1. See the Disclosure Appendix for the Analyst
Certification and Other Disclosures.
Car eer s in Finance
January 5, 2005
Scott Peng
Citigroup Global Markets

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?
Page 2 Citigroup Global Markets

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
Page 3 Citigroup Global Markets

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
Page 4 Citigroup Global Markets

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

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
Page 6 Citigroup Global Markets

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
Page 7 Citigroup Global Markets

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
Page 8 Citigroup Global Markets

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
Page 9 Citigroup Global Markets

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
Page 10 Citigroup Global Markets

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
Page 11 Citigroup Global Markets

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
Page 12 Citigroup Global Markets

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)
Page 13 Citigroup Global Markets

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
Page 14 Citigroup Global Markets

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
Page 15 Citigroup Global Markets

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

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
Page 17 Citigroup Global Markets

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
Page 18 Citigroup Global Markets

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
Page 19 Citigroup Global Markets

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
Page 20 Citigroup Global Markets

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
Page 21 Citigroup Global Markets

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
Page 22 Citigroup Global Markets

23. Disclaimer
ANALYST CERTIFICATION
I, Scott Peng, hereby certify that all of the views expressed in this research report accurately reflect my personal views about any and all of the subject issuer(s) or securities. I also certify that no part of my
compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or views in this report.
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recommended in this report. The Firm may perform or solicit investment banking or other services from any issuer recommended in this report.
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Page 23 Citigroup Global Markets