Hedge Fund Case Study
Anyone who has gone through HF interviews in the past will know that the hedge fund case study is commonplace in the industry. Why is this? Because this is a test of how you will perform in real work. The daily duty of the hedge fund analyst is to research investment ideas on both the long and short sides. Investment case studies test your knowledge so that you can properly prepare an investment idea. If you can’t launch a stock, forget about trying to get a job at a hedge fund.
Traditionally, there are two types of hedge fund case studies: internal and take-home.
In both cases, I find it very helpful to fully understand what the company does and how they make their money before attempting to express an opinion. Some of the most helpful ways to jumpstart a business are through MD&A at the annual 10K, earnings transcripts, and sell-side startup reports. Try not to let the sell-side stock research team guide you in the decision. Sell-side analysts are almost always “permanent bulls” and are often just as wrong as they are right.
Internal case studies are less structured (ie big HFs have take home guidelines, but internally the Portfolio Manager decides what they want to give you). The funds will give you a sell side model so you don’t have to build your own, there is usually not enough time for you to build a model yourself (ie if they did it would be more of a “test modeling” ” than A case study). Usually, you will have limited time, so my biggest advice is: try to spend as much time as possible trying to understand the thesis.
Take-home case studies are much more common in hedge fund interviews. Typically, you will be assigned a company and asked to give feedback on it with a written report within 7-10 days. There is a framework of 4 questions that I like to follow when writing a take-home case study:
1. What is the consensus opinion?
2. What is your variant perception?
3. How do we get paid (what has to happen for your variant perception to develop)?
4. How much do you expect to earn?
When building your hedge fund case study, I always find it helpful to prepare a decision tree that highlights the positive and negative case with expected return. Make sure you are fully prepared to discuss your likely distribution at the interview. The most important part is to be confident, no one will believe you if you don’t believe yourself.