5 THINGS I WISH I KNEW AS A FIRST TIME HEDGE FUND PORTFOLIO MANAGER I've had some DMs / e-mails over the last few months seeking advice on the move from a single manager analyst seat to a multi-manager PM seat, which I thought I would tackle on this fine Friday afternoon If you follow the industry, you know this transition has been a growing trend. Goldman Sachs data shows that multi-manager (pod) seats were 13% of industry seats in 2015 moving up to 24% of industry seats by 2022. If you want to be a PM running a larger pool of capital (call it >$500m), you are almost by default doing that at a multi-manger these days. HF launches that scale to >$500m do happen, but mostly for those with prior successful PM experience, and it is exceedingly rare for the PM seat to transition at existing single manager funds This was my situation after 7 years as an analyst at a Tiger-style single manager. I felt I had developed a money-making toolkit, and I developed an ambition to run my own portfolio. That wasn't going to happen for me at the firm I was at, so I left to another fund where I was given the responsibility to manage a $1bn+ market neutral healthcare book In a way, I'm a weird person to be giving advice on this topic. I was and am proud of my production as an analyst - I played a role in an aggregate of multiple nine-figures of P&L generation. But, my experience in 4 years as a PM at 3 different multi-managers managers was decidedly mixed. In total over those 4 years, my performance was not good. But in that track record, there is an important nuance. The first year and a half I struggled mightily...virtually all of my metrics were ugly. So bad, in fact, that I had to meaningfully re-orient what I was doing. I am proud of that learning process, and over the final 24 months as a PM I was profitable 18/24 (75%) and felt like I finally had "figured out" the pod PM game to some degree. Now listen, I still wasn't a top decile PM, and I learned the incessant grind of being a pod PM wasn't for me - hence why I hung it up. But hopefully new or aspiring PMs can extract something useful from my experience. So here it goes, the advice I WISH I could go back in time and give my younger self as a first time PM. THE GAME IS DIFFERENT While well-meaning, the worst advice I got as a rookie PM was "keep doing what you've been doing". Well, I was a 3-year IRR seeking time-arbitrage player that ran to situations where the sell-side was saying "cheap but no catalyst". Duration was my advantage and asymmetry was my north star. I scoffed at market participants too focused on the "catalyst path" or the earnings set-up or the "narrative". That doesn't mean I shouldn't keep some elements of what had made me successful - knowing my industry very well, resourcefulness around identifying insights on the key driver, and maintaining an independent view on key debates and taking a contrarian stance when my work supported it. But the multi-manager wrapper is just fundamentally different than the Tiger wrapper. The multi-manager wrapper runs with higher leverage and thus cannot afford to allow left tail P&L events, and CIOs don't have the same level of intimacy & trust with the investment team. Because of that approach, risk & the CIOs of pods take a "water your flowers, pick your weeds" approach to PM management that is more coolly robotic, not as humanistic. You can complain about it, but it has worked exceedingly well for those funds. P&L consistency & Sharpe-ratio maximization is the name of the game at multi-manager world. DON'T FIGHT THE RISK MODEL Sit on a multi-manager trading floor and it won't take you long to hear a complaint about the risk model. "the risk model has this beta wrong...the risk model won't let me put on this trade...etc). To me, it's akin to complaining about the weather. Citadel/Millennium/Schonfeld/Balyasny/P72 have all generated 10%+ returns (which is almost pure alpha) since inception and (mostly) avoided large blow-ups because of this tight philosophy around risk - avoiding left tail PM blow-ups and minimizing systematic & crowding risk. It's a genius want to manage LP capital, really, and the GPs of these entities are absolutely incredible businesses (in my opinion). Risk is mission critical here, and they are damn good at it. Don't fight the risk model, embrace the risk model. Rather than trying to game or manage risk, learn the advantages of a vol-targeted model. At a single manager, I could have never received the capital to trade LH vs. DGX or PFE vs. MRK or put on interesting merger arb spreads. You can put a LOT of dollars behind a low risk trade which can make a 7% pair mean reversion forecast look pretty interesting. And these orthogonal trades start to provide risk cover for the 3-year IRR Tiger-style trades that you will also want in your book. The concept of "idea mix" was a really powerful learning for me...rather than simple alpha longs vs. alpha shorts, maybe that is 50% of my risk and the other 50% is pairs, slippage reversal and shorter term catalysts. I maintain a punchy core of alpha generation while giving myself different ways to make money. So, I would tell myself - don't fight risk. Embrace risk. Seek out mentors who can show you different ways to make money in the risk model. Learn about risk models. Read Giuseppe Paleologo's great book Advanced Portfolio Management (he was a former risk director at Millennium and Citadel). Read the Barra risk model handbook (happy to send if you DM me) so you know how the sausage is made. Learn about factors. Understand where the alpha is in factors and understand the risks & opportunities in ST Mo vs. LT Mo. Even in a risk model, 25-30% of your risk will be systematic - what factor overhangs are you ok with? Why might you be ok being long European momentum and short excess beta? These are things I wish I would have learned earlier. I really liked Antti Ilmanen's (Brevan Howard, AQR) Expected Returns book as a grounding on factor harvesting. YOU CAN'T SUCCEED ALONE Running a highly concentrated portfolio at a pod is, to me, a death wish. I pushed the limits of concentration as a rookie PM, and it bit me in the ass. I figured I would just pick all the stocks and let my two analysts do tasks to help me here and there. Update this model. Do this call. That's how I had worked with junior analysts at a single manager. Give them discrete tasks as they slowly scale up. The problem with that is this. I am optimizing for 1) P&L consistency and 2) Sharpe optimization (my risk is fixed so my P&L is simply a function of my Sharpe). I learned a simple portfolio management truth that orthogonal P&L is additive but that risk is not, it is the sum of square-roots, i.e. there is risk diffusion with different sleeves. Rather than have my analysts to lots of discrete tasks, I wish I would have given them a very tight coverage so start. Here are your 15-20 stocks. Build models, become an expert, generate estimates & R/R's and catalyst set-ups. If I did this with each analyst I would have had a steadier flow of ideas that I could act upon quickly, helping me achieve the critical diversification in the book. This also requires a managerial skill-set that I didn't have at 30 as a first time manager. Enforcing a process, being the bad guy when needed, while also balancing feedback, mentoring & culture-building. I was so overwhelmed with picking stocks and learning to manage a portfolio that I neglected this critical vector. The best pod PMs I know have GREAT teams that they trust, and enforce an incredibly tight, disciplined process such that there is little ambiguity about what the process looks like. I didn't do that, and that's a big part of why I struggled. YOUR PRIMARY JOB SHIFTS. FROM ANALYSIS TO DECISION MAKING. I LOVED and LOVE the role of analyst. Shut my door. Dig deeply into an idea, sinking my teeth into the company & investment debate. Emerging from my dark, cold office in 5-10 days with my conclusions. To me, this is joy, this is flow. And I was great at it. The problem was, I kept that up when I became a PM. Which resulted (per point
