Had a DM question: "hey Brett, I have a hedge fund case study coming up - do you have any advice?" So I thought about it a bit, reflecting on the multiple case studies where I have participated (both as interviewer & interviewee). Here is what I came up with:
Most hedge fund case studies in my experience are either the 1) one week homework case, or the 2) 3 hour "stack of paper & blank laptop" case study. The one week case is enough time to actually put the idea through a true research process (also blows up your life for a week)
The 3-hour case is a bit more common, and what this particularly questioner was curious about. The materials in the "stack" may vary, but let's assume you get 10-K/Q's, earnings transcripts, a bit of sell-side research and a comp table. Your approach to the process might vary,
but here is mine: Step 1) Build a minimum viable model (30 min): Pull up two 10-Ks and key in Revenue down to EPS for the last 5 years. ALT-IR then F4 to add rows, then add your analysis rows below each line. For revenue: % yoy, % 2 year, % qoq. For cost items: % of revenue,
bps yoy, % yoy. For profit items: % margin, bps yoy, % yoy, % qoq, Incremental Margin. Observe the trends present in the business, and extrapolate those trends forward. Forecast each line item down to EPS for 5 years, and develop a dummy EPS forecast (this seems easy to do,
but you would be surprised how many people get tripped up on this). Step 2) Understand the story (45 min): You will usually have an hour to pitch the stock, so you better understand the story! Use Business section in 10-K to understand the products, segments & generally
how to company makes money. Add a tab in excel and take notes on anything relevant. Read all of the sell-side research. Then pull up the latest earnings transcript. Try to understand 1) what's driving the biz, 2) what is mgmt's plan & forecast for the business? 3) what are the
controversies surrounding the business (check on the first 3 sell-side questions during Q&A). Pull up MD&A section in 10-K for notes on what drove revenue & profit growth over the last 2 years. Weave all of this information together into a coherent story about 1) what the
business does, 2) how the business is performing, 3) how mgmt & street expects the business to perform in the future? Step 3) go back & refine model (15 minutes): Pull any targets from your reading (revenue growth targets, LT margin targets, etc) into your model. Add cell
comments in any key forecasts and drop MD&A commentary into relevant historical revenue / cost items (cheat sheet for later). You are now working on pulling the story you gleaned into the future forecasts. If you have sell-side research, compare your EPS forecasts to the model
in the note. If you are within 10-15% you are probably ok. If you are wildly different, diagnose & fix model until you are within the ballpark of street. Step 4) develop thesis, target price & risk/reward (30 min): Developing a thesis in 30 minutes is kind of a joke, but
interviewer wants to see if you can quickly and efficiently wrap your hands around a stock narrative. Can you figure out the basic story? Or are you completely lost (and prioritized all 3 hours on the model). You have to balance model & story. So this is less of a thesis and
more of an explanation of what is going on in this situation. Pull your 4 year out EPS (2026), look at comp sheet for relevant multiple, and apply that P/E multiple to your EPS. That is your 3 year price target (also translate that as IRR). Don't have a comp sheet? Look to the
sell-side research for current P/E multiple range and use that as a proxy. Access to neither? Compare fundamentals here (revenue growth, margin trajectory) to S&P. If more attractive, take ~18x market P/E and add some degree of multiple premium based on your judgement.
Now create the risk case. Mouse right click on MOD tab to create a copy. Label MOD-RISK. Take your key assumptions - revenue growth & margins, and cut those down to develop a risk EPS for 2023. Cut P/E multiple down, and that is your risk case. Take a quick look at Risk section
in 10-K and reference sell-side research or call Q&A to see if you can understand the bear case. Weave that bear narrative into the Risk EPS. Take a base P/E on base 2023 EPS for your tactical return case, and set that against your tactical risk case, to develop a R/R ratio.
Step 5): Pull it together w talking points (15 minutes). Create a PITCH tab. Lay out business overview, key drivers, key controversies, base variance vs. street, bull case, bear case, 3 year IRR and tactical R/R. Collectively, this should inform your stock view on whether
you will be pitching this stock as a long or a short. Take a stand, but don't be dogmatic about your view (have the humility that you only spent 3 hours on it!) Step 6) Make it pretty (5 minutes). Yes it matters. If some numbers are to 6 decimal places, some to 1, it will look
supper sloppy. Add a colored row between model sections. Control 1 to properly format a cell, then Control C, Alt E,S,T to paste that formatting where it's relevant (unfortunately your Macabus add-in won't work...). Alt H,O,W to make sure all column are same width.
Step 7) Build out the model (30 minutes): Yes, I purposely left balance sheet & cash flow to the end. I've seen too many candidates spend 90% of the 3 hours getting buried in the model, have no idea on the pitch, and the hour is PAINFUL. Almost instant ding. Is the balance sheet
& cash flow important? Yes. But not as important as 1) understanding narrative, 2) getting to EPS forecast, 3) developing a coherent story weaving narrative & numbers in a risk/reward wrapper. But if you are fast & good, you should have time to go back and build depth around your
model. Add bells & whistles. Add in segment / product build to revenue. Add in quarters to your annual model. Layer in a 20-year DCF / "what's in the stock" analysis on a separate tab. These are more extra credit sorts of bells & whistles, but be careful to prioritize steps 1-5
as those will be absolutely necessary to have a good dialogue with interviewer. Step 8) Display your process. Put a section down of "what I would do in the next 3 hours, and next 3 days". If you didn't get to cash flow statement, make it clear that is your next step, you just
ran out of time (this is forgivable if not ideal). Create a list of questions you had for IR and ongoing diligence plan. Make interviewer see that you obviously have the ability to run a very deep process on this stock.
Step 9) Q&A tips. This case study format is supposed to feel impossible. Keep your composure and have fun with it. Gently remind interviewer you were on a time crunch if asked why you didn't do XYZ, but don't make excuses (and note it is on your "next to do" list). Best of luck