In the highly competitive hedge fund industry, a well-structured strategy doc/business plan should be a core pillar of your approach to landing a PM seat. Regardless of whether you are an experienced PM with a multi-year track record or a sell-side trader looking to move to the buy-side, your strategy doc is a powerful tool for demonstrating that you have a clear plan that works, as well as a strategy on how to execute it.
It is often surprising how many candidates lack a prepared (or strong enough) strategy document, hence why I felt compelled to write this guide.
Below is a detailed framework that should (hopefully) add value to any risk-takers looking to increase their odds of landing a seat within a hedge fund.
Why is a Strategy Document Important?
A strategy document acts as a critical indicator of a candidate's readiness and capability to effectively run a portfolio at a hedge fund. It demonstrates a clear framework for how you would execute your strategy and outlines your operational approach. Typically, this document includes an overview of your investment process, asset classes/instruments/geographies traded, risk management framework, key drivers of P&L, models and inputs that drive your trade ideas and investment views, resource/infrastructure requirements, as well as your historical track record.
A clear business plan not only boosts your chances of being hired as a PM, however also gives extra reassurance to key stakeholders within a fund (such as the risk department) that they can understand your strategy and how it will perform in various environments.
Does Everyone Need a Strategy Document?
While every successful PM in the hedge fund industry should have a strategy document (and nearly all do), there are notable exceptions of when it might not be needed.
Top-tier portfolio managers (akin to A-list celebrities in Hollywood who don’t need to audition for a leading role in a movie), with established track records at top-ranked hedge funds may not always need one to secure new positions. These individuals often have such a strong reputation that their name alone opens doors.
However, it's important to note that even elite PMs typically have a strategy document ready in case needed. They know their investment framework intimately — so well in fact, that they could articulate it in their sleep, which is why they are so successful and good at what they do.
This document not only serves as a testament to a portfolio manager’s process but also ensures they are prepared to discuss their strategy at a moment's notice.
Therefore, having a well-articulated strategy document/business plan is considered best practice and is advisable for any portfolio managers, regardless of experience or track record.
Lastly, it is important to note that if a portfolio manager has a sub-par multi-year track record vs peers, even the best business plan in the world will probably not help them land a seat (at least as a PM with a sizeable allocation). However, we have seen several instances where a PM with a very clear business plan has landed a seat when competing against a PM with a slightly better track record but without a clear enough framework.
Key Components of a Strategy Document/Business Plan:
- Investment Strategy Framework: Begin with a clear outline of your investment philosophy and methodology. Explain the rationale behind your approach and how it guides your decision-making process.
- Asset Classes and Instruments: Specify the asset classes and instruments you trade and how they fit into your strategy
- Geographical Focus: Indicate the regions and markets you target, explaining your rationale for these choices.
- Models and Frameworks: Describe the models that inform your trading decisions. Highlight any proprietary frameworks or analytical tools you have developed or that you use.
- Risk Management: Detail your risk limits, stop-loss mechanisms, and strategies used to mitigate downside risk. Explain how you balance risk and reward, ensuring the sustainability of your strategy over time. For example, a PM might highlight that stop levels are dynamically updated and reassessed based on quantitative and qualitative analysis. Moreover, this section might also highlight tools used to monitor Value at Risk (VAR) and the importance of ensuring concentration risks are within allocated limits.
- Target Returns & Historical Returns: Define your performance targets, supported by historical data. Articulate how you aim to achieve these targets and how they align with your overall strategy.
A Quick Note on Historical Performance and Strategy Breakdown:
A detailed track record at the end of your strategy document is very helpful for demonstrating your performance over time. Here are examples of what this might look for a buy-side vs sell-side candidate on a yearly basis:
Hedge Fund PM Example:
- 2024 YTD: $17 million P&L (6.7% returns | $350 million book size | 1.3 Sharpe)
- 2023: $26 million P&L (11.2% returns | $300 million book size | 1.4 Sharpe)
- 2022: $22 million P&L (9.5% returns | $250 million book size | 1.35 Sharpe)
- 2021: $18 million P&L (8% returns | $225 million book size | 1.3 Sharpe)
*Note: Sharpe is not always important and depends on strategy type, as some strategies are much more volatile than others and some fund also look at Sortino Ratio (for example).
Sell-Side Trader Example:
- 2024 YTD: $12 million P&L (60% from prop risk-taking)
- 2023: $43 million P&L (70% from prop risk-taking)
- 2022: $35 million P&L (65% from prop risk-taking)
- 2021: $29 million P&L (60% from prop risk-taking)
*Note: For sell-side trader candidates looking to move to the buy-side, being able to clarify % of pnl contribution from prop/personal risk vs flow, as clearly as possible, is critical
Importance of monthly P&L breakdowns: More often than not, our hedge fund clients will request detailed monthly breakdowns of performance as well (even if top-level yearly P&L is enough to land a 1st interview). If possible, we strongly advise candidates to keep a close record of their monthly P&L numbers whenever possible on a spreadsheet, as these will usually be requested at some point during the interview process.
Resource Requirements for Strategy Execution
The success of an investment strategy often hinges on having the right resources in place. Your strategy document should outline the necessary resources for effective execution:
Research Resources: Detail the types of data feeds, research tools, and market information required to support your strategy. This section should reflect your understanding of the informational needs of your strategy. For example, proprietary data services such as JPM Data Query or subscriptions like MacroBond, CreditSights, or a range of other independent research & data providers.
Infrastructure Requirements: Discuss the infrastructure needed at the firm, especially for systematic or quant-driven strategies. This may include specialized software, computing resources, and data analytics capabilities.
Personnel Needs: If relevant, specify the number of analysts or team members needed to support your strategy.
Include estimated timelines for setting up and executing the strategy at a new firm, accounting for potential delays related to acquiring resources or integrating with existing systems. This comprehensive approach ensures that all aspects of the strategy are well-supported, from initial research and analysis to execution and monitoring.
Performance Across Market Environments
Discuss how your strategy is designed to perform under different market conditions, providing targets and historical performance metrics. For instance, your strategy might aim for 0-6% returns in typical markets but achieve 15-20% in highly volatile environments (and your historical track record through various market environments should support this).
Outline of an Ideal Strategy Document
When crafting your strategy document, consider including the following sections to provide a comprehensive overview:
Overview
Begin with a brief synopsis of your strategy, highlighting its primary focus and overarching goals. This should include a high-level description of the asset classes, instruments, and markets you trade.
Framework & Drivers of P&L:
Detail the primary pillars or sub-strategies that drive your strategy. Each pillar should be clearly defined, with an explanation of how it contributes to overall performance. Include a rough outline of the percentage of P&L driven by each pillar on average.
Below is a hypothetical example for a macro portfolio manager with 3 pillars that drive strategy returns:
- Pillar 1: Interest Rate Curve Strategies (40%): Targets mean-reverting opportunities in interest rate curves through trades such as spreads or butterflies. Custom-built analytical tools measure signal strength, incorporating factors like realized and implied volatilities and transaction costs to identify optimal entry and exit points. This pillar seeks to profit from temporary dislocations and inefficiencies in the curve.
- Pillar 2: Yield Enhancement and Protection (30%): Seeks to enhance yield through strategies where volatility premiums do not fully account for carry risks. The approach involves identifying and executing trades where the market underprices the risk of carry trades, using instruments such as fully hedged risk reversals. Additionally, it includes acquiring cheap convexity to hedge against unexpected volatility spikes.
- Pillar 3: Volatility Arbitrage (30%): Focuses on identifying and exploiting volatility mispricings across asset classes. This includes analyzing volatility curves, such as skew structures, to find relative value opportunities. Trades are designed to be market-neutral, playing relative volatility surface valuations instead of directional moves, and typically involve hedged positions to optimize risk-adjusted returns.
Models Used
Explain the models that underpin your strategy. Detail how these models are used to generate trade ideas and manage risk.
Approach to Risk Management and Portfolio Construction
Discuss your approach to risk management, including risk limits, stop-loss discipline, and portfolio construction. Explain how you manage risk across different positions and the typical number of positions in your portfolio. This section should illustrate your ability to balance risk and reward effectively.
Expected Returns
Provide information on expected returns in various market environments and discuss the correlation of your strategy with other strategies. Highlight how your strategy fits into a broader portfolio and its potential for diversification.
Resource Requirements
Identify the resources needed for successful execution, including research tools, personnel, and infrastructure. This section should provide a clear picture of the support structure required to implement your strategy effectively.
Performance Metrics & Historical P&L
Conclude with a section that outlines your historical performance metrics, including dollar P&L, percent returns, and Sharpe ratios. Provide a breakdown of performance by pillar and highlight key achievements.
Summary:
Every current (or aspiring) hedge fund portfolio manager should have a clear and well-articulated strategy doc, which is regularly reviewed and updated over time as their strategy develops.
Having represented 100s of PM candidates interviewing at hedge funds over the years, we understand what it takes to make a strong impression. If you're interested in feedback or tips around shaping your strategy document, feel free to reach out to me at [email protected].
