Careers In Finance


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Careers In Finance

  1. 1. Careers in Finance January 5, 2005 See the Disclosure Appendix for the Analyst Certification and Other Disclosures. Scott Peng
  2. 2. <ul><li>PhD in Engineering / Science from MIT </li></ul><ul><li>What next? </li></ul><ul><li>What is finance? </li></ul><ul><li>Is finance the right career choice? </li></ul><ul><li>How does one break into a totally different profession? </li></ul>The Basics
  3. 3. <ul><li>Finance involves the selling or buying of investment instruments on behalf of either oneself or customers </li></ul><ul><li>Aspects of finance includes (but is not limited to) </li></ul><ul><ul><li>Interest rate analysis </li></ul></ul><ul><ul><li>Credit analysis </li></ul></ul><ul><ul><li>Risk management </li></ul></ul><ul><ul><li>Portfolio theory and application </li></ul></ul><ul><ul><li>Financial engineering </li></ul></ul><ul><ul><li>Psychology </li></ul></ul>What is Finance?
  4. 4. <ul><li>When one says finance, one usually thinks of … </li></ul><ul><ul><li>Salomon Brothers (Now Citigroup Global Markets) </li></ul></ul><ul><ul><li>Goldman Sachs </li></ul></ul><ul><ul><li>Lehman Brothers </li></ul></ul><ul><ul><li>Etc, etc </li></ul></ul><ul><li>But … there is a lot more to finance than just those names </li></ul><ul><li>Finance companies can be broadly grouped into </li></ul><ul><ul><li>Buy side </li></ul></ul><ul><ul><li>Sell side </li></ul></ul>What is Finance?
  5. 5. <ul><li>Sell side </li></ul><ul><ul><li>Investment Banks </li></ul></ul><ul><li>Buy side </li></ul><ul><ul><li>Commercial banks </li></ul></ul><ul><ul><li>Mutual funds & Money managers </li></ul></ul><ul><ul><li>Insurance companies </li></ul></ul>Financial Institutions: The Old Days (Mid 90s)
  6. 6. <ul><li>Sell side </li></ul><ul><ul><li>Investment banks </li></ul></ul><ul><ul><li>Commercial banks </li></ul></ul><ul><li>Buy side </li></ul><ul><ul><li>Finance entities </li></ul></ul><ul><ul><li>Commercial banks </li></ul></ul><ul><ul><li>Mutual funds & Money Managers </li></ul></ul><ul><ul><li>Insurance companies </li></ul></ul><ul><ul><li>Hedge funds </li></ul></ul><ul><li>There’s a lot more to finance than just investment banks </li></ul>Financial Institutions: Now
  7. 7. <ul><li>Finance Entities </li></ul><ul><ul><li>Government sponsored enterprises – Fannie Mae, Freddie Mac </li></ul></ul><ul><ul><li>Finance subsidiaries – GECC, GMAC, FMCC </li></ul></ul><ul><ul><li>REITs </li></ul></ul><ul><li>Commercial banks – Citibank, Chase, BankAmerica </li></ul><ul><li>Mutual funds & Money managers – Fidelity, Putnam, Alliance, PIMCO </li></ul><ul><li>Insurance company – MetLife, Mass Mutual, Aetna </li></ul><ul><li>Hedge funds – new kids on the block </li></ul>Buy Side
  8. 8. <ul><li>Invest client assets </li></ul><ul><li>Performance judged against benchmarks </li></ul><ul><ul><li>Equity funds: S&P 500 </li></ul></ul><ul><ul><li>Bond funds: Lehman Aggregate Index of Citigroup Broad Investment Grade (BIG) </li></ul></ul><ul><ul><li>Hedge funds: Pure “alpha” </li></ul></ul><ul><li>Key roles </li></ul><ul><ul><li>Credit analyst </li></ul></ul><ul><ul><li>Risk manager </li></ul></ul><ul><ul><li>Portfolio manager / Trader </li></ul></ul><ul><ul><li>Client relationship manager </li></ul></ul>Buy Side
  9. 9. <ul><li>Examples: </li></ul><ul><ul><li>Fannie Mae & Freddie Mac </li></ul></ul><ul><ul><li>GECC, GMAC </li></ul></ul><ul><ul><li>REITs </li></ul></ul><ul><li>Invest assets versus borrowed capital to maximize return or dividend in a risk controlled fashion </li></ul><ul><li>Risks </li></ul><ul><ul><li>Asset-Liability Mismatch </li></ul></ul><ul><ul><li>Credit risk </li></ul></ul><ul><ul><li>Structural </li></ul></ul>Buy Side: Finance Companies
  10. 10. <ul><li>Invest cash from </li></ul><ul><ul><li>Checking accounts </li></ul></ul><ul><ul><li>Saving accounts and CDs </li></ul></ul><ul><ul><li>Ongoing operations and investments </li></ul></ul><ul><li>Invest to maximize return while managing risk subject to regulations </li></ul><ul><li>Regulation </li></ul><ul><ul><li>May invest only in bank eligible securities </li></ul></ul><ul><ul><li>Investments subject to risk-based weighting </li></ul></ul><ul><li>Risks </li></ul><ul><ul><li>Asset-Liability Mismatch </li></ul></ul><ul><ul><li>Credit risk </li></ul></ul><ul><ul><li>Structural </li></ul></ul>Buy Side: Commercial Banks
  11. 11. <ul><li>Mutual fund managers and money managers (institutional) are not necessarily one and the same </li></ul><ul><li>Mutual funds: manage assets for retail investors </li></ul><ul><li>Money managers: Manage assets for institutional investors such as pension funds, insurance companies, universities </li></ul><ul><li>Major funds and money managers include (but is not limited to) </li></ul><ul><ul><li>Equity: Fidelity, Alliance Capital, Vanguard, Putnam, etc </li></ul></ul><ul><ul><li>Bonds: Federated, Nuveen, PIMCO, BlackRock, WAMCO, etc </li></ul></ul><ul><li>Manage assets versus benchmarks </li></ul><ul><ul><li>Volatility of return versus gains, slippage versus index </li></ul></ul><ul><ul><li>Credit risk </li></ul></ul>Buy Side: Mutual Funds and Money Managers
  12. 12. <ul><li>Invest cash from </li></ul><ul><ul><li>Insurance policies and annuities </li></ul></ul><ul><li>Goal: maximize returns while managing risk subject to regulatory and accounting issues </li></ul><ul><li>Regulatory and accounting </li></ul><ul><ul><li>Capital standards and adequacy subject to state insurance commissions and NAIC </li></ul></ul><ul><ul><li>Myriads of accounting standards and issues </li></ul></ul><ul><ul><li>Investments subject to risk-based weighting </li></ul></ul><ul><li>Risks </li></ul><ul><ul><li>Asset-Liability Mismatch (biggest) </li></ul></ul><ul><ul><li>Credit risk </li></ul></ul><ul><ul><li>Structural </li></ul></ul>Buy Side: Insurance Companies
  13. 13. <ul><li>Been around since 1950s, exploded in popularity in last five years </li></ul><ul><li>Now over 7,000 hedge funds in existence </li></ul><ul><li>Hedge funds are grouped by their investment strategy types such as: </li></ul><ul><ul><li>Equity long/short </li></ul></ul><ul><ul><li>Fixed income arbitrage </li></ul></ul><ul><ul><li>Convertible bond arbitrage </li></ul></ul><ul><ul><li>Global macro </li></ul></ul><ul><ul><li>Managed futures </li></ul></ul><ul><ul><li>Event driven </li></ul></ul><ul><ul><li>Emerging market </li></ul></ul><ul><ul><li>Private equity, venture capital and buyout (not strictly hedge fund, per se) </li></ul></ul>Buy Side: Hedge Funds
  14. 14. <ul><li>Goal: Manage return versus risk (Sharpe Ratio) and minimize correlation to other asset classes </li></ul><ul><li>Advantages </li></ul><ul><ul><li>Work on a variety of tasks </li></ul></ul><ul><ul><li>Relaxed, academic-like atmosphere </li></ul></ul><ul><li>Disadvantages </li></ul><ul><ul><li>Relatively narrow window of expertise </li></ul></ul><ul><ul><li>View of world is very different from non-hedge fund entities </li></ul></ul><ul><ul><li>A lot of new hedge funds out there </li></ul></ul><ul><li>Understand style and riskiness of hedge funds. Do your own research </li></ul>Buy Side: Hedge Funds
  15. 15. <ul><li>Commercial banks with securities subsidiaries now perform virtually the same function as investment banks </li></ul><ul><li>Sell side firms are generally considered as either large “bulge-bracket” or smaller niche firms </li></ul><ul><li>Bulge bracket: Largest investment banks </li></ul><ul><ul><li>Broadest array of equity and fixed income products </li></ul></ul><ul><ul><li>Usually involved in most institutional trades </li></ul></ul><ul><li>Niche – banks which focus on some specialties </li></ul><ul><ul><li>Mortgage-backed securities </li></ul></ul><ul><ul><li>High yield bonds </li></ul></ul><ul><ul><li>Equity IPO </li></ul></ul><ul><ul><li>Financial futures </li></ul></ul>Sell Side: Investment & Commercial Banks
  16. 16. <ul><li>Investment banking </li></ul><ul><ul><li>Investment banking </li></ul></ul><ul><ul><li>Mergers & Acquisitions </li></ul></ul><ul><li>Sales & Trading </li></ul><ul><ul><li>Trading </li></ul></ul><ul><ul><li>Sales </li></ul></ul><ul><ul><li>Strategy / Analyst </li></ul></ul><ul><ul><li>Research </li></ul></ul><ul><li>Product types: Equity and Fixed Income </li></ul>Sell Side Functions
  17. 17. <ul><li>Investment banking </li></ul><ul><ul><li>Grouped along industry lines – technology, insurance, finance, etc </li></ul></ul><ul><ul><li>Understand financing needs of clients </li></ul></ul><ul><ul><li>Work on debt and equity issuance to raise capital </li></ul></ul><ul><ul><li>A lot of presentations and long nights </li></ul></ul><ul><li>M & A </li></ul><ul><ul><li>Understand growth and longer term needs of clients </li></ul></ul><ul><ul><li>Work on finding acquisition targets or sell unnecessary parts of firm </li></ul></ul><ul><ul><li>A lot of presentations and long nights </li></ul></ul><ul><li>These jobs mainly filled by MBA’s </li></ul>Sell Side Functions: I-Banking
  18. 18. <ul><li>Trading </li></ul><ul><ul><li>Make markets on securities – generally a small segment of market </li></ul></ul><ul><ul><li>Make money trading with customers and taking positions </li></ul></ul><ul><ul><li>Specialization: Know a lot about a relatively small segment of market </li></ul></ul><ul><ul><li>Smoke big cigars if you’re right </li></ul></ul><ul><li>Sales </li></ul><ul><ul><li>Understand client goals </li></ul></ul><ul><ul><li>Discuss and propose trades </li></ul></ul><ul><ul><li>Know something about a broad segment of market </li></ul></ul>Sell Side Functions: Sales & Trading
  19. 19. <ul><li>Bond Strategy / Equity Analyst </li></ul><ul><ul><li>Understand markets & investors </li></ul></ul><ul><ul><li>Discuss trades and market conditions </li></ul></ul><ul><ul><li>Must have good communications skills – writing and speaking </li></ul></ul><ul><li>Research: Most PhD’s start their careers on Wall Street here </li></ul><ul><ul><li>Quantitative bent </li></ul></ul><ul><ul><li>Work on implementation of trading models and simulations </li></ul></ul><ul><ul><li>Come up with new models and ways of looking at the world </li></ul></ul><ul><ul><li>Excellent training ground for future traders/salespeople </li></ul></ul><ul><ul><li>Can have long term career in research </li></ul></ul>Sell Side Functions: Strategy & Research
  20. 20. <ul><li>Citigroup, Inc. is the world’s biggest financial services firm </li></ul><ul><li>Citigroup Global Markets, Inc. is the investment banking unit </li></ul><ul><li>Citigroup Fixed Income Quantitative Research </li></ul><ul><ul><li>Approximately 100 in the U.S. </li></ul></ul><ul><ul><li>Approximately 250 in Global Fixed Income Research </li></ul></ul><ul><ul><li>40% PhDs </li></ul></ul><ul><ul><li>Strong emphasis on quantitative aspects of fixed income </li></ul></ul>Sell Side: Strategy & Research at Citigroup
  21. 21. <ul><li>Knowledge </li></ul><ul><ul><li>No, not about solving nonlinear fifth order coupled pde’s </li></ul></ul><ul><ul><li>Read and understand the product and role for which you’re interviewing </li></ul></ul><ul><ul><li>For example, Fabozzi’s “Handbook of Fixed Income Securities” (1373 pages) is a must-read for bond prospects </li></ul></ul><ul><li>Teamwork: Show you can operate in a team environment as both a follower and a leader </li></ul><ul><ul><li>Student government </li></ul></ul><ul><ul><li>Intramural sports </li></ul></ul><ul><ul><li>Volunteer </li></ul></ul><ul><li>Communications: Must be a good communicator </li></ul><ul><li>Well rounded: Have interest outside of the lab </li></ul><ul><li>Take business school classes to achieve a basic understanding of finance </li></ul>What Makes You A Good Wall Street Candidate?
  22. 22. <ul><li>Added burden of proof </li></ul><ul><ul><li>Why do you want to do this? </li></ul></ul><ul><ul><li>Why leave science / engineering? </li></ul></ul><ul><ul><li>How do you think what you know applies to finance? </li></ul></ul><ul><ul><li>What do you know about what we do? </li></ul></ul><ul><li>Need to demonstrate basic understanding of product </li></ul><ul><li>Work on having the qualifications that would make you an attractive candidate (see previous page) </li></ul><ul><li>Think of ways of applying the combination of technical skills and finance </li></ul><ul><ul><li>Develop a business plan for a potential new venture </li></ul></ul><ul><ul><li>Read technical finance literature </li></ul></ul><ul><ul><ul><li>Journal of Fixed Income, Journal of Finance </li></ul></ul></ul><ul><ul><ul><li>Risk Magazine </li></ul></ul></ul>It Is Not Easy for PhD’s (Non-Econ) to Break In
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