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This is why hedge funds are better than private equity for M&A analysts

Markets may rise and fall.  Summit meetings between world leaders may be un-scheduled and then rescheduled. But in a world where so much is uncertain, there is one thing at least that can be relied upon year in and year out:  most investment banking analysts will leave for jobs in private equity.

Just how many banking analysts follow this rite of passage?  According to data from LongRidge Partners, an executive search firm specializing in the alternative investment industry, around 70% of analysts among the leading investment banks will leave for PE.  That translates to around 400-500 each year. By contrast, barely 7% of banking analysts focus on hedge fund opportunities.

It shouldn’t be a surprise that so many follow the path to PE.  In many respects it’s simply the most well-lit and well-traveled. Many analysts, though (perhaps most) proceed to this point in their careers almost on auto-pilot. Banking-summer-internship-to-banking-analyst-program-to-PE-associate. But what then? Those PE associate contracts are typically only for two years. According to LongRidge, again, fewer than one in five PE associates remains in PE, while as many as half go to business school (another move that has some hallmarks of the ‘auto-pilot’ effect).

Alternatively, many of them might be better served looking more closely at a career so few were prepared to consider just a couple of years earlier in their careers: equity hedge funds.

Not only do former PE associates bring with them a valuable skillset that translates well to investing in public equities, hedge funds can offer a deeper sense of ownership, early responsibility, and a path to full discretion on investment decisions (i.e., as a PM) that’s hard to come by in PE.

Your work, as a hedge fund analyst, is more focused on the development and pursuit of investment ideas than on managing the administration of a deal process.  Responsibility comes early, too, with analysts visiting factories and meeting with senior executives in companies they cover - and asking them penetrating questions about their business.  Indeed, at this time of year it’s conference season, when analysts might have the opportunity to sit down face to face with the CEOs of a dozen companies in their coverage over the course of a few days.

In particular, as a hedge fund analyst there is a much greater and more direct sense of attribution than is possible in PE.  Put another way, there’s no one else to take the credit and no one else to take the blame.  A lot of people like it that way.  Indeed, the market itself gives you real-time feedback on the quality of your ideas every day. And while it’s possible to hold positions for a multi-year period, you’re not compelled to;  if there’s a superior use available for the capital it can be reallocated very quickly.

At our firm, where the major business is fundamental long/short equity, a number of our investment professionals have followed this journey.  In fact, 1 in 5 of our portfolio managers previously spent time in private equity.  For investment banking analysts confronted with the question of going to PE or a hedge fund in the future, perhaps more of them will pick ‘both’.

Jonathan Jones is the head of investment talent development at Point72 Asset Management and a former senior recruiter at Blackrock and Goldman Sachs.

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AUTHORJonathan Jones Insider Comment

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