Hedge fund careers have less structure and hierarchy in comparison to investment banking or private equity. And there’s not as much change in work and other responsibilities when you climb up the ladder – as in other fields, either. We covered these points in the article on how to get a job at a hedge fund; however, here are what we want to discuss in this article:
1. A short Explanation on What Hedge Funds do
The main job of a hedge fund is to raise capital from institutional investors and accredited investors and then invest it in financial assets – usually liquid, publicly traded assets.
Hedge funds might use a wide variety of exclusive strategies, which means most of them cannot be applied to mutual funds: using derivatives, short-selling securities, or going activist on a company to force change, for example.
The money of a hedge fund will come from management fee, based on a small percentage of assets under management (AUM), and a performance fee, based on a percentage of annual returns. It is common that hedge funds charged “2 and 20,” meaning 2% of AUM for the management fee and 20% of the returns for the performance fee.
Still, ever since the 2008-2009 financial crisis, funds have been forced to cut fees, and it is also due to their poor performance afterward. The average fees are now closer to 1.5% and 15.0%. It is indeed this fee structure that gives you an upper-hand to earn a lot of money than bankers or any other sell-side role, but this only happens under one condition: your fund performs well.
2. Hedge Fund – The Promising Land for a Wealthy and Prestigious Life
Money is what makes so many people choose hedge funds as their career path: if you’re at junior-level, you can earn $500K up to $1 million, and senior-level Portfolio Managers can go well beyond that.
Often time, besides money, the network always counts when it comes to a hedge fund career: working with smart, ambitious people, studying a new global issue or market each day, and being more creative and independent than in sell-side roles.
One tip to stand firmly in a hedge fund is to have passion about the public markets – trading stocks and researching companies and financial assets for fun in your spare time.
3. The Structure of Hedge Funds
Speaking of a non quant hedge fund, remember these three main areas:
The team of Research/Investment Analysts and Portfolio Managers who are in charge of generating and evaluating ideas and making investment decisions.
These people will execute the investment team’s strategies, and aim for the best price on each trade.
The back office at a hedge fund consists of supporting areas such as compliance, accounting, operations, and IT.
There are other areas as well, such as Risk Management and Investor Relations, which may be separate or part of the ones above.
Let’s drive our focus on Investment Team in this article because most of the content on this site relates to careers that lead there.
4. The Hedge Fund Career Path
The hedge fund career path and hierarchy vary from firm to firm, but here’s a representative example:
- Junior Analyst or Research Associate – Random Task Monkey.
- Analyst – Number Cruncher and Researcher.
- Senior Analyst or Sector Head – Builder and Pitcher of Investment Ideas.
- Portfolio Manager– Decision-Maker and Firm Representative.
On the Execution Trading side, the path might look like this:
Junior Trader or Execution Trader – Trader in Training.
Senior Trader or Head Trader – Trader with (more) P&L Responsibilities.
It is not common to break in as an undergrad, but some of the bigger funds, such as Citadel, Bridgewater, Man Group, and Brevan Howard, are increasingly recruiting undergrads. They do this more often for quant roles that require math/statistics/programming.
The exit opportunities at each level are similar to each other so they will not be addressed here: move to another hedge fund, start a hedge fund, do an MBA to rebrand yourself, or do something outside of finance.
Hedge fund work is more specialized than private equity or investment banking, so you have less mobility.
The hours don’t necessarily change much at each level, and in some ways, PMs have the most stressful jobs of anyone. Technically, you will have to work overtime, the overall week hours is from 60 to 70 hours , and even more than that at the biggest funds.
5. Hedge Fund Career Pros and Cons
Summing up everything above, here’s how you can think about the pros and cons of a hedge fund career:
- High salaries and bonuses at all levels – especially if you’re at a mid-sized or larger fund that performs well.
- Interesting work that allows you to broaden your perspective and critical thinking about almost any global issue and turn it into an investment.
- Somewhat shorter week hours than investment banking, at least at non-mega-funds, and a more predictable schedule since you do not work on transactions.
- A wide network of smart, ambitious people, and they may come from more diverse backgrounds than the typical teams in IB/PE.
- There’s a wide variety of strategies and firm cultures – the office environment varies far more than in IB/PE, so you can probably find something that fits you.
- Firms are small and results-driven, so compensation and advancement are strongly linked to your
- Shorter as the week hours are, they are still fairly long and intense – and you will encounter stress in different types of work (beating the market, not last-minute client requests).
- You will get pigeonholed once you’ve been working for a few years, and it will become difficult to switch strategies (e.g., long/short equity to global macro) or pursue non-hedge-fund opportunities (corporate development, VC, etc. are unlikely).
- Hedge fund career advancement is not so clear in some firms, especially if you find yourself working in a single-manager fund, where the Founder does everything – to advance, you might need to think about switching firms or starting your own fund.
- Compensation is volatile and heavily linked to fund performance, which is why the pay ranges are much wider than the ones for IB and PE.
So, how to make sure your career bet at hedge funds is right?
You should put aside thoughts of earning $1 million+ and ask yourself if you’re truly passionate about finding out companies and other assets to put the money in.
Can you accept the risk of losing money when you’re wrong and can you keep your emotions stable without losing your cool?
If you can do it, you’ll do well even if the industry is in the declining state. Get yourself prepared for the Interview questions right away before the Recruiting season knocks the door!