Will I ever become PM?

Phil · 2/12/17

Hi Quantnet,

It's me again, asking opinions about how my career is going. We hear stories about analyst and developers slowly inching their way to their own book. Do you think that'll be me?

- My progression is going well
- Target school, math and comp sci major
- 5 years experience across two $1b HF. Official title: Quantitative Developer
- 60% alpha generation / 40% development
- Monthly meetings with PM and CIO
- Given chances to add my inputed. My research on a volatility model HAS been used in live trading
- Pay has been increasing gradually. Base between an Associate and AVP, adjusted for location

But ...
- No masters
- Only 10mil allocation on my strat

What you guys think? If anything, my company HAS been rewarding me with cash and more responsibilities. And I'm really a person away from the CIO. But, do I need to like go out and get a Masters to become PM?

Side note: I know they say you need Masters to advance in a quant fund. But from how I interview candidates from non-target Masters, they honestly can't talk time series like I can. Granted I do time series everyday while they Masters is in engineering.

Cheers,
Nijikon

financeguy · 2/13/17

Getting a masters won't catapult you into the PM seat, so I wouldn't recommend taking the time away from work and/or spending a bunch of money to do that. The PM and CIO don't have a reason to want to 'upgrade' you from your seat. They get paid as a linear function of firm revenue, while you are more of a fixed cost to them at the moment (not totally fixed, but hopefully you see what I mean). If you were to transition into a PM seat, they would take home less money. The cash you generate now, assuming that your strategy does well, really goes into their pockets, so they'll prefer to keep you in a support role. In order to transition, you need to (1) tell them this role is something you are interested in exploring, and (2) increase your interaction with the PM and CIO to much more than monthly meetings. Maybe not in that order. You always run the risk of rubbing them the wrong way, or have them come back around to you saying they really are only interested in you being a developer, which leaves you in a weird spot given both you and they will know you don't want to be a developer forever. But that's a standard risk when you speak up to try to change a situation. Point being, they probably won't just naturally transition you into a PM seat by default, and getting a masters won't really help. You need to speak up and spend more time with the market facing team.

Phil · 2/13/17

Hi financeguy,

Thank you for the response. May I share a few more details so I can seek more advice from you.

- I am under a profit sharing model, though discretionary. It's something like PnL from my strat splits 50 / 35 / 15 between CIO, PM and me.

- I'm being objective here but I'm a damn good developer. All my code is multithreaded, results out in minutes, and I doub't a PhD in Physics, which I'm interviewed some, can navigate through my code. Can I leverage on this?

I'm usually the type of guy that will excel in my given scope and I feel hestitate to risk being in a weird spot. I thought either 1) diligence, hard work and good strategy or 2) a top Masters which they can use to impress clients could be my ticket.

Also, between the weird situation you described and this, which is better: given my quietness, I wait a few more years, don't get PM, don't raise my concern, then bail to another HF with the strat after my non-compete of course. That may be the less favourable situation to them compared to making me at least junior PM.

Cheers,
Willy

financeguy · 2/14/17

It's really difficult for me to say given I don't know where you work and what personalities you are dealing with. When you mention the profit sharing, does that mean 15% of the PnL is attributed to your efforts and then you are paid some percentage of that fraction of the PnL at the end of the year? Or is it just putting a number next to your name as a data point, and then they pay you whatever they pay you and it ends up being sort of the same every year regardless?

What is generally clear to me is that (1) you don't get to change job functions unless it's clear to your employer that you want to, and (2) a masters degree isn't going to do anything for you. If developer to PM is a path that exists already at your fund, then maybe you can just drift into the role. Normally, a PM would be happy to leave you as a developer as long as possible, supporting him and allowing him to claim the lion's share of the PnL as his compensation. You would know better than me whether this CIO and PM are just nice, benevolent people who just want you to do well and be a PM in your own right. All I can tell you is normally I would expect you'd have to speak up for yourself in your interest in being a PM, and make a case for why it's better for the firm's profitability to let you be one.

Phil · 2/14/17

When I mean 15%, I mean all of the 15% goes to me. So in common HF nomenclature, suppose my strat made 5% for the year trading on a $10mil notional.

The strat made $500,000
20% is performance fee, $100,000 goes to HF
50% of that goes to CIO, $50,000
35% goes to PM, $35,000
15% goes to me, $15,000

Okay, at least I know you feel strongly about the Masters part. A top masters probably gets me to a top HF but only at the analyst level. I've always debated with myself whether that is better of a live record of 2 years, trading > $10m at a Sharpe of 1.5. You have convinced me it's the latter, which between the two, I'm closer to achieving.

financeguy · 2/15/17

Okay, I understand. I'll get into it later, but you should realize that isn't really the common HF nomenclature, so to speak. There are a number of issues here. First, the size of this portfolio just isn't large enough for you to establish a credible track record to get hired as a PM with a decent payout at a proper shop. Even if you were a 3 sharpe trader, on $10mm of capital, I would immediately question the scalability of your strategy. You'll need to figure out how to get this fund to allocate more capital to this strategy, or develop a few more strategies for them to allocate $10mm each to.

Now let's talk about payout structure. Normally, people just talk about the proportion of PnL they get paid. Your payout ratio is 3% of PnL. That's very, very low. You would do better as a market maker at a bank. Your fund is not likely a premier fund, because you are paid as a function of performance fees. The top funds are not beholden to performance fees when it comes to PM compensation, as they are set up as pass-through structures. A pass-through structure enables the fund to count PM compensation as regular expenses that are passed through to investors off the top line of PnL before returns to investors are calculated. That's why the top funds can pay 20% of PnL to PMs even though their performance fees are 20% or less. (To be clear, 20% is very high end, but it's fairly common for people to be paid between 10% and 15%.) Obviously, only top funds with great track records can demand to have this sort of structure to investors. Basically, if you're not a PM at a pass-through fund, you need to be the top dog on the way the PnL is broken down from the performance fee.

Putting this all together... my recommendation is to figure out a way to scale up this capital, develop more than one strategy, continue to have a 1.5 Sharpe, and then jump to a higher tier fund. Having a track record is miles better in terms of opportunities elsewhere than a masters degree. It might take you a few years from where you are at today, though.

Phil · 2/16/17

Hi financeguy,

Thank you for being the only one replying to this thread. Your comments have been insightful. I hope to get your feedback on one last quick question.

I've always been a B+ guy. And after graduation, I took extra strides to learn from my mistakes.

I had a debate with this other person on how far we are in our careers. I believe you should know that unlike in banking, one's progression in a HF is measured by less defined metrics, perhaps the only consensus is that the jump from analyst to PM is the clearest distinction of one's progress.

My question: I'm 32, in my first year of trading a live strategy of 10mil, and getting paid 3% of the PnL. Between 1 to 10, 10 being the highest, what number grade would you give my career?

I know this is super blatant. Side story: my friend is in banking and I'm trying to tell him things aren't so rosy here either. Don't worry, my grade of myself is probably less than what it should be. I just wish to ask you to get a second opinion.

So 1 to 10?

Cheers,
Phil

financeguy · 2/17/17

That's not a game I think we should play. I don't have a number between 1 and 10 to give you, but we both know it's less than ideal to have a small payout on a small capital allocation. As you say, the path at a HF is less well defined. From that, you can see it's within your power to change it. 10 years out of school of course I'm sure you'd have hoped for a bit more, but careers are long and you're not so "experienced" that you don't have time to change your situation. And also, you should judge yourself based on how happy and fulfilled you are, not based on what some dude over the internet thinks of your career on a scale of 1 to 10. You can take that to be a cop out and a non-answer, but I think it's important. If you keep judging yourself based on other people who you think are outpacing you, regardless of how much further you get, you'll always feel like you're not doing well enough. At least they are willing to put 10 bucks of your strategy to work. If they don't want to scale up that strategy, build another one and get them to put 10 bucks in that one. What I'm getting at is that the HF game is one in which you need to push the envelope a bit to get stuff you want, for precisely the reason that career paths are less defined. You don't just drift from analyst to associate to VP to director to MD (not to make it seem easy to do that in the banking world, but you see what I mean). You need to give these guys who have no financial incentive to promote you some financial incentive to promote you. It's naturally open-ended because it comes from how much you want to build out your strategies. I'm sure they'd be happy for you to sit there churching out a couple hundred grand of compensation for them and supporting their systems along the way forever if you don't speak up or take it upon yourself to build more.