Hedge funds are always among the ultimate destinations on which top Financial graduates dream to land their job. Its lucrative income, some of which reach 7 digits a year, is the key driver for elite individuals to aspire fund manager roles.
Pooling accredited investors, investing in various types of assets, and having exorbitant amounts of money in return
– How actually complicated is this process, put into practice?
– Exactly how much each Hedge fund role makes a year?
– How fat a paycheck is this, compared to other jobs within the financial market?…
Read on to find out all of this information (just to find out more drivers to jump into this billionaire’s job!)
Let’s start off with the basics:
1. How Do Hedge Funds Generate Their Income?
1.1 Hedge Fund Nature of work
Long story short, Hedge Fund is a ‘sexier’, more modern version of mutual funds.
Having the same structure as an investment fund pooled with accredited investors, hedge funds, however, possess much more sophisticated and risky investment techniques. Hedge funds allow investors to gain exposure to more exotic financial instruments, namely real estate, bonds, commodities, currencies,…
By using complicated models of leverage, derivatives, and short positions, Hedge funds aim to hedge out the market risks, aggressively invest within a short-term time frame, and aggressively making the most money regardless of the market fluctuation.
1.2 Hedge Fund Bonus structure – Two and Twenty
Understanding the general income structure of a hedge fund is crucial to understand how each role of analyst or portfolio manager gets paid.
Hedge funds trade in financial markets on behalf of clients in exchange for annual fees, and a cut of the profits. Here comes the famous (infamous?) fee structure of Hedge funds: 20 – 2.
Unlike mutual funds getting money merely as a percentage of assets, Hedge funds drive earnings not only from 2% initial investment but also from a huge 20% of the generated profits.
2% Management Fee
The 2% management fee is paid out regardless of the profit or loss and is based on how much capital the fund is managing at a given point of time.
20% Performance Fee
The 20% performance fee is often charged at the end of the year, based on profits the funds generate that year.
- Got it. So with this fee structure, I could make billions? - YES!
2. Top Hedge Fund Salaries – The Billionaire Titans
You might have heard them on the news, even have dreamed to be one of them – The billionaire Hedge fund managers Club that is the talk of the town. They are the high-profile titans in the industry, the seniors whose podcasts we investors listen to every day.
If you dream that big, how much you can possibly earn?
The answer has been reported: your net worth would possibly be well into 11 figures, just like ones of these big names: Jim Simons, Ray Dalio, Steve Cohen,… Indeed, glancing through the list of Forbes World’s Billionaires, it doesn’t take much time before you’ve found one after another Hedge fund manager on the Top 100 Richest people on Earth.
Let’s take a closer look at the eye-popping incomes of the biggest Hedge fund managers in 2019:
The Rich List 2020 – An Institutional Investor’s report
|#||Name||Hedge Fund||Earning 2019|
|1||James Simons||Renaissance Technologies||$1.8B|
|2||Christopher John||TCI Fund Management||$1.8B|
|4||Israel Englander||Millennium Management||$1.5B|
|5||Chase Coleman||Tiger Global Management||$1.4B|
Now you know why people queue up for Hedge funds: it’s lucrative!
But here’s the blunt truth: it takes at least a decade for a Hedge fund analyst to move up to this billion-dollar position, just considering the years of experience. So what should you expect as an entry-level analyst? How’s the salary progression in this industry in general?
3. Hedge Fund Salary – Salary Progression
… is the average annual compensation for Hedge fund analysts with 2-3 years of experience.
$250k – $300k
… are what you’ll expect to earn after the salary bumps within 5 years, and 10 years at below-manager levels.
You might be judging the enormous gap between these numbers and the aforementioned sexy income of Hedge fund managers, but let me explain.
3.1 What’s the way to become wealthy once got into Hedge Funds?
Short answer: the bonus.
Working as a Hedge fund analyst for years after years, much as the bacon you can bring home, is definitely NOT the pathway for you to make bank. The biggest salary jumps happen between Research Analyst to Senior Analyst, and the second when you are promoted to Portfolio Manager. The higher you are on the career ladder, the more direct impacts you actually have on the investments, and the more proportion of your bonus will be among the total compensation package. That’s the one way to build wealth within Hedge funds.
3.2 A Detailed Look into Bonuses
Let’s take an example to see how you’ll actually receive bonuses through a 5-year investment period.
“At the IBP Hedge fund, where you are working as a senior analyst, your research has directly contributed to the huge 30% return at the end of the year. Your portfolio appreciates your work and offers you 1% of the total performance fee (20% of profits).
Assuming these factors:
- The expected return going forward: Ever since the huge success of a 30% positive return, the fund will not repeat itself. We are hoping for a 15% annual return for the next 4 years as a realistic goal.
- The additional asset inflows: As good performances are maintained, the portfolio managers tend to raise more and more assets, let’s say $100mil a year for every upcoming year.
- Your share of performance fee: A great start of 1% at the beginning won’t stay just there if you keep performing well. It could be raised up to 0.25% in the following years.
Taking these additional factors into account, we can forecast the Fund growth trajectory as below:
|($ in millions)||Year 0||Year 1||Year 2||Year 3||Year 4||Year 5|
|AUM – Beginning of year||500||750||963||1207||1488||1811|
|AUM – Post return||650||863||1107||1388||1711||2083|
|AUM – End of year||750||963||1207||1488||1811||2183|
|Your Share of Carry||0.0%||1.0%||1.3%||1.5%||1.8%||2.0%|
|Your bonus ($ in ‘000s)||–||225||375||543||803||1087|
And there you can see how much the bonus can contribute to your account, even well into billions after 5 industrious years
However, this is a too-good-to-be-true example. Motivating it might be for Hedge fund hopefuls, you must also be aware of the other edge of the sword, carrying the risks weighing billions.
In fact, less than 10% of people working at hedge funds earn more than $1 million annually. Most people make less than $300k annually, according to the latest salary reports.
The dream of billions is only for those who determine to take risks.
3.3 But are there other variables affecting my salary too?
- The fund size: It’s not necessary that your compensation will grow in parallel with your fund size. Funds with large AUM will offer more job stability but are not the most generous when it comes to the compensation package. The sweet spot for pay is at funds with AUM within $5 and $15 billion.
- Location: Through various salary reports, a trend is to be reckoned: Hedge fund analysts in New York and San Francisco have the fattest paycheck. They make about 20-40% more than analysts in Boston, Washington DC, and Chicago.
OK, we’ve been talking about investing all the way here. But notice that Hedge fund is a complex business with several distinct operational segments, not merely Investing.
From accounting, IT, to legal and compliance,… each of these roles might have a different range of paychecks.
We’ll investigate all of that to give you a big salary picture across this industry:
4. Hedge Fund Salary – Salaries Of Different Divisions
You could find below the latest data on Hedge fund salaries across the divisions and levels within Hedge funds. The report was carried out by JW Michaels & Co. for the 2019 financial year.
Now that you have all the numbers, how much are they compared to other jobs in the financial industry?
5. Hedge Fund Salary – What does it take to earn that much?
5.1 What does a Hedge fund require at you?
Short answer: You must be at the top of the top.
Getting into this tier-1 job at Wall Street is highly competitive (3% of acceptance rate for the example of Hedge fund giant Citadel’s). You might come from a prestigious financial background, working years at a trading firm, and yet cannot win a position at Hedge funds.
The qualified applicants are more than just quantitative minds – a wide range of professional and interpersonal skills, along with in-depth knowledge about the markets is essential. Certifications such as CFA, CAIA, or CHA also seem to be helpful.
Here’s a quick checklist for Hedge fund aspirers:
- Have you learned in-depth knowledge of Financial Instruments and Strategies?
- Is your understanding of Risks, Portfolio construction, and Quantitative expertise enough to do daily Hedge fund tasks? (of crunching data, analyzing statistics, modeling…)
- Have you familiarized yourself with the existing marketplace: your firm’s competitors, the market regulations, the prohibitions…?
- Is your academic background shining with a prestigious MBA/MFin/Ph.D. degree or other financial Charters?
- If not, have your quantitative skills been proved through tremendous trading success in the past?
Yes, it seems hard, but not at all impossible. Let us show you some popular pathways to Hedge funds:
5.2 How to break into Hedge funds?
Here are the recommendations:
- You don’t want to break into a Hedge fund right out of college. Most of the time, you likely to either not know what you want to do, or have not possessed sufficient knowledge and experience to join this industry. This is definitely not the normal case, but at the same time, the competition between you and your peers to land the first job at a Hedge fund will be lower, since everyone thinks of this as off-limits. Are you extraordinary? Try this way!
- The best shot at landing a job at a hedge fund is through your start as an Investment banker. Usually, either through 2-3 years of work experience as an entry-level analyst, or fewer years but with a prestigious MBA degree under your belt, you would be an Investment Banking associate. At that point can you springboard off into a Hedge fund.
- That said, it’s not the only shot you’ve got: The 2-3 years of work experience are generally for you to “pay your dues” before obtaining a Hedge fund job. This work experience, although recommended to be top Investment Bank’s positions, is not the only shot possible, just like there’s not only one type of Hedge fund. Equity Research, Sales & Trading, Asset Management, Consulting, each of these experience can absolutely get you a ticket to, and shape the type of Hedge fund you pursue.
6. Hedge Fund Salary – All In All…
Hands down. Hedge funds are where you should head to if you are going after the money: There are very few places that can offer you a fatter paycheck within the financial market, except for Private Equity.
However, along the way of breaking into this industry, rigorous hours of study, years of financial professions, and fierce competitions are there to overcome.
Not to mention the billions-worthy risks you have to bear once you’ve got in. Are you ready for them all?