Careers in Finance

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Careers in Finance
See the Disclosure Appendix for the Analyst
Certification and Other Disclosures.
January 5, 2005
Scott Peng
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The Basics

• PhD in Engineering / Science from MIT
• What next?
• What is finance?
• Is finance the right career choice?
• How does one break into a totally different
  profession?

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What is Finance?

• Finance involves the selling or buying of
  investment instruments on behalf of either
  oneself or customers
• Aspects of finance includes (but is not limited
  to)
• Interest rate analysis
• Credit analysis
• Risk management
• Portfolio theory and application
• Financial engineering
• Psychology

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What is Finance?

• When one says finance, one usually thinks of
• Salomon Brothers (Now Citigroup Global Markets)
• Goldman Sachs
• Lehman Brothers
• Etc, etc
• But there is a lot more to finance than just
  those names
• Finance companies can be broadly grouped into
• Buy side
• Sell side

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Financial Institutions The Old Days (Mid 90s)

• Sell side
• Investment Banks
• Buy side
• Commercial banks
• Mutual funds Money managers
• Insurance companies

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Financial Institutions Now

• Sell side
• Investment banks
• Commercial banks
• Buy side
• Finance entities
• Commercial banks
• Mutual funds Money Managers
• Insurance companies
• Hedge funds
• Theres a lot more to finance than just
  investment banks

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Buy Side

• Finance Entities
• Government sponsored enterprises Fannie Mae,
  Freddie Mac
• Finance subsidiaries GECC, GMAC, FMCC
• REITs
• Commercial banks Citibank, Chase, BankAmerica
• Mutual funds Money managers Fidelity, Putnam,
  Alliance, PIMCO
• Insurance company MetLife, Mass Mutual, Aetna
• Hedge funds new kids on the block

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Buy Side

• Invest client assets
• Performance judged against benchmarks
• Equity funds SP 500
• Bond funds Lehman Aggregate Index of Citigroup
  Broad Investment Grade (BIG)
• Hedge funds Pure alpha
• Key roles
• Credit analyst
• Risk manager
• Portfolio manager / Trader
• Client relationship manager

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Buy Side Finance Companies

• Examples
• Fannie Mae Freddie Mac
• GECC, GMAC
• REITs
• Invest assets versus borrowed capital to maximize
  return or dividend in a risk controlled fashion
• Risks
• Asset-Liability Mismatch
• Credit risk
• Structural

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Buy Side Commercial Banks

• Invest cash from
• Checking accounts
• Saving accounts and CDs
• Ongoing operations and investments
• Invest to maximize return while managing risk
  subject to regulations
• Regulation
• May invest only in bank eligible securities
• Investments subject to risk-based weighting
• Risks
• Asset-Liability Mismatch
• Credit risk
• Structural

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Buy Side Mutual Funds and Money Managers

• Mutual fund managers and money managers
  (institutional) are not necessarily one and the
  same
• Mutual funds manage assets for retail investors
• Money managers Manage assets for institutional
  investors such as pension funds, insurance
  companies, universities
• Major funds and money managers include (but is
  not limited to)
• Equity Fidelity, Alliance Capital, Vanguard,
  Putnam, etc
• Bonds Federated, Nuveen, PIMCO, BlackRock,
  WAMCO, etc
• Manage assets versus benchmarks
• Volatility of return versus gains, slippage
  versus index
• Credit risk

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Buy Side Insurance Companies

• Invest cash from
• Insurance policies and annuities
• Goal maximize returns while managing risk
  subject to regulatory and accounting issues
• Regulatory and accounting
• Capital standards and adequacy subject to state
  insurance commissions and NAIC
• Myriads of accounting standards and issues
• Investments subject to risk-based weighting
• Risks
• Asset-Liability Mismatch (biggest)
• Credit risk
• Structural

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Buy Side Hedge Funds

• Been around since 1950s, exploded in popularity
  in last five years
• Now over 7,000 hedge funds in existence
• Hedge funds are grouped by their investment
  strategy types such as
• Equity long/short
• Fixed income arbitrage
• Convertible bond arbitrage
• Global macro
• Managed futures
• Event driven
• Emerging market
• Private equity, venture capital and buyout (not
  strictly hedge fund, per se)

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Buy Side Hedge Funds

• Goal Manage return versus risk (Sharpe Ratio)
  and minimize correlation to other asset classes
• Advantages
• Work on a variety of tasks
• Relaxed, academic-like atmosphere
• Disadvantages
• Relatively narrow window of expertise
• View of world is very different from non-hedge
  fund entities
• A lot of new hedge funds out there
• Understand style and riskiness of hedge funds. Do
  your own research

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Sell Side Investment Commercial Banks

• Commercial banks with securities subsidiaries now
  perform virtually the same function as investment
  banks
• Sell side firms are generally considered as
  either large bulge-bracket or smaller niche
  firms
• Bulge bracket Largest investment banks
• Broadest array of equity and fixed income
  products
• Usually involved in most institutional trades
• Niche banks which focus on some specialties
• Mortgage-backed securities
• High yield bonds
• Equity IPO
• Financial futures

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Sell Side Functions

• Investment banking
• Investment banking
• Mergers Acquisitions
• Sales Trading
• Trading
• Sales
• Strategy / Analyst
• Research
• Product types Equity and Fixed Income

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Sell Side Functions I-Banking

• Investment banking
• Grouped along industry lines technology,
  insurance, finance, etc
• Understand financing needs of clients
• Work on debt and equity issuance to raise capital
• A lot of presentations and long nights
• M A
• Understand growth and longer term needs of
  clients
• Work on finding acquisition targets or sell
  unnecessary parts of firm
• A lot of presentations and long nights
• These jobs mainly filled by MBAs

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Sell Side Functions Sales Trading

• Trading
• Make markets on securities generally a small
  segment of market
• Make money trading with customers and taking
  positions
• Specialization Know a lot about a relatively
  small segment of market
• Smoke big cigars if youre right
• Sales
• Understand client goals
• Discuss and propose trades
• Know something about a broad segment of market

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Sell Side Functions Strategy Research

• Bond Strategy / Equity Analyst
• Understand markets investors
• Discuss trades and market conditions
• Must have good communications skills writing
  and speaking
• Research Most PhDs start their careers on Wall
  Street here
• Quantitative bent
• Work on implementation of trading models and
  simulations
• Come up with new models and ways of looking at
  the world
• Excellent training ground for future
  traders/salespeople
• Can have long term career in research

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Sell Side Strategy Research at Citigroup

• Citigroup, Inc. is the worlds biggest financial
  services firm
• Citigroup Global Markets, Inc. is the investment
  banking unit
• Citigroup Fixed Income Quantitative Research
• Approximately 100 in the U.S.
• Approximately 250 in Global Fixed Income Research
• 40 PhDs
• Strong emphasis on quantitative aspects of fixed
  income

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What Makes You A Good Wall Street Candidate?

• Knowledge
• No, not about solving nonlinear fifth order
  coupled pdes
• Read and understand the product and role for
  which youre interviewing
• For example, Fabozzis Handbook of Fixed Income
  Securities (1373 pages) is a must-read for bond
  prospects
• Teamwork Show you can operate in a team
  environment as both a follower and a leader
• Student government
• Intramural sports
• Volunteer
• Communications Must be a good communicator
• Well rounded Have interest outside of the lab
• Take business school classes to achieve a basic
  understanding of finance

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It Is Not Easy for PhDs (Non-Econ) to Break In

• Added burden of proof
• Why do you want to do this?
• Why leave science / engineering?
• How do you think what you know applies to
  finance?
• What do you know about what we do?
• Need to demonstrate basic understanding of
  product
• Work on having the qualifications that would make
  you an attractive candidate (see previous page)
• Think of ways of applying the combination of
  technical skills and finance
• Develop a business plan for a potential new
  venture
• Read technical finance literature
• Journal of Fixed Income, Journal of Finance
• Risk Magazine

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Disclaimer