See the Disclosure Appendix for the Analyst Certification and Other Disclosures.

Careers in Finance
January 5, 2005

Scott Peng

Citigroup Global Markets

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?

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Citigroup Global Markets

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

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Citigroup Global Markets

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
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Citigroup Global Markets

Financial Institutions: The Old Days (Mid 90s)

Sell side
Investment Banks

Buy side
Commercial banks Mutual funds & Money managers Insurance companies

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Citigroup Global Markets

Financial Institutions: Now

Sell side
Investment banks Commercial banks

Buy side
Finance entities Commercial banks Mutual funds & Money Managers Insurance companies Hedge funds

Theres a lot more to finance than just investment banks

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Citigroup Global Markets

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

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Citigroup Global Markets

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
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Citigroup Global Markets

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
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Citigroup Global Markets

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
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Citigroup Global Markets

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
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Citigroup Global Markets

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
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Citigroup Global Markets

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)
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Citigroup Global Markets

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

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Citigroup Global Markets

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
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Citigroup Global Markets

Sell Side Functions

Investment banking
Investment banking Mergers & Acquisitions

Sales & Trading

Trading Sales

Strategy / Analyst
Research

Product types: Equity and Fixed Income

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Citigroup Global Markets

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 MBAs

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Citigroup Global Markets

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 youre right

Sales
Understand client goals

Discuss and propose trades

Know something about a broad segment of market

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Citigroup Global Markets

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 PhDs 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

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Citigroup Global Markets

Sell Side: Strategy & Research at Citigroup

Citigroup, Inc. is the worlds 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

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Citigroup Global Markets

What Makes You A Good Wall Street Candidate?

Knowledge
No, not about solving nonlinear fifth order coupled pdes
Read and understand the product and role for which youre interviewing For example, Fabozzis 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

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Citigroup Global Markets

It Is Not Easy for PhDs (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

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Citigroup Global Markets

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. ADDITIO NAL INFO RMATIO AVAILABLE UPO REQ N N UEST Citibank, N.A., London Branch and C itigroup G lobal Markets Inc, including its parent, subsidiaries and/or affiliates (the Firm), may make a market in the securities discussed in this report and may sell to or buy from customers, as principal, securities recommended in this report. The Firm may have a position in securities or options of any issuer recommended in this report. An employee of the Firm may be a director of an issuer 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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Citigroup Global Markets