Careers in Finance

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

2. 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?

3. 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

4. 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

5. Financial Institutions: The Old Days (Mid 90s) • Sell side • Investment Banks • Buy side • Commercial banks • Mutual funds & Money managers • Insurance companies

6. Financial Institutions: Now • Sell side • Investment banks • Commercial banks • Buy side • Finance entities • Commercial banks • Mutual funds & Money Managers • Insurance companies • Hedge funds • There’s a lot more to finance than just investment banks

7. 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

8. Buy Side • Invest client assets • Performance judged against benchmarks • Equity funds: S&P 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

9. 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

10. 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

11. 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

12. 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

13. 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)

14. 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

15. 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

16. Sell Side Functions • Investment banking • Investment banking • Mergers & Acquisitions • Sales & Trading • Trading • Sales • Strategy / Analyst • Research • Product types: Equity and Fixed Income

17. 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 MBA’s

18. 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 you’re right • Sales • Understand client goals • Discuss and propose trades • Know something about a broad segment of market

19. 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 PhD’s 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

20. Sell Side: Strategy & Research at Citigroup • Citigroup, Inc. is the world’s 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

21. What Makes You A Good Wall Street Candidate? • Knowledge • No, not about solving nonlinear fifth order coupled pde’s • Read and understand the product and role for which you’re interviewing • For example, Fabozzi’s “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

22. It Is Not Easy for PhD’s (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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