For anyone that has been through HF interviews in the past, you’ll know that the hedge fund case study is commonplace in the industry. Why is this? Because this is a test of how you’ll perform in the actual job. Hedge fund analyst’s day-to-day duty is researching investment ideas on both the long and short side. Investment case studies test your knowledge of being able to properly prepare an investment idea. If you can’t pitch a stock then forget trying to get a hedge fund job.
There are traditionally two types of hedge fund case studies: in-house and take-home.
In both cases I find it very helpfully to fully understand what the company does and how they make money before trying to express an opinion. Some of the most useful ways of ramping on a company is through the MD&A in the annual 10K, earnings transcripts, and sell-side initiation reports. Try not to let the sell-side equity research team guide you in the decision. Sell-side analyst’s are almost always “perma bulls” and have often-time wrong as many times as they’re right.
The in-house case studies are less structured (i.e. the big HF’s have guidelines for take-home but in-house the Portfolio Manager decides what they want to give you). The funds will give you a sell-side model so you won’t have to build your own, usually there is not enough time to have you build a model yourself (i.e. if they did it would be more of a “modeling test” than a case study). You will usually be limited in 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. Usually you will be assigned a company and be asked to give your opinion on it with a written write-up within 7 to 10 days. There is a frame-work of 4 questions I like to follow when writing up a take-home case study:
1. What is the consensus opinion?
2. What’s your variant perception?
3. How do we get paid (what has to happen for your variant perception to play out)?
4. How much do you expect to make?
When building out your hedge fund case study I always find it helpful preparing a decision tree highlighting the upside and downside case with expected returned. Make sure you are fully prepared to discuss your probably distribution in the interview. The most important part is to be confident, nobody is going to be believe you if you don’t believe yourself.