Hedge Fund Job Interview Cheat Sheet

Citadel Quant Analyst 2nd Round Job Interview Questions

Hedge Fund Citadel Is Hiring Quantitative Analysts – Here Are The Job Interview Questions

Case Interview Question #00546: Our client Mr. Kenneth Griffin is the Chief Executive Officer (CEO) of the famous hedge fund firm Citadel Investment Group. Based in Chicago, Illinois and founded in 1990 by Mr. Kenneth Griffin, the firm Citadel today deploys capital across multiple asset classes and strategies. Currently Citadel manages $11 billion in assets under management (AUM) and is one of the world’s largest hedge fund managers.
Mr. Kenneth Griffin originally developed the hedge fund’s proprietary investment strategy over numerous hard working hours and many years of painstaking research. The investment strategy can be summarized as such:
•    Citadel invests in and selects from a universe of companies that have tradable securities (debt, equity and derivatives).
•    The portfolio manager (PM)’s and analysts performs in-depth fundamental research and analysis on these companies.
•    The PMs decide on a position to take (short or long, type of securities).
•    The PMs seek to exit/unwind typical position within 1-2 years.
The hedge fund combines a proprietary computer program along with its fundamental analysis to enhance its security selection process. The computer program first short-lists the companies based on criteria such as market capitalization, liquidity of securities and foreign exchange risk. If so desired it then works out a recommended position to take based on weighted assessments along dimensions such as market multiples-based valuation and bond yield-curve shape.
The fundamental analysis department then takes over, performing further research and analysis, and finally deciding on the position that the fund should take. The fundamental analysis department currently has a staff of 9 consisting of: 3 senior analysts (who, incidentally, are also the 3 partners of the firm), 4 junior analysts (MBA level), and 2 assistants (fresh college graduates).
Currently, of the 250 companies that the proprietary program shortlists, based on preliminary criteria, only 100 or so get analyzed every year. The hedge fund partners feel that significant opportunities are being left on the table, and would like to see how they can improve the situation, such as possibly hiring more staff or investing money in more advanced technology. What would you recommend Citadel to do?
Possible Answer:
This is an operations strategy and business process optimization case. The candidate should recognize it and attempt to draw a process flow diagram, such as Figure 1 below.
Clearly, the firm is not realizing the full potential of the computer program in shortlisting companies. The candidate should quickly realize that the bottleneck is in the Fundamental Analysis Department, and that the solution is to hire more staff.
The next question, then, is what level of staff to hire. The hedge fund does not want to change the number of senior analysts that it already has. So it will only consider hiring additional junior analysts or assistants.
The interviewer should prompt the candidate to ask questions about information they would seek in order to assess what type and how many people to hire. As the candidate asks about the nature of work that each level of staff does, the following information can be revealed:
Additional Information:
•    There are 3 steps to the process of fundamental analysis: Research, Analysis, and Strategy Formulation. These are typically 50%, 30% and 20% of the work (man-hours) that needs to be done on a company.
•    Of the Research work, 20% needs to be done by a partner, 60% can be done by a junior analyst and up, and 20% can be done by an assistant and up.
•    Of the Analysis, 30% must be done by a partner, and 70% can be done by a junior analyst and up.
•    Of the Strategy Formulation, 60% must be done by a partner, and 40% can be done by a junior analyst and up.
•    All levels of staff are equally productive, provided they are doing the work they appropriate for their level.
At this point, the candidate should realize that it is important to work out what proportion of the work must be done by a partner and by other staff respectively. Good candidates will work out the following data table without too much prompting:
Type of work
Percentage of work
Junior Analyst

Strategy Formulation

20% * 50% + 30% * 30% + 60% * 20% = 31%
60% * 50% + 70% * 30% + 40% * 20% = 59%
50% * 20% = 10%
From the above calculations, we know that
•    31% of the work must be done by a partner,
•    59% of the work can be done by a junior analyst and up,
•    10% of the work can be done by anyone.
So the optimal ratio of staff should be approximately 3:6:1 (partners: junior analysts: assistants).
Since the hedge fund wants to keep the number of partners at 3, it can hire 2 more junior analysts without having to bring in another partner. This makes a total of 6 analysts. The firm is also free to let go one assistant. Ask the candidate the pros and cons of letting an assistant go (marginally lower cost but potentially important to have more then one assistant in case one leaves to business school abruptly).
The candidate may approach the question from the direction of marginal revenue and marginal cost. This is not wrong, but the interviewer should guide the candidate back to the operations based approach by hinting that each additional company analyzed has an expected return of tens of millions of dollars, while each staff can be hired for hundreds of thousands of dollars (or less), and so the candidate should be able to conclude that the real constraint of the case is that the number of partners is capped at 3.
Higher Level Questions:
Good Candidates will get through the above analysis fairly quickly. They will also demonstrate ability to focus on what is important and engage the interviewer. A good question for candidates with operations backgrounds that they want to leverage in interviews or focusing on going into operations include the following bonus questions.
Bonus Question #1: If the hedge fund hired 2 more junior analysts as you recommend, what number of firms will the team be able to process a year?
Possible Answer:
If the candidate assumes that none of the staff were idle before (a wrong assumption, since there is idleness in the system), then the candidate would answer that the throughput would increase by 2/(3+4+2) = 2/9, or about 22%.
If the candidate assumed that only junior analysts were fully utilized before, and idleness existed at both the partner and assistant levels, then the candidate would respond that the throughput would increase by 2/4 or 50% (since junior analysts increased from 4 to 6). This is again wrong, because all work that junior analysts do can also be done by partners, and so it is wrong to assume that partners are idle in the system.
The candidate should be able to realize that in the previous system, partners and junior analysts are fully utilized, but idleness exists at the assistant level. So increasing the junior analysts by 2 is increasing the fully utilized staff by a factor of 2/(3+4) = 2/7 or 29%. So the fund’s throughput should increase to 100 + 100 * 29% = 129 companies analyzed a year.
Bonus Question #2: If there is additional time, the candidate could be asked what other ways the hedge fund might optimize their procedure.
Possible Answer:
This bonus question is about relaxing the simplifying assumptions that were made in the model used for addressing the questions above.
The model assumed, among other things, that the companies analyzed all took a fixed amount of work and gave a standard (constant) expected return. If the proprietary program could give each company a unique expected return and an estimate of the time required for fundamental analysis, the fund should prioritize its analysis according to the ratio of expected return to time required for analysis. For example, if Company A had an expected return of $10 million and required 5 man-days to analyze, and Company B had an expected return of $5 million and required 2 man-days to analyze, then Company B should have a higher priority ($2.5 million per man-day vs. $2.0 million per man-day).
Priorities are necessary since the hedge fund can only analyze a fraction of the 250 shortlisted companies.
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