I know consensus is probably lower rates, but let's say rates stay where they are. How does this affect what career paths are attractive over the next 5 years in finance? I also know probably making macro bets is not necessarily how to decide your career - let's ignore that for a sec. I don't know the answer, but here were some ideas I had. Curious what others think
- Higher rates -> more expensive to re-finance companies -> harder to make buyouts work -> fewer new seats at buyout funds -> excess supply of talent vs. demand in PE?
- Higher rates -> lower multiples for profit losing / high multiple companies -> venture firms underwater -> harder to grow venture funds -> excess supply of talent vs. demand in venture?
- Higher rates -> harder to finance leveraged long/short -> harder to make multis work as a model? I feel like we have seen the exact opposite in terms of where flows have gone, so I must be misunderstanding how borrowing mechanically works for multis? Maybe someone that works at a multi could explain.
- Higher rates -> people get scared about rates / fx -> more opportunities in macro -> more hiring in macro?
- Higher rates -> bond people do better? and maybe more companies end up in broken capital structures -> more hiring in credit?
- Higher rates -> equities returns lower -> lack of inflows + no capital appreciation means long only / elite mutual funds cannot grow -> excess labor supply of this talent relative to demand?
Again, literally I have no idea, but think it's a really interesting question if you try to think about where to place your bets career wise. I feel like most of the effects sound negative, but I feel like there has to be a set of strategies that does better in a higher rates environment.
I've been thinking about this too. A lot of great strategies from 2008-2022 seem to be unviable if the unlevered return is lower than the financing rate. As you said, it seems MMs cannot make money if they have a 2-3% alpha target but now have to finance at 6% or more. Maybe they locked in long term fixed rate loans before 2022? HFT strategies might have a high enough unlevered return to get over this. Before 2022 it made sense to lever up the index on your own account at 1-3% financing rates, but at current rates it's less clear. The big VCs will keep getting capital and funding companies regardless of the fund performance, due to how the industry works.
As for career, I expect macro and distressed strategies will do well without the employees necessarily benefiting from it. There is currently a massive excess labor supply in most white collar fields (due to phone-based social media) while blue collar fields and regulated trades have the opposite issue, so the pay will converge over time (especially adjusted for cost of housing) and the college wage premium will shrink or maybe even turn negative. This is somewhat independent of the rates.
I do think rates will fall back to at least 2019 levels over 10-15 years due to low growth and reduced demand (much fewer kids being born, just like Japan), but that may take too long to be relevant for someone making decisions now.
Very interesting. Do MMs really have to borrow at 6%? I am sincerely confused how the math can work if the return target is 2-3%. Does someone on this site know details on how this works? If rates stay where they are what options do equity long/short MMs really have?
Why do you think macro strategies will continue to do well? I don't actually know if rates / fx vol has been higher than normal, but I guess intuitively it would make sense that if you suddenly get into a new rates environment maybe products related to that would be better to trade. Just anecdotally, the job opportunities I have been shown that seem most desperate to hire appear to be macro in nature, especially in rates and fx. This is anecdotal but since I have essentially no qualifications to look at these products I assume there must be a lack of labor supply relative to need for this skill (something like this would never happen in long/short equity land). If the reason why I've observed this is because higher rates means macro does better for some reason, then I wonder how long an effect like that would persist.
Does anyone know good sources of info on where fund of funds are allocating and why? Or know someone with commentary on a blog or something that's particularly insightful on this? I would be pretty curious.
I don't have any inside knowledge, but I would think they must have long term loans that were already secured when the rates were low, like a 30y mortgage. IB charges the fed rate + 1-2% on a brokerage account and is used by many small funds. It's not clear why a bank would lend to any business at lower than the fed rate.
I don't think hiring is very connected to the fund performance or profitability. It's some combination of AUM flows and senior management of large firms copying each other (in 2021 it was fashionable to mass-hire people, now it's fashionable to layoff). Rate vol has definitely been high since 2020, although it's not clear if that will last.
How are you getting those interviews out of curiosity? I'm finding this year that recruiters just ghost you if you don't fit their requirements exactly (which becomes harder the more experienced you are). The only way I have gotten interviews is through personal contacts.
There has been another thread on risk free impact on MMs; it’s not as punitive as described above. Direct lending and LOs exposed to fixed income (eg PIMCO) are beneficiaries as they have seen inflows in recent quarters. PE returns from 2019-2021 vintages will likely disappoint but that is more of a cyclical overhang vs a big secular headwind imo.
Where is this other post you're mentioning? I searched for it but only found posts with no responses really.
Del
What you describe is "neutral", not a benefit.
You could well argue that from an investor's point of view, earning a 9% return from a MM while risk free is 5% is less competitive than 9% when the risk free was 1%.
del
This actually makes sense. If they are earning the same rate on shorts they pay on longs, they are not affected by the rates at all. IB gives a lower rate on shorts but the spread between long and short rates stays the same. I think for a retail account this doesn't work though, since you pay taxes at a higher rate on the short interest than you deduct on the long interest.
this is huge if true. is this actually how all leverage works at all funds? or do MMs get some special deal? I am pretty ignorant to these mechanics. also anon how do you know this for sure? does this only apply when your dollars long are the same as dollars short? (e.g., you don't just need to be factor hedged if you're Citadel, but to reduce your rates exposure you probably want to be close to dollar hedged as well).
Only disagreement is for LO: valuations have already adjusted to keep ERP at a fixed spread above risk-free so equities should continue to be as attractive relative to bonds as they were before. In fact, the same 50 bps management fee spread over 11% expected returns vs 7% is arguably more attractive.
Hi, do you mind explaining your last sentence? Would expected returns be at 11% now or 7%? I'm an unschooled undergrad. Thanks.
In theory, equities always give 5-6% higher expected returns than treasury bonds because of higher associated risk (treasuries are assumed to be risk-free). So if the treasury yield goes from 1% to 5% (now) then expected returns from equities should also adjust because stock prices go down
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