TheReformedInvestor1
New member
- Apr
- 9
- 6
Global Markets
So you have met the team and the hiring process is going well. You are getting close, but there’s still one major hurdle standing in your way: the dreaded Case Study. You will be asked to present on a stock and formulate an investment recommendation based on your analysis. You’ll be grilled for an hour (for longer if it goes well).
There’s a reason Case Studies matter so much: this is as close to a work situation as you are going to get, and it’s a chance for the team to see how you work as an investor, under pressure.
So what makes a great case study, and how can you prepare for it? Having run a hedge and interviewed countless candidates, here’s what I have learnt about what the best candidates do.
First, know who you are dealing with
Hedge Funds come in all size and shapes or, in this case, various portfolio concentration, turnover, and investment horizons. Before embarking on the analysis you need to work out three parameters that will inform the content of your case study:
1/ the fund’s portfolio concentration: does the fund hold 10-20 positions for years? Or does it have a high turnover and makes shorter term bets on catalysts like quarterly results?
2/ The research process: Does the team rely heavily on real-time data and their own code, or do they prefer to go deep in company fundamentals?
3/ Net exposure. How much of its short book is single name shorts?
You need to take these into account when choosing the focus of your stock pitch. If you can’t work it out during the interviews, the team’s personal backgrounds may help (do they come from a ‘platform’? from the sell side?) or any large positions they have filed (in 13Ds for example).
Don’t offer a company analysis; offer a trading plan instead
The worst analyses I have heard were bland descriptions of the companies and their markets. SWOT analysis, Porter’s five forces are helpful frameworks, but once an analyst you’ll need to do much more than that: a trading plan. At the analyst level or later, you’ll always be better off taking a view on those before engaging yours or your clients’ capital.
Great stock pitches have an answer the following questions:
1/ What’s your ‘In’? (at what share price the stock is a steal?)
2/ What’s your ‘Out’? (at what price will your thesis be mostly discounted?)
3/ What’s not discounted in the share price? (the result of your analysis)
4/ How will you know if you are wrong? (to move early and cut your losses if things don’t go to plan).
Eventually your call will live and die by the stock price. It is the price, not what happens at the company, that will reward you or punish you. It should be front and center in your presentation.
Find an edge on the stock. No, sell side research won’t be enough.
For every buyer there is a seller who has owned the stock (sometimes for a while) and, faced with the same events, has decided to sell. So you need to demonstrate that you know something few others do. Everybody reads sell side research, annual reports, and the press. But stock picking is all about building on top of this common knowledge. What do you bring to the debate?
Here are a few suggestions. Do you have a superior understanding of growth drivers or operating leverage that give an EPS estimate well above consensus (and correct)? Can your contacts in the industry (friends from Uni?) give you a good knowledge of the competitive dynamics? Which products are gaining share, and which ones are losing? There’s a surprising amount of information critical to the stock that can be found, with a bit of creativity and a cell phone. Just stay away from insider information.
Find credible catalysts.
Some fund managers put more emphasis on catalysts than others… Still, even for a long term call, you need to define what needs to happen for your thesis to work. This is a weak point in a majority of case studies. Not knowing how the company’s fundamentals will move the stock price leaves you hoping for some sort of market epiphany: not good enough for a hedge fund manager obsessed by his monthly performance!
So you need not only to anticipate an event (quarterly results, industry conference…) but also explain why it is likely to surprise consensus. So not ‘They report results in a month’, but instead ‘I looked at what the Asian freight forwarders said on their last quarterly call. It looks like that the supply chain bottlenecks are over, so I would expect the margins of the Engine division to increase 300bps year-on-year, well above consensus for the year’. A lot of companies are part of a global supply chain – you can learn a lot about what’s going on just by listening to what others upstream or downstream are saying, and get ahead of the pack.
Pick a Short Idea, if they let you
Of course any great idea can get you in (especially if it works the few days after you pitched it!). But I’ve always found that ideas of Shorts helped candidates better.
Why? A few reasons.
1/ ‘Alpha Short’ (the performance funds generate on their short book) is rare and very sought after by fund selectors. It decorrelates the fund’s returns from the market’s, and is very hard to find in up years (so most of the time). Short alpha can really make the fund stand out vs. the competition, and help fundraising. Fund managers are constantly looking for great short ideas.
2/ The research required will make you look good. You won’t get much help from the sell side (sell ratings are rare) and shorts requires a deep look at company numbers. Are earnings inflated by accounting gimmickry? Do related party transactions or management’s past records suggest governance risks? Do a lot of clients complain about its products?
Technical Analysis can help you but should not instruct you
The best idea at the wrong time can be indiscernible from a bad call, and not everyone likes to buy a stock in a downtrend. The good news is that even very basic technical analysis (TA) can prevent your idea from failing at the first fence. You don’t have to dedicate an entire section of your presentation to it. You only need to look at a few very basic tools (I have found that moving averages, Bollinger bands/MACD, and a look at Volume/open interest/Put-Call ratio can save me a lot of trouble). We are wired to buy the stocks that are climbing. A stock in an uptrend is an easier sell – you can use TA to make sure that it is.
Anticipate your Q&A in details.
Make a list of all the possible questions or objections, and work out a good defence for each. Pitches are won during the Q&A session, once your interviewers run out of questions or objections. For each answer, try to add a new piece of information that was not in your main presentation.
In the best interviews, at the end of the Q&A, it will feel like you and the team have made progress on the case together, and that you have all learnt something, and that you are fun to work with. They have pushed you, and you responded by upping your game.
Seek dissent
After spending a while on a stock we are often increasingly convinced by your own analysis, and increasingly tempted to dismiss opposing views (confirmation bias).
Instead, look for a sparring partner to test run your pitch, or in the absence of someone with experience, look for a coach (there are loads online). By doing the pitch out loud, you might discover that some of your arguments will look stronger, but others may need more work.
Good luck!
There’s a reason Case Studies matter so much: this is as close to a work situation as you are going to get, and it’s a chance for the team to see how you work as an investor, under pressure.
So what makes a great case study, and how can you prepare for it? Having run a hedge and interviewed countless candidates, here’s what I have learnt about what the best candidates do.
First, know who you are dealing with
Hedge Funds come in all size and shapes or, in this case, various portfolio concentration, turnover, and investment horizons. Before embarking on the analysis you need to work out three parameters that will inform the content of your case study:
1/ the fund’s portfolio concentration: does the fund hold 10-20 positions for years? Or does it have a high turnover and makes shorter term bets on catalysts like quarterly results?
2/ The research process: Does the team rely heavily on real-time data and their own code, or do they prefer to go deep in company fundamentals?
3/ Net exposure. How much of its short book is single name shorts?
You need to take these into account when choosing the focus of your stock pitch. If you can’t work it out during the interviews, the team’s personal backgrounds may help (do they come from a ‘platform’? from the sell side?) or any large positions they have filed (in 13Ds for example).
Don’t offer a company analysis; offer a trading plan instead
The worst analyses I have heard were bland descriptions of the companies and their markets. SWOT analysis, Porter’s five forces are helpful frameworks, but once an analyst you’ll need to do much more than that: a trading plan. At the analyst level or later, you’ll always be better off taking a view on those before engaging yours or your clients’ capital.
Great stock pitches have an answer the following questions:
1/ What’s your ‘In’? (at what share price the stock is a steal?)
2/ What’s your ‘Out’? (at what price will your thesis be mostly discounted?)
3/ What’s not discounted in the share price? (the result of your analysis)
4/ How will you know if you are wrong? (to move early and cut your losses if things don’t go to plan).
Eventually your call will live and die by the stock price. It is the price, not what happens at the company, that will reward you or punish you. It should be front and center in your presentation.
Find an edge on the stock. No, sell side research won’t be enough.
For every buyer there is a seller who has owned the stock (sometimes for a while) and, faced with the same events, has decided to sell. So you need to demonstrate that you know something few others do. Everybody reads sell side research, annual reports, and the press. But stock picking is all about building on top of this common knowledge. What do you bring to the debate?
Here are a few suggestions. Do you have a superior understanding of growth drivers or operating leverage that give an EPS estimate well above consensus (and correct)? Can your contacts in the industry (friends from Uni?) give you a good knowledge of the competitive dynamics? Which products are gaining share, and which ones are losing? There’s a surprising amount of information critical to the stock that can be found, with a bit of creativity and a cell phone. Just stay away from insider information.
Find credible catalysts.
Some fund managers put more emphasis on catalysts than others… Still, even for a long term call, you need to define what needs to happen for your thesis to work. This is a weak point in a majority of case studies. Not knowing how the company’s fundamentals will move the stock price leaves you hoping for some sort of market epiphany: not good enough for a hedge fund manager obsessed by his monthly performance!
So you need not only to anticipate an event (quarterly results, industry conference…) but also explain why it is likely to surprise consensus. So not ‘They report results in a month’, but instead ‘I looked at what the Asian freight forwarders said on their last quarterly call. It looks like that the supply chain bottlenecks are over, so I would expect the margins of the Engine division to increase 300bps year-on-year, well above consensus for the year’. A lot of companies are part of a global supply chain – you can learn a lot about what’s going on just by listening to what others upstream or downstream are saying, and get ahead of the pack.
Pick a Short Idea, if they let you
Of course any great idea can get you in (especially if it works the few days after you pitched it!). But I’ve always found that ideas of Shorts helped candidates better.
Why? A few reasons.
1/ ‘Alpha Short’ (the performance funds generate on their short book) is rare and very sought after by fund selectors. It decorrelates the fund’s returns from the market’s, and is very hard to find in up years (so most of the time). Short alpha can really make the fund stand out vs. the competition, and help fundraising. Fund managers are constantly looking for great short ideas.
2/ The research required will make you look good. You won’t get much help from the sell side (sell ratings are rare) and shorts requires a deep look at company numbers. Are earnings inflated by accounting gimmickry? Do related party transactions or management’s past records suggest governance risks? Do a lot of clients complain about its products?
Technical Analysis can help you but should not instruct you
The best idea at the wrong time can be indiscernible from a bad call, and not everyone likes to buy a stock in a downtrend. The good news is that even very basic technical analysis (TA) can prevent your idea from failing at the first fence. You don’t have to dedicate an entire section of your presentation to it. You only need to look at a few very basic tools (I have found that moving averages, Bollinger bands/MACD, and a look at Volume/open interest/Put-Call ratio can save me a lot of trouble). We are wired to buy the stocks that are climbing. A stock in an uptrend is an easier sell – you can use TA to make sure that it is.
Anticipate your Q&A in details.
Make a list of all the possible questions or objections, and work out a good defence for each. Pitches are won during the Q&A session, once your interviewers run out of questions or objections. For each answer, try to add a new piece of information that was not in your main presentation.
In the best interviews, at the end of the Q&A, it will feel like you and the team have made progress on the case together, and that you have all learnt something, and that you are fun to work with. They have pushed you, and you responded by upping your game.
Seek dissent
After spending a while on a stock we are often increasingly convinced by your own analysis, and increasingly tempted to dismiss opposing views (confirmation bias).
Instead, look for a sparring partner to test run your pitch, or in the absence of someone with experience, look for a coach (there are loads online). By doing the pitch out loud, you might discover that some of your arguments will look stronger, but others may need more work.
Good luck!
