It is very fashionable these days to pooh-pooh models in general. I do enjoy the fact that every critic of models, however, of course, has unwavering belief in their “gut feelings” or their impeccable “judgment,” as if we are supposed to just believe that certain individuals were divined by Providence to know the fundamental truth about prices and valuation.
Alright let’s take it from the top.
You think DCF models and co are completely useless, then you call bs on reverse engineering the current market price of equity to assess priced in expectations of underlying fundamentals.
Did I miss anything?
is it possible to get into quant/risk management with CFA/FRM?
i know financial engineering masters would be the route to go. undergrad was finance with highest level of math only calculus.
i’m working my way through financial computing with excel and vba and havent run into any problems yet. Will my background DQ immediately? I would have to take a full time years worth of math courses to get into a qunat MSC program
Financial modelling, much like runway modelling, is typically something you do early in your career. It is a need to know, as the sell side does a lot of it, but it is not a need to do on the buyside.
Quant/risk modelling is much different from traditional financial modelling.
^what do you use on the buyside>
Of course you need some kind of modeling on the buy side. Just because it takes a small part of your day does not make it any less important!
Existing models from similar companies in your database, tweaked models from SS. The point is that you don’t need to build a model from scratch. What you need is a non-consensus view and reasons why you expect that view to be accurate.
what crappy buyside fund are you talking about where modeling is not a need. you talking at a fund of funds probably
What a foolish statement.
I know many of the best small cap hedge fund managers in the country and none do extensive modeling. Do you consider 20, 30 or 40% returns CAGRs crappy? There is some basic modeling involved but none of them reverse engineer PE (lol)
What are you all talking about, no modeling on the buyside?
When you finance an acquisition of a portfolio company with debt, you need to take manegement’s forecast, do your heavy diligence, scrub it, prepare a pro-forma post-transaction financial model that shows your target leverage and send it to the bankers to negotiate the deal financing terms and covenant levels. The banks won’t syndicate a $200M credit facility at 7x EBITDA based on your gut feeling for the industry.
You’ll do the same extensive modeling when you refi to do a dividend recap for your fund, and later when it’s time to exit and sell your portfolio company.
Perhaps the stock screening process for a hedge fund that invests in public equity and debt markets is modeling-light, but in most PE shops you will build quite detailed financial models. And why wouldn’t you - you have all the proprietary, non-public info and unlimited access to management.
This, exactly
no one’s talking reverse enginerring anything. No modeling is not the same as “basic” modeling
Apologies, I should have specified I was talking about public equity. The original question “is in what job do you spend the ‘maojority’ of your time modelling.” I know I don’t spend the majority there and neither does any colleague.
Agree with all of your post but this. The point is that it is automated or handled by support. They are covered. There is no prop info. If your value add is in building models for public companies then you have a future in SLC, Buffalo, India or whereever else that function is being outsourced.
Bromion said in his very first response that there is little modeling outside transactional modeling. Some here jumped to conclude that this means “no modeling whatsoever is needed on the buyside”, others countered with “what about when you reverse-engineer a P/E multple.” I mean, read what bro has to say and take notes. You model a lot, but you model deals - you model stuff where you have quality inputs and access to proprietary info, so that your model makes sense and gives you meaningful output. You don’t model theoretical DCFs full with unqualified assumptions to reverse engineer multiples, find mispricings and estimate esoteric “internal value”. Thats hacksaw work for the sell side equity research folk
OK gotcha
Funds like AQR model very very heavily using many many parameters, P/E is one of them, but again, that is not your off-the-mill excel model but a monsterous machinery that pours through millions and millions of data points
Very few funds reverse engineer multiples, because most if the time, it’s not needed. It tells you why this investment has this specific value of p/e. But simply regressing the firm metrics with an appropriate universe can give you a clear idea where it lies relative to the market. The fundamentals would not interset an equity fund in asset managment, like it would with corporate restructuring in a private equity fund to add value. But that does not mean that market expectations of a business’s prospects are unimportant, it means that there different ways to skin a cat, and extracting information based on today’s market price using relative valuation remains legitimate, irregardless of it’s practical popularity.
One last thing, every fund has it’s own strategy and approach, and most of them don’t stick around for long, eapecially HFs. Don’t be an idiot by using one or two examples to prove a point. You clearly can’t by simply spewing one or two anecdotal observations.
Ok, now I know Mr. Smart has no experience in the industry. You don’t know your ass from a hole in the ground.