1. What is Hedge Fund?
A Hedge Fund (HF) is an investment pool that gathers capital from only institutional and accredited individuals to invest in a wide range of assets. Hedge Funds use complex algorithms and well-tested risk management techniques to secure the highest rate of return regardless of the market climate – making so-called “positive absolute return”.
Because of its complex high-risk, high-return alternative investments, financial regulators typically do not allow HFs to be widely marketed, they’re only made available to ultra-high net worth investors. Some of the popular HF strategies are Long/short equity, Market neutral, Merger Arbitrage, Global Macro, etc.
These intensive, sometimes even aggressive use of complicated investment strategies is what sets Hedge Funds apart from Private Equity & traditional Asset Management firms, and also puts it on top of the most-wanted Finance job on the market. Biggest paycheck, high-level investment – Financial professionals perceive Hedge Funds as the ultimate goal in their career path.
1.2. Hedge Fund vs Private Equity
Besides Hedge Fund, Private Equity is another investment entity within the buy-side dream land, a popular exit option for financial professionals. Although having the same business model of capital raising and allocating investments to secure high returns, these two fields have distinctive characteristics in the Business model and Nature of work.
Hedge Funds actively allocate their capital into various securities, primarily in liquid, public securities like stocks, commodities, derivatives, stakes of public companies,… so that they can reallocate the funds flexibly according to market climate.
They are opportunists who seek for mispriced financial assets and benefit from quick gains throughout a short investment time horizon. The lock-up period is usually within 1 year, and is up to 3 years with mega funds.
Private Equity firms provide financing offers or other offer formats, such as technical or managerial expertise, in exchange for stakes in private companies, with the goal to improve the companies’ performance and ultimately sell them for a better return.
That said, PE firms have longer-term focus, spending most of the time sourcing deals and managing growth for their portfolio companies. The lock-up period in this field is generally 7-10 years. Such duration is needed to identify, invest, and then exit the companies.
Salary & Fee Structure
The fee structure of the two careers is relatively equal, going up and down around the basic 2/20 concept (2% management fee, 20% incentive fee) depending on the entity size.
Total salaries and bonus for entry levels are relatively the same: $100K-$150K. However, Hedge Funds generally have a higher pay ceiling, but also suffer from higher risks of market downtime, owing to their aggressive style of investment.
Nature of Work
The work of a Hedge Fund analyst revolves around the public market: Real-time market-data feeds are needed for analysts and portfolio managers to make assessments on different asset classes on the market and make investment decisions. So the nature of work at Hedge Funds boils down to analysis and research, along with capital-raising and investors management of higher-level executives.
Private Equity’s nature of work is much alike with Investment Banking, where analysts work primarily with deals and acquisitions of entire companies. A lot of valuation, financial modeling, and due diligence are used to source and review potential deals. The high pressure of this career is on a deal basis, the intensiveness climbs as a deal creeps to its end. After the deal, a lot of work is still to be done to monitor and update on portfolio companies.
1.3. Hedge Funds Classification
Hedge funds are usually classified according to the following criteria:
- By Asset Class (e.g., equities, fixed income, commodities/FX, convertibles, private deals, or a mix).
- By Industry Focus (e.g., technology, healthcare, energy, or generalist).
- By Investment Strategy (e.g., long/short equity, investment-grade debt, distressed debt, global macro, merger arbitrage, or quant).
- By Fund Model (e.g., single-manager vs multi-manager).
- By Size of Fund (e.g., under $1 billion AUM vs. $1 – 5 billion vs. over $5 billion).
1.4. Best Hedge Funds
According to the data group HFR, there are more than 15,000 hedge funds managing about $3 trillion worth of assets world wide. Most of them are located in and around New York City.
- Bridgewater Associates (AUM: $160bil)
- Renaissance Technologies (AUM: $68bil)
- Man Group (AUM: $62bil)
- AQR Capital Management (AUM: $60.8bil)
- Two Sigma Investments (AUM: $42.9bil)
- Millennium Management (AUM: $38.7bil)
- Elliott Management (AUM: $37.7bil)
- BlackRock (AUM: $32.9bil, out of $7.4tril of total asset managed)
- Citadel (AUM: $32.24bil)
- Davidson Kempner Capital (AUM: $30.8bil)
Do you want to be among the best-paid financial professionals in those Hedge Funds? Diving into its working nature to see if you’re a fit!
2. Hedge Fund Jobs
2.1. Hedge Fund structure
Hedge Funds in general are very lean organizations: they manage a huge amount of assets with relatively few employees. A typical Hedge Fund can be split into an Investment team, a Trading team, and the Middle & Back office.
- Top financial students all strive for a position in the Investment team – the key strategic personnel of every Hedge Fund, consisting of:
- Portfolio Manager, who makes ultimate investment decisions of the fund, and
- Different levels of research analysts, whose analytical works generate and evaluate investment ideas before being proposed to the PM.
- The Trading team executes the Investment team’s strategies with focus on making the best deal for each trade. Those who are experienced traders from the sell-side could also consider this as an exit option.
- The Middle and Back office are supporting areas for the operations of the business, such as Compliance, Accounting, IT,…
Our articles are designed to help top students and professionals win the tier-1 place in Hedge Fund’s Investment team, and so forth would mostly focus on this division. At the end of the day, it is where top financial professionals make millions.
2.2. Hedge Fund Analyst – Working at a Hedge Fund
You would only expect to work with an investment team of 4-10 professionals when joining in Small-mid sized Hedge Funds, and the number varies up to 30 for even the biggest funds. What are the insights you can draw from this number?
1. Yes – Very limited opportunities compared to the highest competition among the Financial market: Transitioning into Hedge Fund is way more challenging than any of your previous job applications – that’s included Bulge Bracket and top Asset Management firms already. Very few slots to fight for, along with the fact that Hedge Funds expect a long-term committed employee rather than a come-and-go after 1-2 years as in your last Sell-side job. Knowing how to show your commitment and genuine interest & understanding of alternative investment is the key to get these limited job openings.
2. Greater news here: This lean structure means you’re involved in the investment process – the real work. Less of formulaic data crunching tasks as for Investment banks entry levels – exciting tasks start here. Right below explains the daily responsibilities of different roles in Hedge Funds.
a. Job Description
Every Hedge Fund’s ultimate goal is to seek out alternative investments beating the overall market, hedge out the risks, and earn a positive absolute return. With that said, as key personnel, the HF Investment team’s job is about soon predicting economic trends and quickly responding to them to win bets. Such right investment decisions are based on rigorous market analysis, financial valuation, and other alternative market research.
Portfolio Manager (PM) is the ultimate decision maker of any HF, as he or she has large equity interests of the fund. The PM receives investment ideas from internal analysts within his Investment team, or from sell-side analysts, roasts the idea, and decides on what and when to execute trades.
Below PM are Research Analysts of different levels, whose responsibility includes financial modelling, market analysis, monitoring the health of different industries and asset classes, and most importantly, pitching the ideas to the PM. All levels in a hedge fund have to deal with statistical and analysis research responsibilities. But generally, the lower down the hierarchy, the more support work you’ve got to do, such as answering due diligence, or updating financial models; whereas upper roles focus more on Investment research and ideas pitching. A job description summary for typical Hedge Fund roles are presented below:
Research Associate / Junior Analyst
The work in nature is mostly supporting the Senior Analyst with collecting market information needed to propose investment ideas to PM:
+ Developing reports and presentations of companies, markets, and asset classes
+ Updating financial models
+ Also involved in trading, operations and marketing by booking trades, consolidating performance reports, and helping put together client presentations.
Research Analyst / Hedge Fund Analyst
– Same responsibilities as Research Associate, but more focused on investment research and modelling, with a broader coverage universe
+ Checking on companies’ current status by constantly communicating with management, customers, and suppliers,
+ Monitoring and predicting market and companies trends
+ Respond to specific inquiries from PM or Senior Analyst when they challenge investment ideas
Senior Analyst / Sector Head
– Directly building financial modelling and guide analysts through the models
– Assign which stocks to research for researchers
– Decides on how much to invest in each stock
– Clients & investors management
– Read reports, talk to analysts & companies to monitor industry and economic trends
– Evaluate and challenge analysts’ ideas
– Make adjustments to portfolios
Research Associate / Junior Analyst
Research Analyst / Hedge Fund Analyst
Senior Analyst / Sector Head
Years of relevant experience
1-2 years of IB, Sell-side research, Asset management, Buy-side, Consulting,…
3-5 years of relevant experience or fresh MBA from top 20 B-schools
6-9 years of Investment experience
12-20 years of Investment experience
Years to promote to the next level
Salary & Bonus
$125K – $150K
$200K – $600K
$500K – $1MIL
$500K – $3MIL
– Strong financial modelling and market research skill
– High level of quantitative working knowledge: accounting, financial markets, financial analysis and statistics.
– Detail-oriented and passionate about the market.
– Broader Investment coverage universe
– Energetic, tactical, and patient (to constantly respond to PM’s or Senior Analyst’s specific inquiries as they challenge your investment ideas.
– Master in quantitative knowledge: An investment designation like CFA is probably required
– In-depth understanding of the public market: Have developed a specific industrial or geographical expertise, and specialize in a particular asset class
– Usually, only investment professionals who reached the peak of their career are qualified to sit this position
– UNLESS you start your own Hedge fund as soon as during your 20s (Check out HOW, NOW!)
3. How to be a Hedge Fund Analyst?
3.1 Hedge Fund Analyst – Recruitment
The traditional path to HF usually begins 1-2 years post-college, landing your HF job as fresh graduates is really once in a blue moon. Here’s the reason: unlike large banks or asset management firms with established recruitment processes and comprehensive training programs, Hedge Funds are small and nimble operations where there aren’t enough resources to teach you financial skills from scratch.
Regarding the general recruitment process, Hedge Funds is not as structured as Private Equity – there are very few mega funds (Citadel, Point72, Millennium, Fortress, Bridgewater, UBS O’Connor, etc.) conducting on-cycle recruitment to compete with Private Equity early recruitment. These funds have a projected number of openings needed to fill for the summer next year, and approach IB Analysts as soon as they’re 3-4 months into the Bulge Brackets, so preparation is needed as early as when in college.
Other than that, small-mid funds that dominate the market only recruit on a need basis, and usually off-cycle: Personnel are recruited, usually between February and April, and then start the job immediately within several months, even weeks. Opportunities at these funds are scattered and less visible on the radar, which are difficult to search, and are not as promising anyway, but it also means they’re less competitive on the other hand. Another good news is that you can actually make use of these funds’ niche industry or specific strategies if they match your technical background.
3.2. How to work at Hedge Fund? – Their Requirements and Your own tactics
a. Requirements – To be exact, what do they really want from you?
Hedge Funds require at least two things from you as an entry-level analyst:
- You’ve already had a solid foundation in company research, financial valuation, and stock pitching. HF analysts are expected to deal well with modeling, valuation, forecasting, and presenting investment ideas in a clear, succinct way. Your previous experience should involve most of these skills.
- It’s not only the paycheck that drives you to HF. You have to be seriously passionate about Investment, and planning on a long-term commitment at the fund. Mass recruitment and exit happen in top banks and firms, not here at such lean organizations.
(0. Not to mention these no-brainers: Graduated from a top school, with an excellent Financial or Business-relevant degree; excellent analytical skill, financial modelling experience; Interpersonal skills; Internships at top banks / firms… In short, you’re top of the top in the market.)
b. Okay, so what’s the plan?
Principles to get into Hedge Funds mentioned above: Prove your honed research skills and your great passion for investment. Sounds simple, but it’s way easier said than done.
The paths to HF vary, depending on your background and your current position at the time. A big picture of chances to get into HF can be seen in this Wall Street Career Planning, here we’ll show you the details:
> If you’re currently a student
Read, research, repeat!
Equip yourself with a basic foundation of investment through scanning loads of Investing books. At its basics, this helps you speak the same language with industry professionals (to whom you’ll network later), as well as develops your general sense of investment decision making. Most importantly, you’ll know if your heart resonates with Investment or not – this is key important to figuring out your “Why?” in HF interviews.
Research the market everyday: do companies screening, monitor the prices of different asset classes, read through investment ideas on VIC, etc. to get ready for your first investment.
Invest, track, and reflect
In order to differentiate between good and bad investment, you have to do real practice: Join a student investment club and start investing in stocks on the side. If cash is the problem, you can build a mock portfolio using Seeking Alpha to track your performance. Then read future earning releases / transcripts to track and evaluate your call. Finally, build your understanding and experience by further reflecting and learning from both right and wrong decisions.
Once loaded with knowledge and personal experience, let’s go networking and seek for internships!
The hype for networking is real – top professionals at Hedge Fund expect their fellows to actively seek for opportunities and to present themselves for the right funds at the right time. The key goal behind networking with your target funds’ professionals (ideally your school’s alumni) is to provide you insights and tips and tricks from the perspective of a senior, a mentor: how the fund actually works, what the working culture is like, what the skills you need to hone during college years are,… to ultimately land a HF position later on. If you can build enough trust and impression on them, they can be a source of opportunities, and also ensure your resume isn’t missed out among hundreds of others.
You shall see a detailed how-to of successful networking below at the Recruitment Roadmap – our standardized step-by-step guide to Hedge Fund.
Strong market research and financial modelling skills, along with great passion for investment are the two must-have quality Hedge Funds require at their prospect employee. Any college student aiming for Hedge Fund should have several relevant internship experiences under their belt to show that they’ve honed these essential skills. Traditional internships recommended are at Investment banks, small PE firms, or Big 4 firms.
In the most ideal picture, your internship performance at these firms would be decent enough to get a full-time offer right after graduation. The 1-2 years experience at these firms would most likely get you into a Hedge Fund.
> If you’re a professional
Scenario 1: Congrats, you’re in the target group of Hedge Fund headhunters
You’re at entry levels in Investment Banking, Equity Research (or Sell-side research in general), or – You’re a consultant.
Performing well at your current bulge bracket banks / top asset management, consulting firms, getting yourself into the top performers list, and you’ll be reached out by mega funds soon. Though for those whose firms are not among the top, extra effort should be put on aggressive networking with tier-1 headhunters so that you appear on the Hedge Funds’ radar.
Scenario 2: Non-business, non-financial background? That’s actually a plus!
Industry experts with backgrounds in science, technology, healthcare, etc. are definitely having an edge in recruiting at sector-focused funds. Within this niche, highly technical type of fund, they are valuable as sector analysts, who understand the market and products most. One thing you have to prove more of is your passion for investment, which I’ve recommended some tactics above.
Maybe. MBA degree for top 20 b-schools and the prestigious CFA designation totally acts as resume builders. They’re even more valuable if your background is irrelevant to Business or Finance. However, Hedge Funds in general are not so in favour of entry-level candidates pursuing either of the qualifications.
The reason: HFs look for the most Investment enthusiasts, the most high-achieving youngsters who’d better spend one or two years researching the market and investing, rather than doing academic work.
Do you need an MBA or a CFA?