From Quant to Equity Research Associate: Do Androids Dream of Electric Sheep?
Once you go quant, can you ever go back?
Or would you ever want to go back?
Most people would answer that with “No, never!”
After all, quant hedge fund jobs are glamorous, pay well, and exclude the drudgery associated with most finance roles.
But the quant route is not for everyone.
Our interviewee today started out in a quant role, found himself unsatisfied, and then left for greener pastures in equity research.
Here’s how – and why – he did it:
Becoming Quant: From Newton to Normal Distributions
Q: Walk us through your background and how you got into this industry.
A: Sure. I had a Physics and Biomechanical Engineering background in university, but I was always interested in investing, and frequently traded on the side.
I wanted to complete a technical major, but I had always planned to make a career out of investing.
At a friend’s birthday party, I met a quant who worked at a large hedge fund. We got along pretty well, and after I had learned more about what quants do, I realized my skill set would be a perfect fit.
I recruited for various investing roles, and eventually won an entry-level role at a smaller quant shop.
I spent a few years there but found myself increasingly unsatisfied with the role.
I became more interested in fundamental research over time and started to think of equity research as the best option.
So I networked and interviewed around, spoke with lots of different equity research groups, and eventually won an offer at a well-regarded healthcare group at a large investment bank.
Q: So my first question is: “How on earth did you get a quant job out of university? I thought they mostly hire Master’s and Ph.D. graduates?”
A: Not all quant funds/groups hire only Master’s and Ph.D. students.
That background is helpful, but you can still get in with a bachelor’s degree if you’re at a relatively well-known school (i.e., semi-target or target; I went to a semi-target school in NYC).
I did the standard networking slog of contacting alumni and professionals on LinkedIn and going through my original contact’s referrals to win the role.
Q: OK. This interview is not about quant fund recruiting, so I’ll just move on for now.
Why were you unsatisfied with the quant role?
A: I was paid incredibly well, but my long-term goal is to run a business of my own – so I wanted a role that focused more on analyzing business fundamentals than on developing quant models.
I was spending 80-90% of my time building models rather than understanding/analyzing the businesses we were investing in, and my options for moving elsewhere were getting more limited, so I decided to explore a different industry.
Becoming Human: From R^2 to Relationship-Building
Q: So what was your strategy for moving into equity research?
A: Luckily, my boss was more of a mentor than a real “boss,” and he had come from a fundamental research background before joining the quant team, so he still had good connections at banks.
I was upfront with why I wanted to make the move, and he was completely fine with it. I had performed well for a few years there and made him look better, so he was happy to help me out by forwarding my resume to his contacts.
Beyond that, I reached out to many alumni and used LinkedIn to contact equity research professionals at banks that I was interested in.
Q: What were the most common objections you faced?
A: The three main objections were:
- “You’ve been a quant for several years, and your title is ‘Associate.’ How do we know you’re serious about moving into a different industry?”
I was 6-12 months away from a VP promotion, so this was a very valid concern on their part.
- “We cannot possibly match your current salary + bonus. Are you willing to take a big pay cut? And if not, is that a sign that you don’t want this job that much?”
- “Do you know accounting and finance, or just statistical models? Can you value a company or pitch us a stock?”
Q: And how did you overcome these objections?
A: First, I told them directly that I was willing to take a big pay cut and start out at the entry-level even though I was more senior than that in my quant role.
For reference, it was roughly a 60-70% pay cut to go from a Quant Associate to an entry-level Equity Research Associate (remember that in ER, Associates are the junior roles and Analysts are at the top).
That point convinced many of them that I was serious – why would agree to such a pay cut unless they were serious about the move?
Also, I studied the technical side very well, in part from your guides and courses, so I was comfortable answering the accounting and finance questions.
I also benefited by focusing on teams that covered complementary industries.
I had a Physics and Biomechanical Engineering background, so I went for biotech equity research teams where it was easier to tell my story.
Q: And speaking of that, what was your story?
A: The basic outline was:
- Point #1: I always had an interest in engineering and technical fields, but I also invested on the side and followed the markets.
- Point #2: I met a contact at a friend’s birthday party who heightened my interest in quant roles; I thought it was a good fit for my background, so I interviewed and won an entry-level position at a boutique quant fund right out of undergrad.
- Point #3: I liked the analytical aspect of the job, but wanted to spend more time understanding business fundamentals than developing statistical/quant models.
- Point #4: So I’m here today because your firm/group is the ideal place for me to do all that, given your coverage of healthcare/biotech companies, your performance, and the greater independence you give to Associates.
Interviews: Case Studies, Stock Pitches, and Quick Analysis Based on Random Data
Q: I see. So continuing with this theme, what were the most common interview questions?
Did you receive case study-based questions, and if so, how did you handle them?
A: There was a big focus on “fit” and making sure I really wanted the job. I’d say 70% of the questions were some variant of that, which I addressed with the points above.
Most of the technical questions were basic: they just wanted to verify that I understood the three financial statements and how to value companies.
They didn’t give me formal “case studies,” which I believe are less common in equity research interviews.
But they did ask me to pitch a stock, which you’ve covered extensively before.
- Overall View: You don’t necessarily want to say something completely, 100% different from everyone else in ER. Yes, you can be creative, but you probably don’t want to claim that a company’s stock price is set to rise by 100% or fall by 80% in 6 months unless you have really convincing reasons.
- Stop Losses and Mitigating Risk: While you need to give stop-loss and profit-taking levels in the other interviews, they are arguably not quite as important in ER since it’s more of a simple Buy/Sell/Hold recommendation with a target price.
The interviews mostly went fine, but I was caught off-guard with the “quick exercises” that some firms give.
Q: What exactly is a “quick exercise”?
A: As an example, they might give you 2-3 pages of market data and the financial statements of a company and then ask you to value it and make a Buy/Sell/Hold recommendation.
It’s sort of like a stock pitch, but there’s less information, you can’t pick the company, you have to do it on the spot, and you might have only 30-60 minutes to make a decision and justify it.
Speed was essential, so I used this process:
Step #1: Is the company clearly overvalued or undervalued?
If it wasn’t immediately obvious or there wasn’t a huge difference (e.g., 10% or less), I would lean toward a “Hold” recommendation.
There is such a huge margin of error in valuation that you need a BIG discrepancy – say, 50% – to have even a small chance of being correct.
You can determine this quickly by looking at the comparables’ multiples and making simple cash flow projections.
You could create a quick, simplified DCF by skipping the projections for non-cash adjustments, CapEx, the Change in Working Capital, etc., and just making FCF a % of EBITDA based on historical numbers. And then you could calculate Terminal Value with a simple multiple or growth rate.
Step #2: If the company SEEMS to be overvalued or undervalued, is there a catalyst in the next 12 months that will push it toward its true intrinsic value?
To determine this one, I read through recent news and upcoming events in the 2-3 pages of information.
If there was a planned M&A deal, new partnership, expansion, new product launch, or something else like that, I continued with my recommendation; if not, I reconsidered.
Step #3: Come up with risk factors and mitigants.
You won’t have time for detailed analysis, but you can think about what happens if your catalysts backfire (e.g., an acquisition fails to close, or integration costs are higher than expected).
Then, mention brief ways to mitigate this risk (e.g., invest in other companies in the sector without these potential problems) and make a very rough estimate of the company’s value in this “Downside” case.
Equity research reports often have Base, Upside, and Downside cases, so it helps to think about those in advance if it comes up in your discussion.
Q: Thanks for sharing all that.
But it seems like this approach would still take quite a long time – how can you do this efficiently if you have to pick one of several companies?
A: I often stopped at step #1; in many cases, you can just look at the multiples and operating metrics and tell there’s a low chance of the company being mispriced.
If the multiples suggested an overvalued or undervalued company, I made simple cash flow projections to see if they also supported that.
If the cash flow projections checked out, then I did the reading to find catalysts, since that part took the most time.
On the Job as a Recovering Quant
Q: Thanks for sharing all those tips.
So what has the equity research job been like so far?
A: I think it’s quite fun. The biggest surprise was that we do not spend all day, or even most of the day, modeling.
We do spend time on research updates, notes, and model tweaks, but we also speak with clients and industry contacts a good amount.
You’ll end up doing this even as a junior person; sometimes my Analyst is busy or on the road, and clients are often happy to speak with me and get our thoughts on a stock or industry. I think having an academic background relevant to my sector helps as well.
You’re not going to jump into the job and do this on Day 1, but once you become well-known and trusted, it can happen quite early.
Some sources claim that buy-siders don’t listen to sell-side analysts at all, but I haven’t found that to be the case.
Some firms may not pay attention, but plenty of hedge funds and asset management firms do talk to various analysts before making investment decisions.
Q: Great. So what are your plans for the next few years?
A: In equity research, you either grow into an Analyst, or you move into a buy-side role.
I haven’t decided which path I’ll follow yet, and I’m also considering going back to school to get a Masters’ degree in Biotechnology or public health.
Q: Thanks for your time and for sharing your story!
A: My pleasure. Your site and courses have been very helpful, as have you (Brian) personally and your team. So I wanted to give back in the best way I could.
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