings. Which is positive because they are basically mini MBA marketing classes, and in the case of one "elite guild" we lifted an officers Harvard organizational management class notes for the new recruits (guys 10 to 18 years old) and they really did adapt and work better because of it. TLDR: Marketing a company and marketing a guild are really different poo poo, but as gaming grows in culture and social media begins to monetize gaming & gaming video feeds, gaming is starting to become at a sub-PGL level a cottage industry in promotion and brand awareness. Which leads me into management. In this situation I would say there is a 110% alignment with the needs of spergie, adhd overcaffinated gamers and brioni suit wearing overcaffinated cash junkies, but I suspect this is common with all industries which have high turnover rates and tend to visibly attract youth due to perception. In finance, like MMO gaming it is a human talent business. This means that your shop is only as good as the people you staff, and the people you staff are only there for either 1.) the phat lewts 2.) resume prestige 3.) a free ride. Finding out how to keep the 1 & 2's and align them to what you want to build, and moving the 3's into the magical 2.) category (aka they are proud to be with the team and will try to learn/pull with the crew) is the main goal of any executive, be he a raid leader trying to 40-man kill Naxx for a world first, or some guy trying to get Temasek (a very large and "nice" SWF) to give you an investment. Having those people be responsible when you are AFK or MIA for a while, but also giving them the empowerment to lead while you are there because they want to do a good job for themselves (to kill BoB... whatever) is pretty much the same as when I am out of the shop, or any CEO is out of the shop and we expect good results while we are on an "away team mission". The reason is this: many people like to buy-in to a project because they perceive to recognize the risked upside to investing their talent into the company. Drucker has wrote tons of books on competitive management over the last 30 years on this, and Harvard makes a mint on those articles so I will not reproduce an MBA seminar for you, but the ghist is that the first goal of management in any project is to first recruit and then retain thought leaders who you can then empower to lead, and you can sub-deligate projects to. While Mittani and Goonswarm, and the affiliated offshoots since 2005 did not implicitly say "hey guys, we are holding Drucker School for sperglords for 10bux on Sunday to Monday", looking back I can totally see that yes: we did and many goon guilds (even those fuckers in Starfleet Dental) do generally have a process in developing organizational talent, giving them tools to gather project buy-in, and maintain project focus for even a few hours, even if it's just for the "lulz". Lulz in my world, and once you get beyond the paywall of VP, actually become points of merit when arguing for bonus or ESOP stock option plans, only Employee burnout or Project work hours/week (in the words of a friend who runs Pixar) have replaced "mah KDR!!". You get the point. TLR: If you have people under or with you, you need to manage them into a project, no matter how loving stupid it sounds on paper or how sucky it will be to pull off. Knowing how to keep those guys motivated be it a 32-day Russian Front in a MMO, or a 32-day market correction is just as sucky, and the skills overlap. One of the 5 major oil & gas acquisition and divestment brokerages in the world has a Director who still uses the phrase "X-up" when he needs an associate for what everyone knows is going to be a bullshit sales deal. It works. So that's all I need to say, [XYZ (greater than 10B Market Cap NYSE listed oil corp)] can confirm it works. On the other side of HR management I should note about 40% of the time I have adjudicated and been monitored when I was an investment banker (checking people for promotions or bonus pool allocations) it was watching employee attention to detail and their own "breaking points". So in this way, coaching and mentoring is also a strong crossover between video games and corporate performance vs. say other events that rely on small bursts of activity followed by long downtimes/planning seminars. Anyone who has managed more than 30 people can agree with me that the role of executive is half about knowing when someone is about to blow out (and when to pull them off the line) and the other half, as I listed above is about pushing the line forward; even when it does not want to push anymore or wants to start rolling backwards uphill. And that leads me to our final point: Strategy. If anything I would say the discipline which you need being a strategist or a business owner for a company and that of a guild is the strongest crossover next to the HR component, and something I did not find playing sports in both High School or Frosh year University. On Ice or Field strategy tends to be wrote or memory, where each play is practiced but when poo poo goes wrong, the ability to have market research, rapid response plans and recovery bailouts is something usually left to individual actors due to the layout of how those games are played in physical space. In an MMO, even the actors who are not on the field or have been taken off the field due to play, still act as eyes and ears/research analysts feeding data to the squad leaders and team captains to salvage the play. I found this, esp. as I moved up the ranks and had to rapidly shift from getting my "numbers right" to "whats the next move" then this level of gameplay started to make more sense in my head, by taking it back to Tortuga skirmishes or Hot Drop scenarios as my frame of reference. Yes, having a trader yell at you his order book is starting to fall apart on a 3 billion dollar public offering is just as high impact as when you are trying to take down a Titan in NC space. At least that is what I can relate to, your mileage may vary. I will say also that the level of diligence and research that must be applied to market data, competitive analysis and reaction/response prediction (and then taking into account game breaking bugs, non-responsive targets and black swan events like server crashes) is very much a day to day analog for all CEO's and COO's. If they don't admit to this, then they are either 1.) lying 2.) likely do not want to admit the similarities. I can say with confidence next to garage bands, one of the most popular past times amid executives these days is talking about their gaming strategies (or how they coach their kids guilds) amid the Melno Park clique. I find that cool, because adults who grew up learing how not to forum rage when a World of Warcraft boss was launched broken, and they still managed to beat it are now proactively teaching and encouraging their own children to be market researchers and not give up when something is "broken". So in this nugget of insight, I think competitive MMO gaming and executive education has been a net positive on corporate cultures and corp. development training: far better than autistic single player or MOBA click-bait pay to win games, which I think nobody will disagree with. Gaming also does have one thing in common with business that I did leave out, but I think is not stated enough: governance and paygrades. In our current culture of "prestige classes" and cash shop awards, people recognize or recognize the difference between bullshit pay to win, or pay-to-job (daddy gave you a job here, your not one of us) and those who really work and want to work. I think gaming culture, and as I referenced above "the purpz" has alot to play with this, esp. amid anyone younger than generation X. Everyone remembers when they got screwed by class or officer drama out of loots that rightly went to them, or should have been petitioned for adjudication either by the moderators of the game or the guild executives. Many say GenY and GenZ are more "hussy" about exposure and bonus culture, hell I know I was, but so are all my cohort in both finance and who are currently running their own oil & gas companies and are younger than 36 years old (you can google who they are). Alot of this is due to how we experienced win & loss in MMO's, specifically world of warcraft where we learned what we intrinsically knew what an hour of our time was worth; and it definitely was not "worth" nothing on most nights. So I would say this circuitous method GenY/Z learned the "value of a dollar" was also a good result of "elite gaming". We did not exactly work in coal mines or shine shoes for 10 cents like Uncle Scrooge of Disney fame, but after being gyped out of an eye of sulfuras in Fires of Heaven a few times, you drat well learned how to speak up or make a good case (with DKP, statistics, and attendance) to back up your case; which is not uncommon with what every executive goes before their compensation board about ever quarter (or semi-annual, depending on your culture/governance) to argue for more people or to pay the bonus they want; before the ditch to Facebook. Happy to speak more on governance, I know this is a hot button topic ever since Institutional Investor released the bonus table for the mega-funds and large pensions like CAPERS or CALPERS have really been upset about what the populist opinion on pay grading is for industry. Prop Trading: I think I should explain a bit what proprietary trading, agency trading, and dark pool, grey pools, over the counter and upstairs block trading are. This will be quick since I really want to keep it simple - Retail brokerages and high net worth accounts are classified as "pools of liquidity" which is a fancy way of saying if a hedge fund needs 1 million shares to borrow or cover, the bank or brokerage will take your shares out of your account and then give them to the hedge fund that needs them, and then they will buy that share back on the open market; pocket the difference in the net-position, and you will not know your share was not your original share. This liquidity is nothing shocking, there are clear rules as to when a bank can use your account for their own uses (prop trading) and when they are filling orders from inventory (liquidity or order filling; much the same way people order fish or furniture from a warehouse and your small construction business will not exactly have the same wood on the palate you pick up every week for your own workshop) and when they can not. Often if they follow the rules, unless your name is John Corzine or Dick Fludd, it is illegal to randomly take peoples securities without putting them back in a set period of time, and you must always have enough securities on hand to meet an order request (ie: if you want to sell something, they have to have a Share or Bond on hand for you to "sell" to close out your own personal account position). Whew. Liquidity is key because without it, funds often can not trade or establish positions in low volume securities, and this is a big sales pitch point for getting Hedge Fund business. In fact, for some like Bank of America ML, this is their current only pitch point (lol). On tough to borrow or source securities you can be expected to pay up to 20% of the value, which if you expect the stock will only go up or down 1% a day, that is a loving huge premium to pay for an idea. Which leads to the reasons why people tend to gravitate to large funds and large liquidity institutions as soon as they get to a certain scale, because the trades that are hard to get into, but may be very profitable open up substantially. A good example of this is the Tesla trade we made at 18/sh. That was a liquidity driven short squeeze, caused by lack of borrow. So was the Blackberry/RIM trade a few years ago due to Prem Watsa. - Proprietary trading vs. Agent Trading: Agency trading is the simple taking of orders and then filling the order book based upon your ability to source demand. In this case if you happen to be offside (ie you own too much of a stock because you were buying from a SWF/Mutual/HF which wanted to sell) and you profit; thats great, its unexpected income. But you do not have any bank capital which is designated towards doing anything other than making a market. Agency always needs at least an order or a direction in order to be allowed to buy/sell. Prop desks are those who use the banks risk capital (not to be confused with their operations capital or tier 1/3 equity reserves) who take coordinated or speculative bets on the market. The size and amount of risk is governed and monitored as if the Prop desk was a hedge fund, but since they have/had direct access to the bank balance sheet (and Fed repo rates) the amount of leverage the bank would allow you to take on, because of that bank posted collateral (at the fed window inside their nested capital structure) enabled for way larger and leveraged speculation vs. what a conventional hedge fund could get away with; a good example of that would be to compare what Bruno Iskili got away with inside the risk group (which was actually a off the books prop trade desk Jamie had going on at JPM for 6 years) and what Longterm Capital Management ran with during the pre-Russian crisis. A good explanation of prop desks vs. agency desks can be found below, as published by Reuters. http://g2ft.com/images/news/Distinguishing%20between%20proprietary%20trading.pdf Note, Proprietary trading aka. banks speculating with their own reserves and risk capital is not exactly on par with institutional or fund based market speculators, while they are still market participants, the ability and leverage ratios a Proprietary desk can take on, masked by the Basel rules puts them at an unfair advantage vs. normal operators. They can also hide their losses or accounts better given the lack of barriers between commercial deposits and trade accounts post-Glass Seg. more on that in another post. - Dark pool, Grey pool, over the counter, upstairs First off, everyone in institutional world USED to use dark pools or grey pools as the next big thing circa 2010, not just Prop desks. I used to be a shameless user of Dark pools when moving trades around in Canada and the UK because the market liquidity problems were very bad before, and got worse on certain cross listed with the NYSE big board names when HFT's started moving from liquidity making engines to scalping signal trades. A major problem with conventional quotes is that placing an order on the board (aka; like EVE Online, when I want to sell a bunch of stuff I post the price, volume and location ) is that on big orders it gets tougher to break up the order into small chunks, and exponentially more difficult to move off a big load of product if everyone knows you want to sell stuff. So various guys, like Goldman's ChiX thought it would be a great idea if there was an exclusive venue where nobody knew the size, or amount of follow up orders, just that a party needed to trade and he needed to trade now. Then if you picked up that order, then the name and volume would be listed only to that counterparty, who then would promise to take that trade. Which is great because its annon; just like opening a private chat window and trading between two generals in a bunch of video game ships you need to rearm your fleet; only now its Microsoft shares, and your counterparty is Moscow University. That was the basis behind dark orders. Problem is it didn't work out to well. A dark pool is where dark orders are matched and settled, and only after confirmation or reasonable clearing delay would the quote be listed on the board as a dark pool trade. These pools used to work well because a simple order "flash" would usually be picked up in the early days by a large volume matching party who would agree to take part or most of your order on spot. This was great because when compared with having a block trader aka. upstairs market maker tell the whole world you needed to do a trade (and everyone front ran your position), you now could get the speed of execution of a nimble retail account, without paying a steep premium or being chewed to pieces. The problem with black pools is that frequency funds learned to note when a dark pool cross or block was being moved, based upon latency arbitrage between the ChiX and mainboard and could front run the dark pool postings, which actually made it more risky to use Dark Pools vs. professional block trades, because everyone would have custom programmed "flash boy bots" who would specifically tell human traders when a dark pool was going to be "lit" and then to front run that stock. Zero Hedge's authors did alot of work with Nanex and ITG to disclose this, and finally it was published on by the SEC this spring. Long story short: dark pools were designed to generate a bit of annon. and give large traders the privacy of a little retail trader without leading to market disruptive volumes affecting main-board prices in times of weak liquidity. Grey Pools are an iterative of the private exchange of a dark pool setup. In a grey pool, usually you are precleared as a counterpaty, or your volume is disclosed but your price point is not, so without a price to bid no-algo can theoretically run around you. Grey pools also are common amid partially transparent markets (semi-lit or over the counter) where someone has taken on agency risk and agreed to trade in illiquid products or securties by posting the bid/ask on a non-regulated exchange. An example of this would be any one of the dwindling SecondMarket clones who traffic in pre-IPO social media stocks like Snapchat or Facebook/Twitter pre IPO. These are also being heavily regulated come 2015 due to issues relating to front-running and preclearing for regulated institutional accounts. Over the counter: When a product you need does not exist, but can be created then its OTC. Usually, these trades are not regulated in any way, and can be placed on any security provided you can pay the custody fee and charges related to the derivative being constructed on the underlying asset. It could be a put/call, it could be a CDO, or a swap, or a exotic product made up of strip coupons of a simple equity hitting price targets, it all goes. The only problem is since these are all non-liquid and not regulated, you are in on your own. OTC could be considered a black market due to the low volume, esocentric product makeup and lack of collateral monitoring on these trades. A quick bit of google fu, which I suspect can explain far better the nuances between general market pools and operations. I will be honest, I am not a trader, just a humble ibanker/research analyst/portfolio manager/ceo, so if a bench jockey really wants to clear up any mistakes I made on a banker trying to explain market mechanisms, be my guest. http://en.wikipedia.org/wiki/Dark_liquidity http://www.fidessa.com/document/18?ajax=true Now, back to MayakovskyMarmite's original question: Do prop desks run trades through their own firm's dark pool? Why do people pay for order flow from retail brokerages? - Prop desks will run trades through their own firms dark pools, anyone can. They do it for the reason everyone else does, to mask large order flows or to try and get a good deal near the bid/ask on a position they wish to act on at a lower price than where they think the main board will show them a bid at. They pay the same fees everyone else at the dark pool does. A dark pool or platform trading group usually sits independent of the prop trading group, esp post 2011 and conflicts of interest between front running your own dark pool are pretty low, esp given the scrutiny they have faced by both major clearing firms and major pension funds since 2005. - Market fill and allocation. E*Trade's largest revenue generator is that little "get agressive" button you see beside your terminal. Day traders who do not know how to move in and out of the quotes tend to feel frustrated when they see their order 1.) stopped out 2.) filled at a price off the peg they see on their quote delayed screens. Retail order flow is usually done out of brokerage inventory so the whole point of pressuring retail accounts to take any price, and thus swing market control back to the liquidity providers (HFT's in most cases) tended to compromise the spirit of the NBBO. this in turn often would enable exchanges to pay HFT's the largest rebate fees for closing a false spread due to these "get agressive" trade requests, when in reality; a normal order would have filled just as fast using a conventional method of trade filling (anything not WAP). If I missed anything out, or I am a bit wrong, feel free to correct me but that is my opinion on the situation. As I was told by my traders early on when I was learning how to "cut a book" (do allocations on an offering), NASDAQ and Madoff's whole premise was pretty much to bilk people via. casino like momentum on an electronic exchange and then pay per "spin of the wheel" where a normal exchange floor like Chicago Options or NYSE pit would have either halted the aggressive order stuffing via a punch to the nose, or a enforcer would have ordered a market halt for the post to clear the book properly. I suspect eventually NASDAQ momentum and margins will be tamed significantly whenever we see the next P/Ex or P/Rx compression event like 1998/99. http://www.reuters.com/article/2014/05/06/us-sec-investigation-brokerage-idUSBREA450TZ20140506 I can give the answer another pass when I get back to the office and do a bit of serious consulting on what exactly HFT was doing to retail. I honestly have not done much with retail (except learned in my last year as a banker the junior rung of bank management if I wanted to continue upwards to chairman/CEO) so I'm willing to look into it if more people ask about that question. I do suspect, the order scalping of retail accounts via quote front running was the most egregious of the premium allocation service charges. Hal_2005 fucked around with this message at 02:54 on Jun 7, 2014 |
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Jun 7, 2014 02:46
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What tactics/behavior do you think are the most anti-competitive? Is there anything you think should be illegal? Along with other exotic order types, the whole "hide not slide" thing seems to be percolating up.
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Jun 7, 2014 03:59
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You speak about burnout a lot. I'm from an i/o psychology background and this just sounds like a ridiculous way to run a business. Why would you want to burn out your best and brightest? Naive question, can you not just half pay and hours and hire twice as many people? Or give somebody a month off after busting rear end for three months straight? I get that finance is all alpha male bullshit but there is no way anyone can perform at their peak if they're working 80hr+ weeks non stop. The number of bad calls will inevitably go up. Does this not harm your business in the long run?
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Jun 7, 2014 16:32
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At least as an analyst in i banking it seems like the hours are more a function of being beholden to others schedules - eg if you get a task dumped on you at 6 pm by a md you will just have to stay until its done even though nothing was going on earlier in the day. And that work expands to fill available time. Ie a deck can always be better made or double checked again, so the hours just add up in conjunction with culture. Is this a reasonable read? Trying very hard to avoid this happening personally. More relevant question: do all these hedge fund regulations apply to those justusing the legal structure but not trading in tradtl securities? For example: i know someone who some time ago (before many regulations were in place, like 30 yrs ago) made what was legally a hedgefund to bet on horse races. If i wanted to eg make a collective investment instrument for doing something offbeat like wine trading, would that avoid a lot of the sec regulations? Sorry if this is too esoteric. Another question: what do you think are reasonable ways to go from strategy consulting to pe? Would an mba from a good school work, or is more/less thsn this required? Was hoping you might have some insight. To what extent does fund size matter for returns? It certainly seems like a 100 mm aum firm would have an easier time making like 30 % returns than a 1 bn aum firm just due to size, but perhaps im wrong about this. Before the financial crisis, to what extent do you think hedge fund managers were aware of the potential crisis? Obviously some reacted to it intelligently and clearly knew abiut it, but for those who did not do thinks like shorting cdos, did they suspect and not act, or really not think it was coming? Curious about your take.
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Jun 7, 2014 20:27
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Thank you for the thread and the thoughtful and thorough answers! Two avenues of interest for me: 1. Do you have any experience with OTC Derivatives? What do you think of Dodd Frank, and the post Dodd Frank world? 2. If one were interested in High Frequency Trading, what is the best way to get "into" it? Working on your own program, finding a mentor, mastering coding abilities, etc.?
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Jun 10, 2014 21:11
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