Hedge Funds

Career Guide – Hedge Funds

In Investment Management by Gaurav SharmaUpdated On:

Hedge Funds

What is a Hedge Fund?

Hedge funds are exclusive and highly speculative investment vehicles utilizing a variety of unconventional strategies to generate absolute return for their investors.

Let’s break that statement down to its core elements:

Exclusive – Most jurisdictions restrict hedge funds to raise capital only from accredited or qualified investors. These are essentially high net worth individuals.

Highly speculative – All investments are speculative to an extent, but hedge funds differ from mutual funds and other publicly available investment opportunities because they are less restricted by government regulations. This means they can afford to take very high risks and invest in highly speculative asset classes. Therefore, the use of high leverage is quite common along with aggressive employment of derivatives, swaps etc.

Variety of unconventional strategies – Hedge funds use a number of strategies like long/ short, distressed debt, event driven, global macro, fixed income arbitrage, convertible arbitrage, merger arbitrage etc. It would take quite a while to get into all of them but just know that hedge funds have several orders of magnitude more strategies available to them then mutual/ pension funds, asset management companies or even private equity firms. The world is your oyster.

Absolute Returns – Hedge funds don’t follow the markets; they go after absolute returns. Asset managers have a mandate to generate better returns with some sort of index or industry average serving as a benchmark. Hedge funds, on the other hand, have to beat their own previous high-level watermark in order to generate profits.

Hedge Fund Job Description

Hedge funds are entire companies unto themselves. It’s not just one role but a team made up of researchers, traders, risk managers, compliance, fund accountants and other middle and back-office staff. We cover most of these roles in general in their own articles but for this one, we will be focusing on the main career branch in hedge funds – the investment researchers and portfolio managers.

Here are some of the thing you will be doing as an Analyst:

  • You will have to come up with ideas to generate alpha or absolute returns for the fund while sticking to the firm’s main investment philosophy/strategy.
  • Valuation and modelling skills are obviously required. Hedge fund or not, you are still investing in assets and when investing you need to know the fair value of the asset and how you expect it to perform in the future.
  • You’re responsible for the construction and building of an investment thesis around your investment ideas. Initially, you probably won’t be working on your own ideas for the most part but rather supporting your team. However, you’re expected to grow fast, and you will quickly reach a position where you have to present and defend your investment ideas.
  • Many funds have a multi-strategy approach and deal in multiple asset classes. This means that you must be comfortable with different asset classes like equities, fixed income, commodities, etc. and all their derivatives.
  • To further complicate matters, hedge funds have quite a bit of freedom in terms of which sectors and countries they can choose to invest in. The wider your investment portfolio, the more balls you will have in the air at any given time.
  • You will help other teams in the preparation of monthly reports like performance documents and portfolio deliverables for clients. This will also include ad hoc requests from clients like portfolio analysis, research updates, investment data requests and so on. You will be banking some pretty big clients who have given you a lot of money, so they will want to know what is happening.
  • Assisting senior portfolio managers with marketing and client relationship management activities will also be required.

Portfolio Managers:

  • Portfolio managers are just at the top level of the fund looking at everything from a strategic perspective. They are the ones responsible for the performance of the funds and it is their reputation that brings clients in.
  • At the portfolio manager level, you would be expected to decide the overall strategy and direction of the fund and manage all the investment professionals reporting to you. It essentially becomes your fund to manage – within the confines of liberal risk management guidelines and bare-minimum legal compliance.

Qualifications and Skills

 Love for investing (and being good at it) – Investing requires a combination of technical skills, industry experience and behavioral aptitude. In most banking roles, you can succeed as long as you bring a fair bit of value to each of those requirements. But for high stakes investment roles, and especially unstructured ones like hedge funds, you need to bring your A-game for everything.

For example, an asset manager at a mutual fund will be restricted in the types of investments he can make with no leverage at all. As a hedge fund manager, you can leverage to pretty high levels and invest in all sorts of high-risk high-reward assets. And from there on out, you’re the only one responsible for the upside as well as having to worry about the downsides.

You can of course hedge your bets, but everything has a cost. Your incentive structure is directly tied to the fund’s performance, so some hedge fund managers tend to take higher risks than what may be considered appropriate by a neutral party. Would you know where to draw the line?

Risk appetite – Hedge funds often make highly leveraged investments. Even though the name hedge fund implies that the bets are hedged, the reality is that the overall risk and sensitivity to volatility in the underlying market and global macroeconomic factors is quite high. It takes a unique mindset to be able to thrive in such situations, but some are driven by it.

Even with the best models, you are still dealing with an incredible amount of uncertainty. I often cite the case of Long-Term Capital Management* – a hedge fund founded by the legendary John Meriwether* and two Nobel laureates who quite literally invented the modern way to price derivatives. The fund collapsed and had to be bailed out in the late 90s. I am sure you are all very aware of the aftermath of the 2008 crises. Such events are cataclysmic for hedge funds but can also lead to billions in profits (just ask John Paulson).

*I have several books recommendations if you want to learn more about Meriwether or LTCM.

Thriving in unstructured environments – You’re unlikely to find a structured work environment like you would in a traditional investment or corporate bank, so this career is better suited for intellectual risk-takers.

Hedge fund roles differ significantly from traditional banking roles in the sense that you would not be working on specific deals or schmoozing clients. Your sole aim is to generate superior returns for your fund using any and all strategies at your disposal. If you can do that, you will have no need to schmooze clients – they will come running to you!

Handling stress – Considering the amounts at stake, it can get stressful in almost any banking role. But hedge funds usually take this a step further because it is entirely possible for your portfolio to gain or lose hundreds of millions of dollars in a single trading session. You will see the results of your decisions unfold before you in quick order. Even the best managed hedge funds are not immune from the risk of suffering terrible losses and your reputation, as well as a good chunk of your personal wealth, is usually on the line.

Teamwork – “being a team player” is such a clichéd requirement thrown around for almost every role that I completely avoid mentioning it in my guides. That doesn’t mean that it is not important, it’s just that I think it is implied for any role where more than one person is employed!

However, the reason I mention it for hedge funds is because it is critically important for hedge funds and for private equity. The reason for this is that both of these types of entities and small teams and share the profits that they generate with each other. This means that when a partner is recruiting a new analyst, he is not just getting an employee but someone who can impact his own financial well-being. You can imagine how critical such decisions need to be and this is why their selection processes is so exclusive.

Building your Resume

Getting your CV ready for a hedge fund role is an endless undertaking that requires consistent performance all throughout your academic and professional life. You must demonstrate that you are an overachiever who consistently delivers well above your peers as reflected in your GPA, academic pedigree, your internships and any work experience that you might have.

However, there is another way that you can make yourself be noticed. At the end of the day, hedge funds require people who can deliver returns on investments. If that is something that you have managed to achieve in your early years, then by all means – talk about it to your hearts content. Tell them how you started trading in your early teens, how you turned a thousand dollars that you had saved up into enough money to buy your own car by buying naked puts, or how you generated enough returns at a local college investment club that you got a call from Warren Buffett himself.

Academics and Certifications

Most of your competitors for any hedge fund position would likely be brandishing Ivy League, Oxbridge or equivalent degrees on their CVs. In fact, you will likely be up against candidates who are PhDs in quantum physics or something like that. In order to stand out from the crowd, you have to somehow match that. I don’t want to sound too harsh, but the fact is that with competition that fierce, you need to have an excellent academic pedigree to stand a fighting chance.

In terms of certifications, the CFA is undoubtedly going to be helpful. It is not going to be enough generally to get you and all the way, but it definitely sends a signal to the recruiter that you have a minimum basic understanding of financial markets. This reduces the risk for the hiring manager to shortlist your CV.

Internships and Work Experience

Hedge fund roles normally do require some amount of work experience. They usually ask for 2-3 years of experience at a bulge bracket investment bank in roles like M&A, leveraged finance, sales and trading etc. Alternatively, you can also get in from an asset management firm, a private equity role, an equity research role and so on.

The reason for this, as I already mentioned, is that hedge funds have small teams so they often lack the manpower to really spend on training fresh graduates. However, the larger hedge funds are now beginning to warm-up to the idea and have started creating graduate training programs for fresh campus recruits. A good, solid internship with a bulge bracket bank would also greatly help your cause. Here is a link to my guide on banking internships and the mindset that is necessary to secure a good one.


The fixed component of your overall compensation would likely be in the USD 150,000 to USD 200,000 range during your first year (or around GBP 100,000 – GBP 150,000 in the UK). This is equivalent to associate level compensation in investment banking, but the real kicker is the variable component. For hedge fund roles, your competition is totally dependent on your performance and the fund’s performance. Which means that it is entirely possible that your variable component could be anything from 50% to 250%+ even as an investment analyst.

As you begin to participate in the fund’s profits, that is when things get really interesting. Hedge funds usually have a structure where they keep a fixed percent of the alpha generated for the clients as their commission. This is usually in the 15% to 20% range. Now imagine if a fund clocks in a billion dollars in returns for a year. You will then have 150-200 million dollars to distribute amongst a relatively small team. Portfolio managers at the largest funds have in fact made a lot more than that.

A Normal Day at a Hedge Fund

Hedge fund work is quite honestly a lot more interesting than being stuck crunching numbers all day. You start a bit early – may be around 5 AM and catch all the market news from Asia, Europe and the Americas. Roll into work at around 7 and get right to work to prepare a briefing for your portfolio manager or other team members. This report usually has to go out well before 9 AM.

If there have been any significant events the previous night or in some other important part of the globe, then all your colleagues would probably be glued to the telly for the market opening. However, on most days that is not the case and you will slowly just begin to work on your investment work while perhaps briefly glancing at the markets just to keep updated.

Other work includes generating and working on investment ideas for yourself or your team members, helping out with any report generations for clients, liaising with the middle or back office for any housecleaning activities and so on. You might also like to spend time with some folks from the sell-side at sponsored events, roadshows, calls or conferences etc. You should usually be done by 6 or 7 PM.

Working Hours

hedge fund analysts are almost always early risers who need to absorb and process all the material market information before they even get to work. However, the hours are still considerably better than most investment banking roles. A normal week can be anything from 55 to 70 hours in your initial years. There are certainly some weeks where you will overshoot that number but that is usually a result of inefficiency more than anything else.

You need to understand that you are not working on deals or making infinite pitch books for clients. You are generating and proving investment ideas. While you will still have some amount of grunt work assigned to you by your bosses, it is far less than what you would expect in other investment banking roles.

Career Path and Progression

Hedge funds are usually considered the end goal by many bankers rather than steppingstones to other careers. Another important point is that as a high hedge fund manager, you usually won’t have a lot of skills in common with the deal and client focused investment bankers. This limits your exit options somewhat but there’s still plenty to be happy about.

Why leave a good thing?

The goal of most investment analysts in hedge funds is to eventually become a portfolio manager. By staying put, I do not necessarily mean that you must stay with the same hedge fund, although that has its benefits. The fastest way to get there would be to make strategic lateral movements and snagging a senior level position during each move.

Given the compensation structure that I have already outlined earlier, you certainly would not want to move to any other role because of the money. Therefore, staying in the broader hedge fund industry while moving to accelerate your career or to switch up between different strategies is all you need to do.

Starting your own fund

This is not really going to be an option for quite a while, but it is another end goal that you can work towards. In order to start a hedge fund, you will need to put in some capital (a few million) of your own, which should be manageable if you’re a career banker. The tricky part is to convince other investors to give you their money to manage. You obviously would have built up a reputation, but keep in mind you’re competing with the entire hedge fund industry and others investment firms in order to gain that clients trust.

Taking up other investment roles

Moving to private equity or venture capital is not that common because your approach is completely different, but it is doable nonetheless. A more plausible move might be to an asset management firm but the compensation structure there can be limiting. That being said, hedge funds are highly volatile and during tough times the job security is quite low, so it never hurts to have options.

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About the Author

Gaurav Sharma

Gaurav (LinkedIn) started his finance career as an intern in Citi’s Institutional Clients Group in 2009, eventually ending up as an Associate Director at Standard Chartered Bank’s Corporate & Institutional Banking division a few years later. By 2016, he was an independent consultant helping FinTech start-ups in London with product development and launch. Gaurav also helps banks with their digital banking initiatives and advises PE & VC firms with investments in the financial services and FinTech sectors. Gaurav writes on topics ranging from EU banking regulations and tradional finance to Blockchain startups and the future of banking itself! He has an Engineering degree in Computer Science and an MBA with a double major in Finance and Marketing. He is also a Certified Financial Risk Manager.