25 August , 2009
Now that you have polished off your hedge fund resume we move on to one of the more overlooked essentials to getting in the door for a hedge fund interview: the hedge fund case study. You may be puzzled: Isn’t the case study the final step in the hedge fund interview process? Theoretically, yes. But, what I am talking about here simply a written up investment idea that you attach with your resume whenever send it out.
You may be asking: “Hunter, what is the purpose of this? Why?” Just like when working on your hedge fund resumes, you need to distinguish and differentiate yourself. As noted in earlier posts, a hedge fund will receive 200 or 300 resumes for every one front-office job. If you present a resume in the fashion that I have layed out, AND add a case study on a particular investment you find PRESENTLY compelling, your chances are multiplied greatly that your resume will go in the “Follow Up” stack.
Now you may be saying to yourself: “But I don’t have any good investment ideas” And I respond: Well then, why do you want to go work for a hedge fund? I literally jot down five or six ideas everyday for future review – some I get to and some I don’t. But I am always looking to generate outsized returns for minimal risk. I want to turn over EVERY STONE possible for that one three or four bagger that no one has even heard of. I was at dinner with a hedge fund manager last week and I asked him, as I always do to everyone I know in this business: What are you looking at? He proceeded to tell me a situation that I had never even heard of that made so much sense it was scary. Those are the situations you want in your case study / investment memo – something that will make the hedge fund manager jump out of their seat and then demand that one of his/her analysts start looking at the company.
No one wants to hear about how you think Microsoft is inexpensive. No one cares that you think First Data’s bank debt is a steal. These are situations where marginally more information will give you limited edge. Plus, everyone is already talking about them.
Where can you find these ideas if you are not actively looking? There are so many places: SumZero, Value Investor Club, Silican Valley Investor, Bloomberg Message Runs, other buy-siders etc. After you have found an interesting, current idea (Has to be actionable TODAY AND it has to be tradeable, so no ultra-microcap with diminimus volume), it is time to start writing the idea up.
Here is my format, and do not take this as Holy Gospel, because I think many approaches work equally well:
- A large header, with the company’s name and the security for which you are recommending
- A three or four sentence thesis. If you cannot explain the idea rationally in three or four sentences, it probably is not compelling enough
- A break down of the capital structure
- An overview of the company
- Why the mispricing exists
- Anything particular pertinent to the thesis (think industry trends, covenant issues, recent results or announcements)
- A valuation and investment opinion
- Conclusion
In at least two of these sections, preferably the thesis and conclusion, you want to “advertise” the potential IRR of this investment. I do not know why, but for whatever reason, when you say “…offering an IRR of 40% with limited downside risks” people start salivating.
You want to keep the whole document less than three pages, with lots of charts and graphs supporting your thesis. People will not spend long looking at the document, they will know if you they like you pretty quickly from your laying out the thesis. So the more “stuff” you can pump into their brain supporting said thesis, the better. Do all the normal stuff, like editing the case thoroughly (something I need to do a better job at!) and making sure it formats well when printing.
When you send out your hedge fund resume to a recruiter, through a “cold email”, or best through a referral, you want to include the case study in the email. You mention something in the body of the email such as: “In addition, I have included a summary of the work I have done on XYZ situation, which I find to be a quite compelling investment opportunity.” You get the drift.
In the next segment on how to get a hedge fund job, we will talk about ways to get the interview (two-part series) once you have your resume and hedge fund case study ready to go.