by Brian DeChesare Comments (9)

Public Pension Fund Investment Management: Interviews, Jobs, and More

Pension Fund Investment Management

Have you noticed that roles at pension funds attract almost no interest online?

There are countless articles, videos, and threads about investment banking, private equity, and hedge funds, but almost nothing about pensions.

But pension fund investment management roles can offer plenty of benefits, from solid work/life balance to access to the best portfolio managers in the world.

And, unlike in traditional finance roles, you might even help people who need it and do something good for the world – as our reader today found out:

Public Pension Fund Investment Management: What It Is and How to Break In

Q: Can you summarize your story for us?

A: Sure. I grew up in “a Southern state” in the U.S., studied finance at a non-target university, and then joined a rotational program at a middle-market investment bank.

One of my roles in that program was to analyze and recommend investment managers (mutual funds and hedge funds) to clients, and the job intrigued me.

I couldn’t network my way into a full-time role there, but a few months later, I found a similar role at a public pension fund in a “large state” (i.e., in the top 10 by population).

I interviewed for the role, won an offer, and have been here ever since.

I’m at the hedge fund allocator here, which means that we evaluate funds, hire and fire managers, and find new managers who fit our strategies.

It’s similar to what a fund of funds does, with a few key differences – which we’ll get into later.

Q: OK. Can you briefly describe what pension funds do and the key benefits of working for one rather than a hedge fund or private equity firm?

A: Sure. First, note that most U.S.-based funds are quite different from the ones in Canada, which increasingly operate like traditional private equity firms and hedge funds.

In the U.S., pension funds invest employee contributions into pension plans, aim for a certain annualized return, and then distribute the proceeds to the beneficiaries when they retire.

Public pension funds are ones run by federal, state, and local governments to provide for the retirements of public-sector employees such as teachers and police.

Some of these funds have groups dedicated to direct investing, but most also do a significant amount of fund-of-funds-style investing, where the goal is to back the best hedge funds, mutual funds, and private equity firms.

The main benefits of working in pension fund investment management include:

  • Building Relationships and Learning from the Best Investment Managers and Hedge Funds – I get access to managers at funds like Bridgewater, Pershing Square, Citadel, Millennium, PDT Partners, Two Sigma, AQR, and Marshall Wace here.
  • Improving Beneficiaries’ Lives – My work directly contributes to beneficiaries that truly need the help, such as teachers in underfunded elementary schools. This is in sharp contrast to many other roles in finance, where the goals could be summarized as “make the rich even richer.”
  • Work/Life Balance – I work 45-50 hours per week and travel 1-2x per quarter to meet with hedge fund managers. We’re not under pressure to do deals constantly, so the 80-hour workweeks you see with investment banking hours simply don’t exist.

The downsides of working in pension fund investment management include:

  • Much lower compensation than in IB/PE roles.
  • More bureaucracy since you’re working for the government.
  • Undesirable living locations at some funds (e.g., Sacramento if you’re at CalPERS in California).

Q: Thanks for that summary.

What types of candidates do you usually recruit? Could someone get in straight out of undergrad?

A: Funds usually want candidates with some full-time experience, either as “capital introduction analysts” (professionals at large banks who introduce their prime brokerage clients to potential investors) or in other buy-side roles.

Your work as a cap intro analyst is quite similar because you analyze investment managers and recommend them to institutional investors based on their preferences.

You’ll also develop a useful network of fund managers, an understanding of investors’ mentality, and an understandable story (e.g., you have experience and still want to be in the industry at a high level without the hours and stress due to family/other commitments).

If you’re a recent grad at the MBA or undergrad level, it’s often best to start at a college endowment fund.

Many of these funds have $1 – $10 billion in AUM, they tend to be open-minded, and they make faster decisions about hiring investment managers.

You can learn the ropes there and then leverage the skill set at a pension fund.

Q: And what should you expect in the recruiting process for pension fund investment management?

A: First, the process will take 3-4 months between the first interview and the final one, mostly because of the bureaucracy that comes with a government entity. That would be an eternity at an investment bank, but it’s par for the course here.

You’ll go through at least 3 interviews, a case study (“Should we keep or fire Hedge Fund Manager X?”), and an Excel test for interviews.

All the interviews questions revolve around teamwork, communications, and your investment beliefs.

Every decision here is a team decision, so there will be quite a few behavioral questions, and the same goes for communication skills; your guide to investment banking fit questions applies to pension funds as well since you need to present concrete examples and stories.

For the questions about investment beliefs, you can prepare and learn more by:

  • Investing and developing your own track record, especially using more complex strategies such as ones that include derivatives.
  • Studying the strategies used by famous hedge funds. For example, I’m a big fan of Cliff Asness at AQR and read a lot of his writing and his firm’s whitepapers, from which I developed some of my own beliefs (e.g., that quality + momentum investing is a killer combination and the Warren Buffett is overrated as a “value investor”).

Pension Fund Interview Questions and Strategies

Q: Any chance you could share some of the questions that candidates might receive in pension fund investment management interviews?

A: Sure. I’ll separate these by category:

Resume, Teamwork, and Communications

Walk me through your resume.”

“Tell us about a time when a colleague treated you unfairly and explain how you dealt with the situation.”

“When you are a member of a team, what type of role do you tend to assume? For example, do you generate ideas, take notes, run the numbers, or plan out tasks?”

“Can you describe a time when you told a team about some uncomfortable truths that the other members did not want to acknowledge?”

“What’s the best way to communicate a complex topic to an audience who doesn’t know you?”

“Tell us about a project that met resistance initially, but which you pushed through to completion. How did you organize your efforts and overcome the resistance?”

These questions may seem a bit different, but they’re not difficult if you’ve outlined your story and prepared your 3 “short stories.”

Most of them are just disguised strength/weakness or success/failure questions.

Investment Beliefs

“What’s your view on active vs. passive investing? How might a move to more passive investment approaches impact the equities market?”

“How would you think about factor exposure (e.g., value, momentum, and quality) when building an equity portfolio?”

“Suppose that you’re aiming to build a portfolio of long-only equity managers who will outperform the global equity markets. How would you implement this portfolio, and which issues would you consider?”

“What is the most overused statistic when measuring performance and risk, and which statistic does not get enough attention?”

“You’re going to meet with a hedge fund manager for the first time. What would be the 3 most important takeaways from that meeting?”

“Suppose that you’re analyzing a fund, and your gut feeling contradicts the numbers. How would you resolve the conflict?”

There are not necessarily “correct” answers to these questions – but there are well-thought-out answers and poorly reasoned ones.

Q: Great. And what about the case study and Excel test?

A: The Excel test is fairly basic and assesses your knowledge of functions like IRR, NPV, HLOOKUP/VLOOKUP, INDEX/MATCH, and other financial formulas. If you have at least some experience with modeling and valuation, it’s straightforward.

The case study involves an exercise like the one you described in your private equity funds of funds article, where look at criteria such as historical performance in different markets, realized vs. unrealized gains, team structure/cohesion, and strategy and risk exposure.

For example, if a fund has consistently delivered 20% annualized returns, the fund size and senior managers have been very consistent, and no “one-time wins” have propped up its returns, you might recommend investing.

On the other hand, if the fund’s performance has been spotty, with huge variations from year to year, and it wants to double its size next year, you might recommend against it.

The Pension Fund Analyst Job Description: A Day in the Life

Q: Thanks for that explanation. Moving on, can you tell us about the job itself?

Also, can we return to that point about how pension fund investment management is different from a fund of funds?

A: I spend most of my time sourcing new potential managers and evaluating existing managers, so hire/fire decisions are always top of mind.

I take an average of 1-2 calls or meetings per day, which usually means speaking with team members or external managers.

Once we make a hire/fire decision, we present a lot of analysis to make the case to the broader team and the investment committee.

These activities take up around 95% of my time.

The work is different from fund-of-funds jobs because we focus on finding specific types of managers that meet our criteria for AUM and strategy.

Funds of funds are often more general in their sourcing; they see a lot of managers and can write smaller checks, but we don’t even pay attention to the manager unless we can write a 9-figure check.

They also tend to make investment decisions (both “hire” and “fire” ones) more quickly, which is why some in the industry view FoF investments as “low-quality capital”: it comes and goes easily.

Q: Digging into this in a bit more depth, can you explain how you would analyze a hedge fund and make an investment recommendation?

A: First, I would try to understand the specific market inefficiency that the manager is trying to exploit.

Then, I would assess whether or not they have an “edge” in exploiting it, and then I would try to understand how they make decisions.

Most managers cannot even articulate the inefficiency they’re taking advantage of, so they get eliminated in step one.

If the manager can explain this adequately, and it seems like they have a clear “edge” regarding proprietary technology/data, a niche market, or a different investment philosophy, I might take a deeper look.

We can figure out the first two parts – the inefficiency and the edge – via the sourcing process, the investor deck, and an introductory call; the time-consuming part is understanding how the investor makes decisions.

That includes everything from how they size positions to when they buy/sell/add/trim positions to when they hire personnel and how they handle underperformance.

This process can take years because we have to observe the manager in different market conditions.

But if the person seems promising, he/she will be seriously considered once a spot in our portfolio is available.

Pension Fund Salary Levels and Hierarchy

Q: You mentioned earlier that the hours and lifestyle are fairly good, but the compensation is also much lower than IB/PE pay. Can you quantify that?

A: I can try!

The usual hierarchy in pension fund investment management is Investment Analyst, Investment Officer, Senior Investment Officer, Portfolio Manager, Program Director, and Chief Investment Officer (CIO).

At the Analyst level, base pay is a discount to base pay in equity research, which, in turn, is a discount to investment banking salaries.

Your base salary will grow as you advance, but by far less than it would grow in IB, PE, or even ER, and your bonus will never come close because you’re working for the government.

Rather than paying you a large bonus, public pension funds would prefer to increase beneficiaries’ benefits or save the money for a rainy day.

My rough estimates for pay in pension fund investment management roles in mid-sized-to-larger U.S. states would be (as of 2018):

  • Investment Analyst: $60 – $100K
  • Investment Officer: $100 – $125K
  • Senior Investment Officer: $125 – $175K
  • Portfolio Manager: $200 – $300K
  • Program Director: $300 – $400K
  • CIO: $400 – $600K

Some CIOs at large funds can earn more than that (e.g., closer to $1 million), but the path to the top is much slower than in investment banking, and pay is far lower in entry to mid-level roles.

You can also Google terms like “[State Name] pension fund compensation” and look up the data for yourself because governments are required to report salaries publicly.

The trade-off is that the hours are far better (45-50 per week), and my schedule is very predictable; my hours tend to spike only when I’m part of a team bringing a hiring recommendation to the investment committee.

Pension Fund Exit Opportunities

Q: Thanks for that overview. What are the potential exit opportunities from pension fund investment management?

A: If you’re earlier in your career, the most common exit opportunity is to move to another buy-side role, such as at a hedge fund or asset management firm.

I’ve seen ambitious Analysts join emerging market macro hedge funds, become quant researchers at the top hedge funds, and even start hedge funds.

You could also get into a good MBA program from here, though the top 3 programs will still be challenging regardless of your background.

If you’re later in your career, this role is typically the end goal, and the main exit opportunity is joining another pension fund.

If you want to do that, I strongly recommend working for a firm that believes in active management because it will help you develop your views and will lead to better lateral opportunities.

Q: Great. To sum up everything, what are the best and worst parts of the job, and how can someone decide if it’s right for them?

A: The best part is that you get to learn investing from the smartest minds in the industry and pick the brains of the top managers about their entire decision-making process.

And while you are taking risk and investing money, you are doing so in a less stressful way than at the typical hedge fund, and you’re helping people who need the financial security.

The worst parts are the bureaucracy and the number of meetings – some days, you will simply run from meeting to meeting without getting any real work done.

Everything moves slowly, and sometimes you can’t bring ideas to the committee because a single person is opposed to the manager’s style.

The Board of Trustees may also get in the way of investment decisions, though that’s more common on the private equity side.

The best way to decide if this role is right for you is to complete an internship in a related area, such as at a fund of funds or in a group that deals with asset allocation and fund manager selection at a large bank.

Q: Thanks for your time! I learned a lot.

A: My pleasure.

About the Author

Brian DeChesare is the Founder of Mergers & Inquisitions and Breaking Into Wall Street. In his spare time, he enjoys lifting weights, running, traveling, obsessively watching TV shows, and defeating Sauron.

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  1. You could also get into a good MBA program from here, though the top 3 programs will still be challenging regardless of your background.

    What do yo u mean? What about MPA?

    1. There is a big difference between the very top MBA programs and the “great but not top” ones. Pension fund investment management is a fine background for a top 10 or 20 school but would be more difficult to use for admission into a top 3 school. I don’t see how an MPA is relevant here since it’s not really for finance-related fields but more for governments and non-profits (???).

      1. Thanks. I worked as a PM in a public pension fund (equivalent to CalPERS in the US) with deep linkage to a central financing authority. Exploring options of a MBA or MPA.

  2. I’m interested in the 2nd point of the main benefits of working in pension fund investment management, “improving beneficiaries’ lives”. I’m wondering what other jobs in finance would improve the lives of people that truly need help, instead of “making the rich even richer”?

    1. There aren’t that many options. Maybe impact investing and certain types of infrastructure / project finance? But finance as an industry is mostly about shifting money around and making rich people richer (well, at least until the entire system comes crashing down). “ESG” is so broad/vague a term that it’s basically meaningless.

  3. Great article.

    I was wondering how important it is, for IB summer analyst recruiting, to have campus leadership?

    You say the three “ingredients” are GPA, relevant experience, and interesting activity/sociable.

    What if I have all three of these, but lack campus leadership positions? I’m still in the top clubs on campus – just not in a leadership position?

    How much will this hurt/what can I do to make up for it? Btw – I had leadership in high school as a business owner and captain of a sports team, if that helps.

    1. Campus leadership doesn’t matter that much if you already have the other things. And you can always speak to your high school experience if it comes up (which it probably will, since recruiting keeps moving up earlier).

    2. Hi Brian,

      Are there any articles that you would recommend to read regarding lateral hiring from IB associate to pension funds?

      Wanted to learn more about ppl motivation

      1. We don’t have anything like that at the moment because very few IB Associates actually move to pension funds. I’ll see if we can cover it in the future.

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