What is a Hedge Fund and Career in Hedge Fund

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Hedge funds are exclusive, highly speculative investment vehicles that use unconventional strategies to generate absolute returns for their investors.

Breaking Down Hedge Funds

Exclusive: Hedge funds can only raise capital from accredited or qualified investors, typically high net worth individuals.

Highly Speculative: Unlike mutual funds, hedge funds face fewer government regulations, allowing them to take high risks and invest in speculative asset classes. High leverage and aggressive use of derivatives and swaps are common.

Variety of Unconventional Strategies: Hedge funds use diverse strategies like long/short, distressed debt, event-driven, global macro, fixed income arbitrage, convertible arbitrage, and merger arbitrage. They have more strategies available compared to mutual funds, pension funds, asset management companies, or even private equity firms.

Absolute Returns: Hedge funds aim for absolute returns, independent of market performance. Unlike asset managers who must outperform an index, hedge funds strive to surpass their own high-level watermark to generate profits.



Hedge Fund Job Description

Hedge funds consist of researchers, traders, risk managers, compliance officers, fund accountants, and other staff. This guide focuses on investment researchers and portfolio managers.

Analyst Responsibilities:

  • Generating Alpha: Develop ideas to achieve absolute returns while adhering to the firm’s investment philosophy.
  • Valuation and Modelling: Assess asset values and forecast future performance.
  • Investment Thesis: Build and defend investment ideas, supporting your team initially and later presenting your own ideas.
  • Multi-Asset Class Comfort: Handle equities, fixed income, commodities, and their derivatives.
  • Global Investment: Manage investments across various sectors and countries.
  • Client Reporting: Prepare monthly performance reports, handle ad hoc client requests, and conduct portfolio analysis.
  • Client Relationship Management: Assist senior portfolio managers with marketing and client relations.

Portfolio Managers:

  • Strategy and Direction: Decide the overall strategy and direction of the fund.
  • Team Management: Oversee all investment professionals.
  • Fund Performance: Ensure the fund’s performance meets or exceeds expectations.

Qualifications and Skills

  • Passion for Investing: Requires technical skills, industry experience, and behavioral aptitude.
  • Risk Appetite: Manage high leverage and speculative investments, balancing risks and rewards.
  • Thriving in Unstructured Environments: Excel in less structured work settings, focusing solely on generating superior returns.
  • Stress Management: Handle the stress of potentially significant gains or losses in a single trading session.
  • Teamwork: Critical for hedge funds and private equity, where small teams share profits.

Building Your Resume

  • Consistent Performance: Demonstrate exceptional academic and professional achievements.
  • Investment Success: Highlight any personal investment successes.
  • Academic Pedigree: Compete with candidates holding Ivy League or equivalent degrees.
  • Certifications: A CFA can indicate a basic understanding of financial markets.

Internships and Work Experience

  • Relevant Experience: Typically, 2-3 years at a bulge bracket investment bank, asset management firm, private equity role, or equity research role.
  • Graduate Programs: Larger hedge funds are starting to create graduate training programs.
  • Solid Internships: A good internship at a bulge bracket bank can be advantageous.

Compensation

  • Fixed Component: USD 150,000 to USD 200,000 in the first year.
  • Variable Component: Performance-based, ranging from 50% to 250%+ of the fixed component.
  • Profit Participation: Share in the fund’s profits, with a typical commission of 15% to 20% of the alpha generated.

A Normal Day at a Hedge Fund

  • Early Start: Begin around 5 AM to catch global market news.
  • Market Briefings: Prepare and send reports before 9 AM.
  • Investment Work: Generate and prove investment ideas, handle client reports, and liaise with middle or back office.
  • Market Events: Attend sponsored events, roadshows, and conferences.
  • Working Hours: Typically 55 to 70 hours per week, better than most investment banking roles.

Career Path and Progression

  • End Goal: Hedge funds are often the ultimate career destination for many bankers.
  • Lateral Movements: Strategic moves can help accelerate career progression.
  • Starting Your Own Fund: Requires significant capital and a strong reputation.
  • Other Investment Roles: Possible moves to private equity, venture capital, or asset management.

By focusing on these elements, hedge funds offer a dynamic and potentially lucrative career for those with the right skills and mindset.

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