Sculptor Capital Management Interview

Info About Sculptor

- Leading global alternative asset management firm providing investment products in a range of areas including multi-strategy, credit, and real estate - Offices in New York, Shanghai, London, and Hong Kong - Serves global clients through commingled funds, separate accounts, and specialized products - Goal: seek attractive and consistent risk-adjusted returns across market cycles through a combination of bottom-up research, high degree of flexibility, a collaborative team, and integrated risk management - Strategies in fundamental equities, corporate credit, real estate debt and equity, merger arbitrage, structured credit, and private investments - November 1, 2023: $33 billion in assets under management

Company Website Info

- Success as an opportunistic investor grounded in a long-tenured team that puts clients first - Model to act swiftly on market opportunity and minimize risk - High client retention rate - 70% of the clients have been partners for over a decade - Transparent, open architecture firm - Values Fostering intellectual curiosity Hard work and the relentless pursuit of leaving no stone unturned Empowering employees to champion ideas will drive performance Teamwork, respect for one another, and honesty - Clients Alignment - invest in our funds alongside clients Partnership - business of building long lasting client relations Flexibility - continually developing products and account structures to satisfy clients' needs Transparency - open, clear, and detailed communication - Partners Institutional Investors - pension funds, sovereign wealth funds, and endowments Financial Advisors - ESG integration through analysis, framework, and monitoring - 30% of senior leadership and ethnically or gender diverse - 63% of incoming intern class is diverse - $1.4 million donated to charitable organizations

Why are you a good fit?

1. Ability to think analytically through prior coursework that involved problem solving, prior experiences in which I had to use data to provide insights, 2. Hard-working, fast learner and also extremely willing to listen 3. Strong communication skills through extracurriculars and organization through managing my schedule

How would you define a balanced portfolio?

1. Diversification: A balanced portfolio spreads investments across multiple asset classes, industries, geographic regions, and investment styles to reduce concentration risk. By diversifying, investors aim to minimize the impact of adverse events affecting any single investment or asset class on the overall portfolio performance. 2. Asset Allocation: Asset allocation is a key component of a balanced portfolio, determining the proportion of assets allocated to different asset classes based on their risk-return profiles. Common allocations may include a mix of equities for growth potential, fixed income for income generation and stability, and cash equivalents for liquidity and capital preservation. The specific allocation depends on factors such as the investor's risk tolerance, investment objectives, and time horizon. 3. Risk Management: A balanced portfolio aims to manage risk by striking a balance between growth-oriented investments and more conservative assets. While equities offer higher growth potential, they also come with higher volatility and risk. Fixed income securities and cash equivalents provide stability and income, reducing overall portfolio volatility. Risk management strategies, such as periodic rebalancing and diversification, help maintain the desired risk-return profile over time. 4. Long-Term Focus: Balanced portfolios are typically constructed with a long-term investment horizon in mind. They aim to generate consistent returns over time while minimizing short-term fluctuations in portfolio value. Investors are encouraged to maintain discipline and avoid making impulsive investment decisions based on short-term market movements. 5. Flexibility: A balanced portfolio allows for flexibility to adjust asset allocations over time in response to changes in market conditions, economic outlook, and pe

What are the biggest risks in the market?

1. Economic Uncertainty: Fluctuations in economic indicators such as GDP growth, inflation rates, and unemployment levels can significantly impact market sentiment and investment decisions. 2. Geopolitical Events: Political instability, conflicts, trade disputes, and diplomatic tensions between countries can disrupt global markets, leading to increased volatility and uncertainty. 3. Market Volatility: Rapid and unpredictable price fluctuations can result from various factors such as changes in investor sentiment, sudden news events, or shifts in market dynamics. 4. Interest Rate Changes: Monetary policy decisions by central banks can affect borrowing costs, consumer spending, and investment patterns, influencing the performance of both equity and fixed-income markets. 5.Liquidity Risk: Market liquidity refers to the ease with which assets can be bought or sold without significantly affecting their prices. Reduced liquidity can amplify price movements and increase transaction costs, especially during times of market stress. 6. Credit Risk: Concerns about the ability of individuals, companies, or governments to fulfill their debt obligations can lead to credit downgrades, defaults, and broader systemic risks within financial markets. 7. Systemic Risks: These are risks that could potentially threaten the stability of the entire financial system, such as the collapse of major financial institutions, widespread cyberattacks, or failures in critical infrastructure. 8. Regulatory Changes: Shifts in regulatory frameworks or enforcement actions can impact market participants, leading to changes in business practices, compliance costs, and investor behavior.

Why Sculptor?

1. Fast paced environment where I can gain expertise in asset management across geographies and asset classes 2. Seems like the environment there is very collaborative and welcoming - want to work with other to help solve their problems, feel like it is more personalized and rewarding, concrete impact, all sorts of backgrounds 3. Values of hard work, teamwork, honesty, intellectual curiosity, diversity, and community impact

Why do I want this position?

1. I am extremely interested in the summer internship at Sculptor Capital Management because it aligns perfectly with my goals to gain broad exposure to the alternative asset management industry. Rotating across legal, compliance, corporate strategy, client services, and operations over the course of 10 weeks would allow me to explore the wide range of functions that drive an investment firm and find my area of greatest interest. 2. Beyond the rotational aspect, I am seeking an internship where I can develop specialized expertise and receive mentoring from industry veterans in a collaborative environment. The small team setting and hands-on learning opportunities at Sculptor Capital appeal to me for building foundational skills in alternative investments - an industry I may wish to grow my career in. 3. Want a job in which I am helping others and making a tangible impact

How would you construct a portfolio for a high net worth individual?

1. Investment Objectives & Risk Tolerance First, I would have an in-depth discussion with the client to fully understand their investment goals, time horizon, cash flow needs, and risk tolerance. For a high net worth investor, the priority is likely preserving capital while achieving growth, so mitigating downside risk is crucial. 2. Asset Allocation Given their substantial net worth, I would recommend a highly diversified multi-asset class portfolio. This could include domestic and international stocks, investment grade bonds, non-investment grade credit, real estate, private equity/debt, hedge funds, and other alternatives. The mix would depend on their return objectives and appetite for risk. 3. Risk Management Strategies: Implement risk management strategies such as asset allocation rebalancing, hedging techniques, and downside protection strategies to mitigate portfolio volatility and preserve capital during market downturns. 4. Tax Efficiency: Structure the portfolio with consideration for tax efficiency, utilizing tax-advantaged accounts such as IRAs, 401(k)s, and municipal bonds to minimize tax liabilities and maximize after-tax returns. 5. Regular Monitoring and Rebalancing: Regularly review the portfolio's performance, market conditions, and changes in the individual's financial situation to ensure alignment with their goals and risk tolerance. Rebalance the portfolio periodically to maintain the target asset allocation. 6. Customization Every client is unique, so the portfolio would be customized based on any values-based preferences, existing holdings, interest in ESG/impact investing, desire for income generation, legacy planning needs, etc. Truly understanding their complete financial picture is key.

What are ways to value specific companies and when would you use each method?

1. Market Capitalization Market capitalization is the simplest method of business valuation. It is calculated by multiplying the company's share price by its total number of shares outstanding. For example, as of January 3, 2018, Microsoft Inc. traded at $86.35.2 With a total number of shares outstanding of 7.715 billion, the company could then be valued at $86.35 x 7.715 billion = $666.19 billion. 2. Times Revenue Method Under the times revenue business valuation method, a stream of revenues generated over a certain period of time is applied to a multiplier which depends on the industry and economic environment. For example, a tech company may be valued at 3x revenue, while a service firm may be valued at 0.5x revenue. 3. Earnings Multiplier Instead of the times revenue method, the earnings multiplier may be used to get a more accurate picture of the real value of a company, since a company's profits are a more reliable indicator of its financial success than sales revenue is. The earnings multiplier adjusts future profits against cash flow that could be invested at the current interest rate over the same period of time. In other words, it adjusts the current P/E ratio to account for current interest rates. 4. Discounted Cash Flow (DCF) Method The DCF method of business valuation is similar to the earnings multiplier. This method is based on projections of future cash flows, which are adjusted to get the current market value of the company. The main difference between the discounted cash flow method and the profit multiplier method is that it takes inflation into consideration to calculate the present value. 5. Book Value This is the value of shareholders' equity of a business as shown on the balance sheet statement. The book value is derived by subtracting the total liabilities of a company from its total asset

Why Asset Management?

1. Passionate about global financial markets and investigating investment opportunities. Asset management appeals specifically due to the high level of complexity and problem-solving involved in constructing optimal portfolios across asset classes 2. Paired with academic background in business economics and internships have provided me with hands-on experience analyzing market trends and conducting financial research which has equipped me with a solid foundation, well-versed in using analytical tools and identifying investment opportunities 3. Dynamic field that offers continuous learning opportunities, growing within a challenging environment, continually expand my knowledge, work with others on a daily basis, make a tangible impact 4. Enjoy the responsibility the comes with managing assets, proving myself, gaining clients trust

Why are emerging markets more attractive than domestic markets?

A. Higher growth potential Emerging markets tend to have rapidly growing economies which can lead to higher growth for companies operating in these markets. This can result in higher returns for the investor. B. Diversification Adding emerging markets to a portfolio can help to diversify investment risk and provide exposure to different economies and industries. This can help to reduce the overall volatility of a portfolio. Diversification also helps with a lower correlation between price changes. C. Attractive valuations Emerging market companies may trade at lower valuations compared to domestic companies. This provides an opportunity for value-oriented investors to achieve higher returns potentially.

How would you go about interacting with clients?

A. Preparation Before you interact with a client, make sure you clearly understand who they are, their needs, and the purpose of the interaction. Gather relevant information, such as the client's history and previous interactions, to better understand their perspective. B Communication skills Using clear and concise language, active listening, and the ability to express complex ideas are crucial for building a rapport with the client. C. Active listening Paying close attention to what the client is saying and understanding their perspective can go a long way. Then, ask relevant questions to ensure you understand their needs and concerns. D. Problem-solving You need to work with the client to find a solution to their issue and put yourself in their shoes. Offer relevant information and alternatives, and solve their concerns. E. Follow-up Make sure to follow up with the client to ensure their needs are met and address any lingering concerns.

Why Client Partner?

Building and nurturing client relationships is pivotal in asset management. The Client Partner Group's work in delivering an exceptional client experience across all touchpoints is highly appealing to me. I am eager to observe how this team fosters trust, tailors product offerings, and provides thought leadership to meet diverse client needs.

Whose investing style would you like to emulate and why?

Combination: Value Investing (e.g., Warren Buffett): Value investors seek to identify undervalued stocks trading below their intrinsic value. They typically look for companies with strong fundamentals, stable earnings, and attractive valuations relative to their peers or the overall market. Emulating the value investing style can be appealing for investors seeking long-term capital appreciation through disciplined, patient investing in quality companies. Growth Investing (e.g., Peter Lynch): Growth investors focus on companies with high growth potential, strong competitive advantages, and innovative business models. They prioritize companies with above-average revenue and earnings growth rates, even if they trade at higher valuations. Emulating the growth investing style can be attractive for investors seeking aggressive capital appreciation and willing to accept higher volatility in pursuit of superior returns.

Why Operations?

Efficient operations are essential for a seamless asset management business. I am drawn to this group's responsibility in overseeing portfolio management, trading, and client servicing activities while maintaining strict control standards. Understanding the operational complexities of managing client assets would provide me with a holistic view of the firm's core processes.

What does factor theory imply about optimal asset allocation

Factor theory is a modern and relatively new investment approach that aims to identify common factors that drive returns of different assets and to use these factors to optimize asset allocation. The theory explains that the size, value, momentum, quality, and low volatility of assets affect returns and that a well-diversified portfolio that captures these factors can achieve higher risk-adjusted returns. According to factor theory, the optimal asset allocation will depend on an investor's investment goals and objectives, risk tolerance, and investment horizon. The optimal asset allocation will be a mix of different assets that capture the desired factors, with the mix being adjusted based on the investor's objectives.

What can an asset manager do for clients that they can't just do for themselves?

First of all, it provides someone dedicated to maximizing returns subject to their objectives so that the client can focus on other things in their life. But second, and most importantly, asset managers can provide access to a wider set of information and products that any individual could have. This includes being able to place a client into alternative asset classes and get them exposure to things like private equity, hedge funds, private tech companies, distressed credit, etc. that they simply couldn't get on their own.

Why Legal?

I am drawn to the Legal group because I am fascinated by the complex regulatory landscape that governs the asset management industry. Understanding the legal frameworks and ensuring compliance is crucial for preserving the firm's integrity. I look forward to learning how the Legal team navigates these challenges while enabling key strategic objectives.

Why Corporate Strategy?

I am excited about the prospect of contributing to the firm's Corporate Strategy function. Evaluating global initiatives and shaping the long-term strategic vision is an area that deeply interests me. I would cherish the opportunity to witness how market trends, competitive dynamics, and growth opportunities shape the firm's strategic roadmap.

If you're looking to get up to speed on a certain sector, how would you do it?

If you're on your own - not working in finance - then you'd be a bit more limited. You should say that you'd try to find articles on the WSJ, Bloomberg, and the Financial Times about the sector to get your bearings. Then you'd try to find some more detailed industry primers online if you could. If you're really curious about the sector, you may reach out to some experts on LinkedIn to see if they'd be available to talk to you. If you're working in asset management, then you have many more options. The first thing you should do is get ahold of research reports coming out of investment banks on the sector. You could then go on the Bloomberg Terminal and do a scan for recent articles on the company and use the Bloomberg Intelligence feature to try to find more analysis on the sector. Finally, chances are within the firm you're working at there will be quite a few experts to talk to who would be more than happy to answer the questions you come up with after reading all the primers and news you can find.

If a central bank says they plan to raise rates in the future, what will happen to the yield curve?

In order to dampen down bond market volatility, often central banks (like the Federal Reserve) will engage in what's called "forecasting". This involves the central bank suggesting that they envision raising rates sometime in the future so that market participants can adequately adjust to this new reality and not be shocked when the rate hike (or cut) occurs. If you think about the composition of a yield curve, what will happen when rates are forecast to rise in the future is that the curve will get steeper. This is because the front-end won't move as much as the middle or long-end of the curve because rates at the front-end obviously aren't moving yet.

What impact do interest rates have on market and on consumer preferences?

Interest rates can have a significant impact on the market as well as on consumer preferences. When interest rates rise, it becomes costly for companies to borrow money to start new projects. As a result, company earnings decrease. This can lower the price of the stock in the markets. It also becomes expensive for consumers to buy durable goods such as housing and vehicles. It can also impact their spending habits due to the increased cost of credit cards. When interests decline, the cost of borrowing for companies decreases, resulting in increased earnings. This can boost the stock price in the market. For consumers, declining interest rates make it easier to afford durable goods such as housing and vehicles. Also, spending habits increase due to cheaper credit.

Would you rather have good financials with poor management or poor financials with good management? Why?

It is generally better to have poor financials with good management. This is because the management of a firm plays a huge role in the company's future success. Good management can improve the company's financials over time, whereas poor management can worsen the financials and hamper performance. A long-term vision is essential to any business. On the contrary, poor management can make it incredibly difficult for the company to improve. Having a strong and effective leadership team in place can help navigate challenges and make sound decisions which will ultimately drive the growth and success of the firm. In the asset management industry, having a long-term investment horizon is generally preferred, and the addition of great management in the company you're going to invest in will be more profitable.

Name some factors that are increasingly relevant in the upcoming business cycle

Over the past two years: rising inflation, increase in interest rates, labor market has been shaky

What happens to yields if the Fed raises rates?

Overall, when the Fed raises rates, it tends to lead to higher yields across various fixed-income securities, reflecting the increased cost of borrowing and the impact on the broader interest rate environment. However, it's important to note that market reactions to Fed actions can vary based on factors such as investor expectations, economic conditions, and global market dynamics.

Walk me through a discounted cash flow ("DCF")

Step 1: The first step in the DCF model process is to build a forecast of the three financial statements based on assumptions about how the business will perform in the future. On average, this forecast typically goes out about five years. Of course, there are exceptions, and it may be longer or shorter than this. The forecast has to build up to unlevered free cash flow (free cash flow to the firm or FCFF). We've published a detailed guide on how to calculate unlevered free cash flow, but the quick answer is to take EBIT, less capital expenditures, plus depreciation and amortization, less any increases in non-cash working capital. Step 2: We continue walking through the DCF model by calculating the terminal value. There are two approaches to calculating a terminal value: perpetual growth rate and exit multiple. In the perpetual growth rate technique, the business is assumed to grow it's unlevered free cash flow at a steady rate forever. This growth rate should be fairly moderate, as, otherwise, the company would become unrealistically big. This poses a challenge for valuing early-stage, high-growth businesses. With the exit multiple approach, the business is assumed to be sold based on a valuation multiple, such as EV/EBITDA. This multiple is typically based on comparable company analysis. Step 3: In step 3 of this DCF walk-through, it's time to discount the forecast period (from step 1) and the terminal value (from step 2) back to the present value using a discount rate. The discount rate is almost always equal to the company's weighted average cost of capital (WACC). Step 4: At this point, we've arrived at the enterprise value for the business since we used unlevered free cash flow. It's possible to derive equity value by subtracting any debt and adding any cash on the balance sheet to the enterprise v

Why Compliance?

Strong compliance practices are the backbone of any reputable asset manager. I am keen to gain exposure to the Compliance group to understand how they develop robust policies, monitor investment activities, and adapt to evolving regulations. This experience would provide invaluable insight into the compliance rigor required to build client trust.

What is an ETF's estimated NAV?

The Net Asset Value (NAV) of an Exchange Traded Fund (ETF) is an estimate of the fund's per-share value based on the total value of its underlying assets (e.g., stocks, bonds, commodities, etc.) minus its liabilities, divided by the number of outstanding shares. NAV = (Assets - Liabilities)/ Total Number of Outstanding Shares The estimated NAV of an ETF aims to calculate what the ETF's NAV will be in the future. This estimate is based on market conditions and economic trends. However, the estimated NAV is not a guarantee of the fund's future performance and may differ from the actual NAV, which is based on market prices that may fluctuate.

Tell me about how you can lower the Sharpe ratio of a portfolio

The Sharpe Ratio = (Return on Portfolio - Risk-Free Rate)/ Standard Deviation of the Portfolio's Excess Return To lower the Sharpe ratio, you could do the following: A. Lower the portfolio return If the returns on the portfolio are reduced, the numerator would also decrease, lowering its value. This can be achieved by reducing the position sizes on high-performing assets. B. Increase the risk-free rate The second factor that goes in the numerator is the risk-free rate. An increase in the risk-free rate will reduce the Sharpe ratio. This can be done by tinkering with your model's equation to reflect a riskier market environment. C. Increasing the portfolio risk A higher portfolio risk will increase the denominator. If the numerator remains unchanged and the denominator increases, this will lower the sharpe ratio. This can be done by making new positions or overweighting your portfolio in riskier securities such as equities, derivatives, and cryptocurrency.

If the market went up by 1.5%, is that a big or a small change?

The answer to this question can be both. It would depend on the volatility of the market index. Volatility is a statistical measure; it is the degree of variation in a script's price or an index over time. Its standard deviation usually measures it. Volatility can refer to the uncertainty in price. An index with higher volatility would mean the price could be very unpredictable. The price could fall drastically in the short term. The opposite is true when the volatility is low. Whether the market increases or decreases, the change would be relatively minimal.

How do the three financial statements tie together?

The first line of the income statement is the revenue line or "top line," and after subtracting various expenses you arrive at net income or "bottom line" for the company. Net income comes into the cash flow statement as the first line, which is then adjusted for all non-cash expenses to get to a change in cash over a specific period. This change in cash will correspond directly to the cash line item in the balance sheet, providing a more detailed look at why that specific balance changes. The balance sheet is unique in that it is a snapshot of the balances of accounts at a specific time vs. a period of time (i.e. the previous quarter). Net income also connects to the balance sheet as a change in retained earnings. The balance sheet shows a company's assets, liabilities, and shareholders' equity, and is a snapshot in time. The income statement outlines the company's revenues and expenses over a period of time (quarter/year). The cash flow statement shows the cash flows from operating, investing, and financing activities over a period of time. The three financial statements all fit together to show a picture of the company's financial health.

Tell me about the single key economic indicator

The single key economic indicator that complements all other indicators is the Gross Domestic Product (GDP). GDP is the measure of a country's total economic output, indicating an economy's health. It is a measurement of an economy's size, performance, and health. GDP is a critical metric because it impacts everyone, from investors to politicians to citizens. Policymakers look to GDP when considering decisions on interest rates, taxes, government expenditure, and trade policies. Citizens look at GDP to assess if the economy is growing enough, which helps them find jobs. A growing economy with high GDP signifies that there is low unemployment and that the economy is productive. Investors who own and purchase a business also consider GDP when making decisions on starting, maintaining, and purchasing a business. The impact on interest rates is key to their funding and generating enough revenue to survive and thrive.

Walk me through how to get to unlevered free cash flow from net income?

To find unlevered free cash flow starting from net income, just take net income and add back depreciation / amortization and then subtract changes in working capital and subtract capital expenditures. If you're starting from the top of the income statement (revenue), then get down to EBIT by subtracting COGS and operating expenses from revenue. Once you have EBIT, take off your taxes, add back depreciation and amortization, and subtract working capital and capital expenditures. UFCF = EBITDA - CAPEX - Working Capital - Taxes

What are credit spreads and why do they matter?

What a credit spread essentially tells you is the amount of compensation investors are requiring in order to take on the credit risk of a certain company or set of companies. The reason why you spread this against the underlying treasury is that the underlying treasury is risk-free. So, for example, if Apple has 10-year bonds that have a 1.5% yield and the 10-year treasury is at 1.5%, then you would say that investors need just 1.0% additional yield to make up for the risk in investing in Apple's bonds. Of course, this is a very small amount of additional compensation to get as opposed to just buying a risk-free treasury (but market participants view Apple's bonds as being very safe). Credit spreads are also an indication of general market risk and how wary investors are or are not feeling. So you'll often look at things like high yield credit spreads that show the average spread across the universe of major high yield issuers. If the spread is very low, then that's a signal of a strong economy with investors looking to place money into "risky" companies for little additional compensation relative to a treasury.