Is the Buy-Side the Best-Side?

Hello and welcome dear readers, welcome to another addition of Financial Technology today. This edition will be focusing on what many to consider the summit of Capital Markets. The Buy-Side of FS.

Intro: Buy-Side vs. Sell-Side, The Basics:

I would imagine many reading this would have a thorough understanding of the differences of the two stripes of Financial Services (moreso than me if we're honest), however, for the unanointed, I'll explain.

In Capital Markets (Markets which are focused around the buying and selling of securities: Stocks, Bonds, Foreign Exchange etc) there are two main sides of the industry. The Buy-Side, and The Sell-Side.

As the names would suggest, once side is doing the buying of securities, while the other is doing the selling. It really is basically that simple.

The Buy-Side would include types of firms such as Hedgefund's, Asset Managers, Pension funds etc. Household names such as: Blackrock, Vanguard, Charles Schwab and Fidelity are all examples of Buy-Side firms.

The big Sell-Side firms would be the likes of Goldman Sachs, Morgan Stanley, JP Morgan, and Bank of America.

Hedgefunds and Asset Managers (and Private Equity):

To dive a bit deeper into the buy-side, we have to take a closer look into the players in the space, mainly the 3 listed above.

Hedgefund's like Bridgewater, Alternative Asset Managers like Carlyle, and PE shops like Apollo have long been the preferred destination of choice for the best and brightest in the industry.

They work on large complex transactions and trades, using cutting edge technologies. PE Firms execute transactions such as Leveraged Buy-outs, many Funds trade using sophisticated algorithms and technology. It's all about as high-brow as it gets.

Due to their complexity, the leanness of the teams, and the sort of money they're managing. You have 3 of the biggest triggers that lead to very high paying roles:

1) Complex work which raises the barrier for entry, making it more competitive. Thus tightening the talent market. A tight talent market means firms have to pay more to hire people. Supply vs Demand in action.

2) Lean teams leads to more money in the comp pool going around for the people on said team. Running leaner teams further tighten the talent market, with limited spaces on the team, firms pay more for an A player then 2 B players.

3) Managing the money they do, along with the complexity of how they're managing it, leads to these firms wanting to hire very smart people. You're not going to underpay someone managing $1bn of client assets.

With that said, we have a natural Segway to our next section... Buy-Side compensation...

Show me, the, MONEY!!

Many people in the industry know that the Funds and AM's are usually paying the highest on the street, but just how much more are they paying?

(Note: I'm commenting purely on Technology from here on out, I don't know enough about the business side to give proper colour)

I would say, anecdotally speaking, the Buy-Side pays anywhere from 30-60% higher than their Banking and Vendor side counterparts.

For example, a solid Senior Technical Product Manager, from a coding background who has a good grasp on AI and ML, would be pulling in somewhere between 2-300k Total comp on the Sell and Vendor-Side.

If that person were to go to a Two Sigma, a DE Shaw, an HRT, or a Point72 however, they'd be looking at anywhere from 350-500k TC.

It's the same story across the board for the most part, from what I've seen at least. Engineering, IT and support (although to a lesser amount), Transformation, Quants etc.

Now, to make it clear, this isn't down to the philanthropic nature of these firms listed above. They're not just paying more because they can. They pay this much as they're competing with the Google's and Microsoft's of the world.

Who can afford to throw out 100's of thousands of dollars worth of RSU's to people without blinking.

Also worth noting, many comp structures in Funds/AM's are incentive and fund performance based. If the fund performs well that year, I've heard of people getting as much as 200% of their base as a cash bonus. In one lump sum.

If the funds don't perform, you're losing a massive chunk of your compensation. As many of them may pay base salaries at the market or below it.

There are also different financial incentives, many will allow their employees to put capital into the fund so they can have a piece of fund performance, which is generally reserved for incredibly wealthy clients who provide the capital.

As a disclaimer, this is not the case for all Fund's and AM's, as you could imagine like any industry, not all these firms are created equal. I'm talking about the higher end of the market here.

Recruitment Trends in the Sector:

It's hard to give a general statement for recruitment trends across the whole of the buy-side given there's so many different firms of so many different sizes, trading different strategies, so have different needs. That said, there are some things I've noticed at a high level:

1) It's INCREDIBLY relationship driven: More so than any sector I've ever seen, the whole ecosystem is ran on handshakes and friends of friends from a recruitment perspective. Which makes sense given how tight knit the community is. I spoke to a number of smaller shops over the last few weeks who don't even advertise their positions, they just speak to their network and have a book of agency contacts they've use over the years whom they trust.

The larger firms don't have this option though, given the volume of growth they see and hires they make. They'll have quite robust and talented internal talent teams, advertising open roles, although not all of them.

2) Low Turnover: One surprising tidbit I've come to find is that many of these smaller to mid-sized firms actually have quite low turnover, on the technology side at least. There are exceptions obviously, but many people I've spoken to have been in these companies for years, as have their teams.

I, like many, have heard the horror stories over the years about some of these firm, which I won't name but I think most people knows the type I'm referring too. But the majority of the firms, the ones you don't hear about, have a lot of very kind and happy people working there. Who have been there for years, hire about once or twice a year, have a great balance and workplace culture.

3) They don't do remote: The vast majority of the firms I've spoken with are in 4 days a week, even 5. With a few being 3 days a week. There is reasoning behind this though, much of it can be client facing, or supporting people who are client facing. So they need to be on-site. If you're building technology for a Portfolio Manager who is on-site 5 days a week, well then, see you in office 5 days a week.

There's also a technology aspect to consider, a lot of these firms have invested in incredibly expensive technology infrastructure to give them the edge. I'm talking fiber lines, Dealerboard's, 6 monitors per person, top end computers, Bloomberg Terminals, the list goes on. These are in theory replicable for an at home set up, but it's absurdly expensive and still likely won't be as optimal as the office set up.

Firms that have caught my eye:

Walleye Capital:

First on the list, is a firm called Walleye Capital here's a link to their website:

"Walleye Capital is a multi-strategy platform hedge fund headquartered in Minnesota. The firm manages investor capital predominantly through two core multi-strategy hedge funds.

The Walleye Investments Fund ("WIF") is a multi-strategy hedge fund with a primary focus on options market making.

The Walleye Opportunities Fund ("WOF") is a multi-strategy hedge fund that aims to generate attractive risk-adjusted returns through a diversified portfolio of dozens of highly uncorrelated strategies. WOF participates in four core strategy groups, including Equity Long/Short, Tactical, Quantitative, and Volatility strategies."

As a lover of Tech, Capital Markets, and recovering Option trader. I am extremely biased towards quantitative shops. So a Quant shop where one of their main strats is Options Market Making is the dream for me.

I find their strategies and application of technology fascinating. The CEO having a Masters in Mathematical and Computational Finance from Oxford University, sure doesn't hurt.

Element Capital:

Last up, we have Element Capital Management link to their Website:

"Element Capital is an alternative investment manager with a Modern Macro style of global macro investing. Modern Macro is an evolved investment approach that integrates macro fundamental, systematic, and relative value analysis in the formation and implementation of directional views"

I find Macro strategies quite interesting as well, the idea of looking at global economics to predict trades is one of my favourite applications of investing.

The coolest thing about Element to me is the fact they've continuously reduced their fund or downsized in order to keep their strategies and sizing optimal. In a world where everyone is trying to get as big as possible as quick as possible.

The thoughts of a successful fund knowing the limits of their strategy, and being humble enough to reject or return capital in order to maintain performance, is quite noble.

Conclusion:

Overall, it doesn't get much more high finance than this area of the market. It attracts the best and brightest the industry has to offer, paying them Kings and Queen's ransoms in order to retain them.

It's an area of the sector I'm eager to do more work in, I found myself talking strategies with some of these people and I could have spoken to them for hours. I find it fascinating.

That all said, it is a deeply entrenched industry and is quite hard to break into. But when you do, the skies the limit, both for your career and for your pockets.

Thanks for your time,

Cheers,

James

P.S - here's our Salary guide, it's a great resource and you should share it with all your friends. Then tell them to work with us. :)

https://www.harringtonstarr.com/blog/2023/07/the-harrington-starr-financial-technology-salary-survey-2023-slash-24