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Stock-picking college freshmen impress Steve Cohen's hedge fund with short idea

University of Virginia first-year students Adavya Dhawan, Adin Segal, and Deepak Jayachandran won Point72 Asset Management’s global case competition with their short thesis on Shake Shack. Their team, Hoos Capital, received $15,000 in prize money and entry into the 2019 Point72 Academy Summit.

Steve Cohen’s $12.4 billion hedge fund is letting teens and early twenty-somethings pitch stock ideas to its investment professionals to recruit the next generation of talent.

Earlier this month, Point72 Asset Management hosted The Global Case Competition, giving college first-year students and juniors the opportunity to demonstrate their investing skills through a stock pitch — either a long or short idea.

This year’s competition attracted 666 students from 94 different colleges and universities from around the world. The students worked in teams of three, more than 225 groups in total, to form their ideas. The top 8 teams were invited for a free trip to New York to compete for cash prizes.

The theme of this year’s competition was the fast-casual industry. The first-place team, “Hoos Capital” from the University of Virginia, won with their Shake Shack (SHAK) short. The judges found that the UVA first-year students “demonstrated a solid understanding of the fundamental debate on the sector, focusing on same-store sales growth, pricing power, and market penetration considerations. Their articulation of a variant view at odds with market consensus was the most compelling of the eight finalists.”

“One of the most dangerous things is when someone is right too often”

As part of the weekend, the students got to interact with some of the firm’s investment professionals, including the fund’s head of equities Perry Boyle, who offered the youngsters a sobering stat — “the best investors are right only 53% of the time.”

“One of the most dangerous things is when someone is right too often, too early and they think they’re a genius, they think it’s all them,” said Boyle, before adding, “This is a game of odds. This is a game of probabilities. The first time someone is wrong in a significant way it shakes their confidence, it shakes their conviction in themselves, it makes them question everything. And, that’s really healthy. That’s a good thing.”

It’s important for young investors to make mistakes, learn from them, so when they’re involved in moving a lot of money around, they’re less likely to make a catastrophic mistake, Boyle explained. The beauty of trading stocks, though, is that you don’t have to be in any one position. It can be sold or closed out.

“One of the classic mistake remediation mistakes — like ‘I’ve made a mistake, and now I’m going to fix it’ — is, ‘I’m going to make the money back in the stock I lost the money in.’ Mmm…No, that’s not optimizing the capture of your opportunity set.”

Casting a wide net for talent

The competition is an early step in the hedge fund’s recruitment process offering the students their first taste of hedge fund life. Afterward, some of the students will go on to take the next step toward a hedge fund career path. The winning team is offered spots in one of the firm’s Academy Summits, a one-day event held in New York, San Francisco, and Singapore that provides an overview of the hedge fund world.

Jonathan Jones, Point72’s head of investment talent, told Yahoo Finance that the competition is a “deliberate effort” to “cast a very wide net for talent.”

“We have a belief that great talent can be found in many more places than we can easily physically go and look. It’s true — we love to get interest from people from very highly rated prestigious schools and universities, but we also don’t believe that those institutions have a monopoly on great talent,” said Jones.

It’s a novel idea for Point72. Traditionally, the path to a hedge fund job has been to spend two years after college in an investment banking analyst program before making the transition to the buy-side. These days, however, hedge fund recruiting has been facing its own unique set of challenges as investment banking classes have been shrinking, and more young people head to Silicon Valley for lucrative tech jobs. In recent years, Steve Cohen has even publicly said that “talent is very thin” and that he’s “blown away by the lack of talent.”

From Academy student to full-time hire

In 2015, Point72 came up with an unconventional way to target top-tier talent by forming its namesake academy.

The Point72 Academy started as a single class of ten students and has since expanded to a global program aimed at training recent college grads and young professionals for its full-time financial analyst and summer analyst programs. The summer internship program consists of 10-weeks where students are taught and coached by staff and investment professionals. That program serves as a gateway for the full-time financial analyst program, offered to college seniors for 10-months of rigorous curriculum on financial modeling and research designed to jumpstart a career in the hedge fund space.

To date, 24 students who’ve been part of the case competition have become academy hires. The academy has been a critical pipeline for the firm’s analysts.

“[We] see about a third our annual hiring appetite at the analyst level currently being fulfilled by candidates that have come through the academy and that will likely trend to closer to 50% over the next couple of years, especially as we expand internationally,” said Jones.

The idea for the academy to recruit and train talent came out of the 2008 financial crisis.

“Coming out 2008, I realized PMs who held up the best during that debacle were people who had been analysts here,” said Boyle. “How can we turn more analysts into PMs in a more efficient way? Well, we should train them.”

Boyle started teaching himself but soon realized that he’s just one person and couldn’t scale it. He approached Cohen with his idea to create an academy for undergrads and teach them so they can “hit the ground running.”

Performance over pedigree

Soon after, Boyle found Jaimi Goodfriend, a former hedge fund equity research analyst who at the time was a college professor at the University of Illinois. At the University of Illinois, Goodfriend had built the school’s investment banking academy where she had a 100% success rate of placing students in finance jobs.

“I was recruited out of college, I did not go to an Ivy League school, I went to University Michigan, and somehow I managed to find my way into a bank,” said Goodfriend, who is the director of the Point72 Academy. “But I did notice that it was heavily skewed toward sort of those more prestigious universities.”

Speaking to the idea of performance versus pedigree, Goodfriend emphasized the importance of finding the best and brightest talent regardless of educational background. At the University of Illinois, she found that many of the students didn’t have the same opportunity set.

“I felt very passionately those people deserved a chance,” said Goodfriend.

Goodfriend’s approach to building talent has translated to Point72. One of the hires through the case competition was Mathew Rindelaub, whose team won his junior year at the University of Texas at Austin. His team’s 2014 winning pitch was short on B&G Foods (BGS), a company that sold Pirate’s Booty and other packaged goods. The thesis centered around the secular decline in brick-and-mortar retail and the rise in healthier food choices.

Rindelaub, now 25, is an analyst at Point72 and a graduate of a state school.

“It’s very easy to get into like a group-think mentality in finance or on Wall Street or the hedge fund industry, and you don’t want to have the same prototype person, times 25,” said Rindelaub. “And I think if you get people who not only are from state schools or from non-core schools but also people of different educational backgrounds, you are able to get like a lot more uniqueness in terms of perspective in terms of what people are good at.”

Not only is the Academy widening the school pipeline, but it’s also aiming to increase diversity, including more women and more international backgrounds.

“What we hope we get out of that is diversity of approaches to investing and new sources of creativity, so that we adapt to the market as it changes,” said Boyle, adding, “If you hire one profile of person, it doesn’t matter what you do, you’re going to get correlated results, and we’re trying to break out of that pattern. We don’t want correlated results.”

Julia La Roche is a finance reporter at Yahoo Finance. Follow her on Twitter.