This installment of Hedge Funds 101 dives into the difference between the investment strategies, compensation, and lifestyle at Long-Only (LO) funds and Long/Short (L/S) equity hedge funds.
With the underperformance of hedge funds in 2021 due to the Gamestop/Wallstreetbets short squeeze and the overall underperformance of many tech/growth-biased single manager hedge funds in 2022, there has been a rising debate between the long-term career and earnings prospects of working at a LO fund vs. a L/S equity hedge fund. Despite the earnings allure of L/S hedge funds, prospective analysts have understandably gotten cold feet with the top funds seeing major issues, like Melvin Capital shutting down, Tiger Global down over 50%, and a slew of other funds down between 20-50% in a single year.
While the overall bias shifted from L/S to LO in 2022, the debate has become muddled with recent focus on AI has been driving tech stocks higher, including Nvidia (NVDA), Microsoft (MSFT), and Facebook (META). This trend has helped drive strong performance for many tech/growth-biased funds as well as the large multimanagers.
Differences in Investment Style & Process
There are some key differences between LOs and L/S funds in terms of their investment strategies truly centered around duration. On average, LOs target a 3-5 year duration for their investments while L/S funds can target anywhere between 3 months and 2+ years.
LOs look to invest in companies that they think will outperform target indices (S&P 500, Russell 2000) over a 3-5 year period. These investments typically include companies that are market share gainers with the chance for profitability upside. If a LO investor can get confidence that a stock’s earnings will grow faster than the average S&P 500 company, that will likely make for a good long-term investment (assuming valuation is not crazy). In order to diligence this, LOs will typically focus on market sizing and market share work informed by industry experts and discussions with management.
L/S investors employ a variety of investment strategies. Higher turnover hedge fund teams at the pods can focus on quarterly company updates (called prints). These teams try to accurately predict quarterly prints and assess if those prints are above or below expectations. Teams can predict the financials of companies using various data sources (credit card, website, third-party data, internal data teams). Other lower turnover, longer duration teams at pods and tiger cubs will perform some of the same analyses as the LOs, thinking about longer term market share gainers and losers.
Differences in Compensation
Interestingly, the compensation differences between LOs and L/S mirrors the investment style differences. Starting at base salary, analysts tend to make similar amounts. Base salary is a larger portion of a young analysts’ compensation at LOs, while L/S analysts’ compensation is highly bonus weighted.
LOs compensation curve is quite linear. Compensation tends to scale at a stable rate while an analyst. Becoming a PM at a LO can be very fruitful, given these PMs manage massive amounts of capital. However the road to becoming a PM at a LO is very long and there are very few highly compensating seats at the big LOs.
L/S compensation can scale much quicker than at a LO. L/S is very much an eat-what-you-kill industry. After a few years, analysts at pods and single managers can make $1M+ bonuses in good years. However if your team is down or makes very little money (which can happen pretty regularly), PMs and analysts alike will not earn a bonus. For a PM, the earnings are virtually limitless as PMs make a % of annual returns.
Differences in Lifestyle
Like compensation, lifestyle can vary drastically across the public markets industry. Traditionally multimanager hedge funds and some single manager hedge funds tend to be a bit harsher on lifestyle. Multimanager and many single manager analysts work >60 hours per week, with upwards to 80+ hours during busy earnings and conference seasons.
LO analysts typically have lighter weeks on average, though not always. The average LO analyst will work ~50-60 hours a week, but can have easier weeks closer to 40 hours during lighter seasons in the summer and around holidays.
The key differences between LO and L/S careers can be defined by the market phenomenon called volatility. LO careers tend to be less volatile than L/S. L/S teams are constantly starting up and shutting down, creating a lot of opportunities, but also a lot of potential downside. When deciding which path to take, weigh your appetite for volatility and risk vs. potential compensation, lifestyle, and general interests. Comment below if you have any specific questions on the differences between these careers.