For every success story of an investment banker or market maker who moves over to the buy-side and climbs the ladder, there are tales of sell-side professionals who make the leap to a mutual fund shop, hedge fund or private equity firm only to crash and burn.
For example, Eric Mindich became the youngest ever partner at Goldman Sachs more than 20 years ago at age 27, earning him a reputation as a “Wall Street wunderkind.” He launched New York-based hedge fund Eton Park Capital Management in 2004 with $3.5bn in capital, expanding to manage $14bn in 2011, but those assets were cut in half over the ensuing six years and the fund lost 9.4% last year. In March, Eton Park announced that it was shutting down and returning the remaining $7bn-plus in capital to investors.
Regardless of how successful you have been in banking, here are six signs that you should think twice before accepting a job on the buy-side.
1. Not looking before you leap
Putting in a few years at an investment bank before joining a hedge fund or private equity firm has become such a common career path that some people plan to do it without questioning whether or not that’s best for them. It’s important to consider why you want to make the move, according to Anthony Keizner, a partner at Odyssey Search Partners.
Ask yourself: Are you running away from banking, or towards investing in particular? Are you just interviewing for buy-side positions because of peer pressure?
“Unless you’re committed to this type of work, it’ll show through – or you’ll fake it, but be unhappy,” Keizner said.
A lot of hedge funds are basically startups, and there’s a wide range of potential outcomes for such firms.
“Some [investment bankers] hear ‘Capital’ at the end of the name and they say ‘It’s a buy-side shop – sure, I’ll join,’ even if maybe there’s not a lot of information on the firm,” said Dylan Pany, principal consultant and the head of the trading team at Selby Jennings. “Sometimes a few buddies leave their former firm, start a hedge fund and they’re done after a few years, whereas some will increase their AUM tenfold.”
The industry as a whole is facing fee pressure as many hedge funds’ performance has disappointed, and often when the fees an investment firm collects go down, the compensation of its employees goes in the same direction.
2. Not being prepared for a shift in investment philosophy
A critical element in making the transition from the sell-side to the buy-side is to ensure that you understand the investment firm that you are joining and align yourself with that investment philosophy that of the company you’re leaving, according to Reshma Ketkar, a director and the head of the traditional asset management practice at Glocap.
“For example, if you are a sell-side trader making a transition to a long-only or fundamentally orientated long/short hedge fund, you may be accustomed to shorter-term trades rather than an investment process that is bottom up and has a typical hold period of one-to-two years,” Ketkar said.
3. Counting on a better work/life balance
If you’re leaving for better hours, you may end up disappointed. At some hedge funds, junior analysts have to burn the midnight oil, doing research and completing various tasks long after the markets have closed and the senior bankers have left for the day. Hedge fund traders are expected to stay late during earnings season.
“While analysts on the buy-side don’t typically work into the night like investment bankers, firms expect their analysts to be responsive during the evenings and weekends, and successful investors spend a lot of time outside the office doing research and reading 10-Ks and 10-Qs,” Keizner said.
4. Lack of experience seeing how investment recommendations play out
If you are an investment banker, you may be trained in being an adviser to your clients rather than forming a coherent investment view on a stock or a private company, Ketkar said.
Being on the buy-side, whether at a long-only shop, hedge fund or private equity firm, means taking ownership over your investment recommendations and understanding how they will impact the performance of the fund, she said. There are many elements involved.
“Ultimately you will be judged on the basis of those recommendations,” Ketkar said. “Sell-side analysts often feel that the transition to the buy-side in a research capacity should be easy because they are trained in evaluating stocks and making a buy or sell recommendation.”
5. Not being used to wearing many hats
Investment bankers who have been working at a bulge-bracket for 10 or 15 years might be effective in their role but likely won’t be able to make the move to the buy-side as seamlessly as a strong trader or analyst at a smaller bank. One factor comes down to specialization versus experience rolling up your sleeves and doing whatever the firm needs most at that moment in time.
When you start out at a hedge fund, expect your daily routine to involve a wide range of tasks. The smaller the firm, the wider range of responsibilities employees are required to take on.
“At brand names [clients and prospects] call you, whereas at smaller banks you’re making calls and working harder to generate revenue for your firm,” Pany said. “Buy-side hiring managers see JPMorgan on a candidate’s resume and say, ‘This person is a stud’ – not necessarily.
“They could be surviving based on the name, but if they move over to the buy-side, they’ll be required to do a lot more in business development and client relations, skills many people lack when moving over from the sell-side to the buy-side, because investment bankers haven’t had to do it,” he said.
6. Not being prepared for culture shock
Sure, many hedge fund portfolio managers are control freaks.
However, people often are surprised that both quantitiative and fundamentally driven hedge funds are quiet, cerebral places – not the dynamic, noisy trading environments portrayed on TV, Keizner said.
“If you find the best part of investment banking to be the collegial, fun team environment, be careful what kind of buy-side firms you apply to,” he said.
In the investment banking world, it’s traders in particular who want to move to the buy-side, whereas it’s not the same function for salespeople at a bank versus an investment firm. Regardless of role, investment bankers often struggle with the cultural aspect of joining a fund manager.
“It can be shock and awe for IBD traders who are now working on the buy-side with guys who show up in flip-flops and shorts, versus the business suit they’re used to wearing,” Pany said. “The dress code tends to be a lot laxer on the buy-side, and some people do struggle with that.
“If you’re moving from an investment bank to a small hedge fund with 20 people, it’s a totally different cultural environment,” he said. “Some ex-bankers don’t like the fact that everyone doesn’t show up in suits and ties, which is a surprising aspect that many people overlook.”
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