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Hedge Fund Analyst: Do You Have What it Takes?

Date: Monday, October 3, 2011
Author: HFObserver

The job of the investment analyst is one of the most sought-after jobs in the hedge fund industry, especially given the exceptionally high levels of compensation that can be earned in just a few years. An investment analyst is paid to analyze and recommend buy and/or sell investment decisions and perform the due diligence required for such decisions.

The question is:  Do you have what it takes? Portfolio Managers and firm founders consistently bring up seven key traits when speaking about the qualities that excite them in a candidate for the role of investment analyst. With the large supply of highly talented applicants, founders and hiring managers usually have the luxury of selecting those who exhibit these traits at the highest, most differentiated levels.

Before answering whether you have these characteristics, let’s look more deeply at each one.

Skeptical:  A skeptical investor actively questions knowledge, facts, or opinions/beliefs stated as facts, or expresses doubt regarding claims that are taken for granted elsewhere.  Joel Greenblatt, in his book You Can Be a Stock Market Genius, offers a humorous perspective on the nature of skepticism. His now famous advice:

·        Don’t trust anyone over thirty

·        Don’t trust anyone thirty or under

Analytical:  An analytical investor is skilled at being detailed, logical, and rigorous with respect to answering valuation questions.
Most professionals, particularly those already in the finance and hedge fund industry, regard themselves as being highly analytical. Remember that everything is relative in an interview process.  Every candidate the manager interviews will emphasize their analytical skills.

For hedge funds, investment analysts need to have a relentless drive for identifying and analyzing the relevant facts and details that might impact an investment decision. A numerical orientation is also an important part of being analytical. An analyst must measure and quantify the risks and rewards associated with an investment decision.

Contrarian:  A contrarian investor is one who opposes or rejects popular investment opinion and favors independent thinking. People skilled in contrarian thinking tend to build their own models — rather than borrowing models and/or information from sell-side analysts or others. A contrarian approach to investing is often the fruit of such an independent effort to understand drivers of business value when assessing a security, an industry, or an economy.

Confidence:  A confident analyst has a strong belief in his or her investment thesis.  The confidence to stick by one’s investment decision in the face of internal pushback or market conditions not favorable to one’s thesis can be difficult.

Humbleness / Lack of Arrogance:  There is a fine line between confidence and overconfidence. Too much confidence is arrogance, a deadly trait for investors and one that hedge fund managers do not want to see in a hire. Arrogance leads to an overestimation of the value of one’s investment beliefs and a tendency towards denial in the face of other facts or poor investment results. In a recent speech, Omega Founder Leon Cooperman commented, “Arrogance is a luxury you cannot afford.”

Communication:  Written and verbal communication are important for anyone interacting with his/her peers regarding in investment recommendation. An analyst must be able to articulate and defend his/her investment ideas in a cogent, logical manner to peers and portfolio managers, particularly when the investment thesis is presented with a high degree of conviction.

Hiring managers say that excellent communicators can also be invaluable when facing off with external parties; good communicators often extract better information and go beyond the investor relations-type material offered by companies being analyzed; truly excellent investment analysts often combine excellent communications skills with creativity and due diligence to uncover hard-to-find public information from unique sources.

Interested in/commitment to the markets: Analysts must have a strong interest in investing/trading and/or a strong ability to analyze drivers of business value. One founder of a hedge fund recently reminded an audience full of aspiring hedge fund analysts that there are always 10 mutual fund managers right around the corner who will manage a client’s money for lower fees, clients have every right to expect more from a hedge fund analyst. In other words, what it takes is an unusual degree of market focus and commitment: “It’s a vocation and an avocation.”