Hedge Fund Short Case Interview
This conversation was generated using Cook'd AI's career assistant and reviewed by Fallon Han from our editorial team for accuracy.
I want a realistic case interview. Put me in a live short idea discussion on a stressed company, and make me defend valuation, the short thesis, and a downside scenario. I am a first-year MBA in the US on F-1 status recruiting for hedge fund associate roles at sector-specialist funds.
Great. We will run this like a live hedge fund interview for a sector specialist fund. Case setup: a mid-cap software company just cut guidance after churn spiked, the stock is down 45 percent, and management says the issue is temporary. I will press you on valuation, the short thesis, and what happens in a downside case. Start by giving me a 60 second read on the business, what matters most, and your initial view on whether this is a short or a value trap.
My first read is that this is a subscription software business with declining retention, so headline revenue may still look okay while underlying demand is deteriorating. I would focus on ARR growth, gross and net retention, customer concentration, and any signs that sales efficiency is breaking. My initial bias is short because if churn is rising in a low growth business, the multiple can compress fast and earnings power may be overstated.
Good start. Now walk me through valuation. Do not give me a generic answer. Tell me what multiple you would anchor on, what peers or comps matter, and why this stock could still be expensive even after a big drawdown. Then tell me what metric would make you more confident the short is working.
I would anchor on EV to next twelve month revenue and EV to EBITDA, but I would discount both because EBITDA can be inflated by capitalized software costs and temporary cost cuts. For a stressed software name, I would compare against slower growth peers and also look at historical trading during prior churn issues. Even after a 45 percent selloff, it could still be expensive if next year revenue growth is not sustainable and the market is pricing in a rebound that does not happen. I would want to see retention stabilize and billings reaccelerate; if net retention keeps falling and billings lag revenue, that would increase confidence in the short.
Now the hard part. Give me the actual short thesis in three bullets, not a story. I want one operating issue, one market issue, and one catalyst. Also tell me what could go wrong with the short so I know you can think like an investor, not just a bear.
Operating issue: churn is not temporary but reflects product weakness or pricing fatigue, so recurring revenue is less durable than management claims. Market issue: the company has an optimistic investor base that still values it like a high quality compounder, so any disappointment could drive multiple compression. Catalyst: the next earnings report or customer survey could show another retention miss, forcing guidance cuts and analyst downgrades. What could go wrong is if churn was caused by a one-time implementation issue and a new product release quickly fixes it, which would make the short lose on both fundamentals and sentiment.
Good. Assume management says a major customer renewed early, gross margin is holding up, and they are cutting costs to protect EBITDA. How would you build a downside scenario from here? I want a simple framework with revenue, margin, and valuation, plus what stock price reaction you would expect if the downside case starts to happen.
I would build a downside case where net retention stays below 90 percent, new bookings remain weak, and revenue growth decelerates into the low single digits or flat. On margins, I would assume cost cuts protect near-term EBITDA but do not fix the business, so margin expansion comes from underinvestment rather than operating leverage. Valuation would likely rerate to a lower quality software multiple, maybe closer to a mature, low-growth name instead of a premium compounder. If that happens, I would expect the stock to be down another 20 to 30 percent from current levels as investors realize the earnings are not durable.
That is a solid framework. Final follow-up: if I push you and say this could be a crowded short, how do you answer in one minute? I am looking for how you would discuss borrow, sizing, and what would make you cover. Then I will grade the whole answer like an interviewer.