When people think of trading firms, their mind tends to shoot in one direct: wall street mayhem, images of people sitting on a long desk, ticker symbols all over the room, etc. and people yelling left and right on the floor of an exchange.
Every once and a while I get an email asking for career advice. I've typed up some of this previously as well, but what follows here is primarily dedicated to those of you looking for a future path that's going to last a very long time. If that's you, then I ask: before reading this, think long, hard and realistically about what kind of life you want to (and CAN) pursue. I've always viewed success as a function of persistence, chance and most importantly, lack of friction. People make a lot of money when they don't have to show up to work with an arsenal of medieval weapons everyday. You have those who just cruise through the halls shining, and those who look like paranoid and stressed out. Guess which person is going to have an easier time moving ahead?
Friction is a function of preparation as well. If you're not prepared (either for the work or what other people want to see), then you're going to have a harder time vs. someone that has already checked off these boxes. I hate to sound negative but that's just the way our world oftentimes works.
So let's being with a few questions:
Where do you fit in? Nowhere? Welcome to the club. Is it just money you're after? What can you do easily (that requires the least amount of mental friction)? What do you actually enjoy doing? What causes you to be desperate? What causes you to be fulfilled?
Trading/portfolio management isn't for everyone. But many people do indeed enjoy this business, and don't belong on a trading desk. I've always liked it, but I know plenty of others that don't.
So before you even go too far, think about what's realistic, but without limits. There is a big difference between these two. Can you realistically see yourself pursuing trading / portfolio management day in and day out? If so, then keep going:
Here, I wanted to shed light on a few different things:
(1) the different types of firms out there that (inclusive of those that tend to go under the radar) as well as (2) the types of jobs you'll typically find within them, and (3) management of your expectations.
To isolate positions in trading to a single industry is a quick way to remove yourself from a massive world of investment. We are products of our environment, and in the case of many retail traders, there is an entire world left untapped and rarely considered.
Hedge funds, commodity trading advisors, energy marketers, true proprietary trading shops, commercial hedgers, etc. There is a huge list of opportunities out there that typically flies under the radar of many people who have a true interest in pursuing this as a career. Most people simply don't know where to begin.
If you are in a position where you have many years of career ahead of you, then you will likely appreciate this the most. If not, other alternatives are available, which I'll discuss at a later date.
Getting a trading job comes with some obvious benefits. Needless to say there are drawbacks as well, but I have always observed that many of those subside with time, or just the more senior you get. The way I see things, you could have one end goal of obtaining a position in trading with two ways of achieving it: either burn through a tremendous amount of energy, time and money doing it, or seek to do it the “right” way, from the beginning.
Shortcuts are typically longcuts.
To the upside…
- Salary – you should be getting paid a base salary in addition to any P&L achieved (provided you're a revenue producer and not a hedger), based on your agreement with the firm.
- Health insurance, 401k, and other benefits – its a job like any other. These come with it.
- Experience – you're in a professional environment, surrounded by people that have been doing it for years.
- Resources – with the money to back them, you have access to far superior tools and talent vs. what many are generally accustomed to.
- Camaraderie – trading by yourself is, by definition, lonely. It pays to have friends doing it with you.
…and the downside?
- You're working for somebody else…..but aren't we always, even if we have our own businesses? I realize its different, but personally, I've been more stressed on my own vs. with other people.
- You will likely have quotas from a P&L standpoint if you're speculative trading. This all depends on the structure of the firm. But no reputable firm should be taking a cut of your transaction volume.
- You'll do the commute every day. Welcome to this thing called “work”. If you want a paycheck, you need to actually get out of your chair and throw on some khakis.
- Work politics – its everywhere and you'll never get away from it. This is a skill that is basically essential in life, as far as I'm concerned. I'm not saying become the next Patrick Bateman, but rather just learn how to deal with, provided you're not ho-hum buddies with the people at the top of the food chain.
People love to focus on the bad. But obviously, it pays to have a serious career backbone, especially in this business.
The first thing you need to consider is where you live, or where you would be comfortable living. Certain areas are going to contain a higher percentage of certain types of firms versus others.
Here in Denver, we have a lot of energy marketing firms (aka oil, gas, electricity traders) and then very few periphery offices for larger firms engaging in speculative trading, with close to no hedge funds. And good luck finding them. They tend to stick to themselves and rarely post positions in public arenas. Energy trading is another story, however, and these positions get posted just as much as quantitative trading positions get posted in NYC.
We have a lot of operations for larger financial planners and registered investment advisors, but that's another story and doesn't generally fit the mold of what we're seeking.
So for the time being, if you want to trade commodities or FX, you have a much higher chance of locking in a position in New York or Chicago vs. Houston, the fossil fuel capital of the US, in which case you had better learn the ins and outs of the oil market.
Los Angeles and San Francisco also have a very good number of equity/commodity/FX trading firms that have been around for decades.
In other countries you'll of course find similar common threads.
And this isn't to say that the firms you're looking for aren't located outside of metropolitan hubs. They most certainly are, but significantly more sparse vs. other areas.
Get Ready to Start from Scratch
When you work for someone else, you need to adapt. The number of (reputable) places that will allow you to walk in the door and start trading as you have been learning from day 1 are close to zero. Depending on who owns the firm, and their own general outlook on speculative trading, you could be involved in just about anything: delta one, long/short equity, derivative-based anything, HFT, opportunistic credit, you name it. The list is enormous.
You also need to understand that daytrading, as most people know it, doesn't cut it from a portfolio management standpoint as a standalone. The amount of risk applied on a position-by-position basis is far too much stress for most institutional portfolios, which is why other methods are employed. Larger CTAs now widely use algorithms to spread the exposure across baskets of commodities, options, etc. in order to get this done. So as usual, it all varies, but it is a skill which is sought after.
So obviously you have to decide: do you want to do this full time or not, reliant on the fact that you are not going to be able to just walk in the door and start doing what you think is appropriate? Or do you want to learn the ropes and position yourself for a solid career in finance?
Needless to say, my opinion falls on the latter. Do it right, and see where the path takes you. Many of these experiences can even be transferred to other professions as well.
Hedge funds are generally your best shot, because there are simply so many of them which are well-funded.
From 2005-2008, I worked for one of the largest firms in the United States. The vast majority of my coworkers came from investment banks (myself included). The portfolio managers primarily started off as analysts (equity, credit, you name it), then shifted over to the hedge fund, where they would work under another portfolio manager. At some point he/she could “graduate” and essentially be responsible for their own portfolio (aka “Junior Portfolio Manager”), for which the initial allocation was $20mm (long/short equity was the primary strategy at the time, as it is to this day). Not all analysts had the opportunity to move up. Like anything else in life, they were only given the opportunity if their superiors believed they could handle it.
There was really no set-in-stone time where one would leave the sell side and head to the buy side. It all varied. Some would do it in their early 20s, others in their late 40s / early 50s. It all varied.
I generally recommend most people who want to transition to the buy side seek out generally smaller firms, or large firms with an otherwise incredible culture (but these are extremely rare). Let me explain why: the culture changed significantly while I was working for this firm. The larger they got, the more “corporate” they became, and it essentially felt like I went from working in a highly entrepreneurial environment to where I was working at the bank, yet again. It was one of the main reasons I left. So ultimately, smaller is oftentimes better for many people, depending on what you're seeking (especially if you have a huge entrepreneurial streak).
For those of you who prefer structure and generally increased “comfort”, bigger is likely better for obvious reasons, as long as you can handle the politics.
Either way, the common thread here is sell side > buy side. Oftentimes, those doing the hiring just want to see a certain language presented on your resume. I tell everyone just to get their foot in the door and just talk, talk, talk a lot once you get in there.
Keep in mind that you want to get into the right “office”. An entry level back office job is likely to keep you in the back office. And you can't get those years back. This isn't to say that people don't have the ability to move from back to front office, but the circumstances in which they do are not nearly as common as having you “branded” for one position or another.
I would take an entry level front office job over a mid-level back office job that offered more money because the difference in exponential growth in terms of earnings is so ridiculously/dramatically different. This is, of course, if you're up to it. Some people genuinely don't like being in the front office and prefer the middle or back office instead.
Hedge funds are of course registered with the SEC and oftentimes need to file for exemptions with the CFTC, based on what they're trading.
True, legitimate, 100% prop trading firms are rare. Here in the US, many operate in a grey area from a compliance standpoint, meaning that many firms that should be registered as CPOs (based on ownership structure and investors) are indeed not. Of course, the bigger they get or the longer they're in business, the more they have to prove it, therefore the “grey area” typically only applies for so long.
This is not the case in many other countries, where registration is much more relaxed for these types of businesses, but it is here.
A true prop trading firm gets their money from a single source and is then at liberty to trade however the heck they want.
But this being said, they still exist, and some are massive. The path for working at these types of firms is very similar to those of a hedge fund. Many people without prior experience of managing a portfolio typically starts work under someone who does, and works their way up.
Much like any hedge fund, prop firms specialize in varying methodologies and seek talent that meshes well with it.
Your college degree is typically not indicative of where you end up in life, as many of you know. So a degree in computer science can just as easily be applied to quantitative trading as it can app development. Likewise, a degree in biology does not mean you have to work for the Environmental Protection Agency. I say this because one of our top managers at the hedge fund did, in fact, have a degree in biology. The co-portfolio manager had a degree in psychology.
As usual, it depends on where you want to go and what's already under your belt, based on your professional experience.
Commodity Trading Advisors and Commodity Pool Operators
This all brings us to CTAs and CPOs, which are an interesting breed. Think retail / institutional / old school / new school hybrid. The range could be any more different.
The big variance between these two is that CTAs work under a power of attorney. As an investor, you would never cut a direct wire to a CTA, but rather your own account at a broker, or to a CPO/hedge fund using their services.
CPOs can accept money and have two options when it comes to account productivity: trade it themselves or hire out other CPOs/CTAs to do it for them. A CPO can essentially be a fund of funds for CTAs, and in many cases, are. CPOs face much more overhead per year in compliance/accounting costs as a result of directly taking money from investors.
Many large CTAs do indeed exist and have benefited greatly from newer, more exotic means of rounding up investors (like managed futures mutual funds). As I likely don't need to tell many of you, CTAs trade with some of the widest ranges of disciplines, many of which mirror many of the strategies you read so much about from a daytrading perspective.
Finding CTAs is easy, especially the larger ones. There are plenty of CTA databases out there as well as contributors to these funds I just mentioned, and simple regulatory databases.
Here is one that most of you are likely not well accustomed. No, we're not talking about sending out email blasts to get sign ups for the next energy seminar.
Bottom line, energy marketing is oftentimes code language for energy trading. There are indeed a couple different “types” out there. Let me explain.
Energy marketing, as a term, means buying and selling energy from where it is produced to where it is needed. These days, it can be easily/oftentimes translated to “energy prop trading” where nothing is being hedged…..it is simply the buying low of gas and electricity (mainly traded on ICE here in the US, but CME as well) and selling high, and vice versa.
There are many different business-types that engage in speculative energy trading, and many are found around major transport hubs (like Houston) or wherever its being dug up. Energy companies in and of themselves (yes, like the ones that literally power your house) have trading desks that perform a wide range of functions.
Quite frankly, its an unconventional industry when it comes to finances. Over time, these essential functions evolved to the point where speculative trading was just another part of the business. These days, there are no shortages of them and they tend to be just about everywhere…..you just need to seek them out in the first place.
Treasury and Other Non-Speculative Functions
One of my first jobs entailed hedging exposure for equity, option and fixed income portfolios. It wasn't a bad job and gave me a ton of exposure to all sorts of different financial products, both on-exchange and OTC, but it did admittedly slow down my “front desk growth”. Those of you who DO have an operationally-wired brain might also want to consider treasury positions for larger companies, or trader positions (with purpose of hedging). Anyone who is doing business outside of their headquartered country is going to need to hedge currency exposure. This includes manufacturers or retail products, online and brick and mortar retailers themselves, etc etc. Likewise, many producers of hard-commodities like lumber, cattle, etc., need to hedge, and these are well beyond full-time jobs. Doing it all entails a ton of work.
Naturally, this position falls under the hood of operations and is not speculative in nature, but I thought it was worth mentioning. A lot of problem-solving is typically entailed with these types of jobs and could be a good fit for many of you reading this.
Brokers / Investment Banks
First off, brokers/banks don't (excuse me….rather shouldn't) take speculative risk. And the jury is still out on Dodd-Frank, but it looks unlikely that these firms will ever get their prop desks back.
But the number of current trading jobs at these places is massive. These roles serve tons of different functions, depending on the asset class. Frankly, there are way too many to get into here, but they all typically fall back in loading and unloading, or just maintaining, and inventory of financial products.
Delta one, and other methodologies like it, have behaved as somewhat of a back door to the exodus of proprietary trading desks at these firms. So as I say, just dig. What actually happens on these floors rarely makes it out to the front page of the newspaper.
These positions could entail anything, either on or off-exchange. Equities, FX, Futures, Debt, and then every derivative on those classes under the sun: swaps, options, forwards, etc.
Many banks/brokers of course have their own research areas where quantitative models are assembled for clients, or qualitative analysis is disseminated. Just another path worth mentioning.
“Non-Bonafide” Type of Businesses That Pose Extremely High Risk
I'll cut to the chase here and say that if any firm wants you to pay them for anything, then you are likely going to end up running around a hamster wheel and largely wasting your time and money. Sorry to burst the bubble of many of you, but these types of online businesses seem like an easier path to pursue for a reason.
All you need to do is stop for a second and do the comparison between what we just talked about vs. what we're talking about now. It's like night and day…..who is selling who?
Over the years, I have seen these types of businesses come and go, and their models for making money vary wildly. Typically, the business makes you pay some kind of upfront fee with the promise of giving you piles of cash to trade in exchange for education of some kind or just a cover of technology costs or initial margin.
The risk metrics these types of businesses follow are typically, and frankly, unrealistic and well outside the boundaries of what even most professional CTA's put up in terms of numbers year after year. Simply stated, you have a higher chance of keeping your job at a hedge fund, CTA, prop shop or CPO (and collecting a salary and benefits) than you do being accepted by some of these online shops. That's not a joke and yes, I read that sentence a few times before pressing “Publish”.
In the defense of these types of businesses, I can't say I blame them for wanting to cover their rears so much. They never know who is truly on the other end of their platform and the success ratio among retail traders is very well known. But at the same time I see very rare long-term and sustainable benefit to one party here (take a guess which one).
They have also proven themselves as being very successful at what they do. As usual, I'm staying away from names here but growth rates have proven themselves time and time again.
Like anything else, this all takes patience and hard work. But getting started now vs. later will likely save you piles of time on efforts.
One of the biggest misconceptions out there is that you need to be able to “kill it”, and only then, can you get your dream job by presenting your trading statement to a firm. First off, larger firms will not look at your trading statement and give you $10mm just like that. Portfolio managers are born and bred in these types of environments, climbing a ladder like anyone else. The only time I ever see a portfolio manager start off in that exact position was when he/she did it for another firm, previously.
Smaller firms are another story, and you have a better chance of being noticed. They're generally more hungry for growth and therefore more flexible in terms of what they're willing to look at. Either way, you don't try, you don't get. But put away the trading statement and focus on your resume instead for a second, because that's just the way it works.
In the end, “killing it” is not the number one goal of these managers anyway. It has never been for me.
One look at these numbers will tell you that risk is the primary factor in determining who wins and who loses over time.
Sensibility, prudence and common sense always wins in the end.
Assembling Your List And Closing Things Up
As I mentioned before, finding many of these firms is easier than you might think. Very few of them are going to pay the online job board ransom fees (and have to sift through piles of unqualified and honestly, annoying, candidates) and opt for using their own website and a talent recruiter instead.
Don't discount headhunters – they get paid for promoting you and you get what you want as well. Just make sure they're working in your best interests in regards to a desired position. You can always say no. Just like anything else in life, headhunters come in a variety of “quality levels”. There are many, for example, that only seek out C-level management. Others specialize in portfolio managers or quants.
Put your list of firms in a spreadsheet and just keep checking the careers sections on their websites. If you see something you like, don't hesitate. Early applications have a massive statistical advantage of getting in the door. This has been proven over, and over, and over again.
If you're still in school, most of these places will take interns as well. Oftentimes, this is an “easy” way in, as many of them most definitely hire candidates from their internship programs.
Finally, don't discount anything. I say this mainly for the people who question their abilities or don't think they are “good enough” for a role he/she really desires. You never know who you will run into at the firm to which you're applying. I've seen it a lot: snobby and arrogant (one guy literally wouldn't stop mentioning that roughly 80% of the people he hired was Ivy League…this was at an investment bank that is the golden child of stereotypes for Occupy Wall Street, and seemingly rightly so), resourceful and positive (always say yes to these guys), and even a guy that kept passing gas during my interview with him (seriously….something wasn't right there).
A lot of these people land in these positions based largely on who they know, so sniff around. Once you start working in one of these places you realize how foolish you were to second guess it from the get-go.
Bottom line: you don't try, you don't get. So just try.
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