How to Become A Hedge Fund Manager In 2022? A Simple Guide

A hedge fund is a type of alternative investment that pools money from high-net-worth individuals and institutional investors to invest in various assets. It is run by professionals who choose a wide range of investment strategies to generate decent returns.

Unlike mutual fund managers who employ event-driven and long-term strategies, hedge fund managers use complex trading and risk management techniques that involve leverage, derivatives, and short selling. In simple terms, a hedge fund can be characterized by active management that tries to provide better returns than the market.

Although large hedge funds employ hundreds of financial professionals, landing your first job in this industry is not an easy task. Developing a career path in hedge fund firms requires determination, strong analytical ability, problem-solving skills, and extensive knowledge of financial trends.

In this overview article, we have explained how hedge funds are managed, what roles research associates and managers play, and how much they get paid for their efforts.

So, whether you are looking for an entry-level job or planning to become a hedge fund manager ten years from now, this article will help you get a strong start. Let’s start with a basic question.

What Is Hedge Fund Management?

The term hedge fund management includes three key parameters:

Fund

A pool of money from high-net-worth people, institutional investors, and accredited investors.

Hedge Fund 

The fund is designed to make money for investors even if the stock market is not performing well. Unlike most other private and closed-end funds, hedge funds invest in relatively liquid assets, allowing investors the put and withdraw money frequently based on the fund’s net asset value.

While hedge funds are typically considered risky investments, some use less volatile strategies and extreme hedging techniques to provide stable returns.

Hedge Fund Manager 

Hedge fund managers oversee either the entire hedge fund or a specific amount of it. They make major investment decisions for the firm. They continuously monitor the risk-reward ratio and capitalize on every possible opportunity to gain better financial returns.

Common Hierarchy In Hedge Fund Firms

The structure of a hedge fund is usually divided into three parts:

1. Investment Team

This involves research analysts and portfolio managers who develop strategies, find investment opportunities, and make decisions on asset allocation. They oversee the investment process and manage risk across portfolios.

2. Trading Team

Traders implement the strategies developed by the investment team and aim for the maximum profit on each trade. They may use advanced data tools to execute security and derivative transactions. Decision-based traders scan the markets and place orders manually based on the information available at that moment.

3. Back Office

Despite its seemingly invisible presence, the back office employees play a crucial role in the hedge fund business. They develop policies and establish processes to ensure those policies are followed. They also take care of fund accounting, invoicing, post-trade compliance, and IT operations.

As for the career path, the hierarchy of job titles varies from company to company. However, most hedge funds follow the basic structure:

 

Junior Analyst and Junior Trader: They are more like trainees or random task monkeys who support their seniors in screening, researching, and analyzing various assets and trades.

Fund Analysts and Researchers: They find investment opportunities based on research and due diligence and recommend them to portfolio managers.

Senior Analyst and Head Trader: Once the investment is made by a hedge fund, senior analysts continually monitor its performance and potential risks. The head trader, on the other hand, supervises junior traders and ensures that the firm’s trading operations are in full compliance with relevant laws and regulations.

Portfolio Manager: The hedge fund manager is like the CEO of the company. He represents the firm and is responsible for all profits/losses made by the firm.

What Role Do Hedge Fund Managers Play?

A hedge fund manager conducts qualitative and quantitative research, develops and implements investment strategies, builds portfolios, decides what assets to buy and when to buy and sell, and reports on fund performance.

In larger firms, a fund manager has a support staff of traders and analysts. The manager can employ more researchers to help him identify companies and individuals who may make good fits as clients.

Who Should Become A Hedge Fund Manager?

People who have great analytical skills and can thrive on stress are a great fit. This job requires a lot of work: you need to study a lot of companies, communicate with people, monitor every movement of the stock prices, and make bold decisions.

Plus, the industry is highly competitive. You don’t just have to beat the market, but other hedge fund managers out there as well. This takes a lot of hard work, and since the market is highly volatile, there will always be an element of risk. It could lead to exhaustion and increase anxiety disorders. So choose your career with caution.

8 Steps To Becoming A Hedge Fund Manager

To become a hedge fund manager, you need to devote many years of your life. Following are the steps that can get you there:

1. Do proper research

First, explore your options and make sure that you really want to work in hedge funds (not in private equity, investment banks, exchange-traded funds, or mutual funds).

Once you are certain, go all in and learn as much as possible. Start with reading books and articles and subscribe to free hedge fund newsletters. Learn all basic terms and definitions, simple strategies, and methods to analyze companies. Gain in-depth knowledge of asset classes, long/short equity, distressed debt, investment-grade debt, quant, private deals, and global macros.

See who are the major player in this industry and what are their strengths and weaknesses.

2. Get the required education

More than 74% of hedge fund managers have a bachelor’s degree, and about 16% have a master’s degree. It’s very difficult to become a successful fund manager with only a high school degree. So it would help if you got proper education first.

A Master’s degree in Finance, Economics, Accounting, Business Administration, Mathematics, or Systems Engineering could increase your chances of working in a financial management firm.

While it’s not necessary, acquiring the Chartered Financial Analyst (CFA) or Chartered Alternative Investment Analyst (CAIA) certification may also be beneficial. Both involve education, experience, and multiple difficult exams.

Candidates with CFA certification, for instance, are considered to have good knowledge of economics, investment analysis, and portfolio management. It will definitely help you demonstrate your skills to potential employers or clients.

3. Find your mentors

Try to find at least one mentor at the early stage of your career. You don’t need to look for people in top positions; any good analyst or trader would be able to teach you something valuable.

It might take time to find one and develop a relationship, but many successful personalities are happy to help younger generations out. However, you’ll need to show humility, commitment, and eagerness to learn.

4. Start building your network

Build a network with other finance professionals. It would help you gain new insights about the industry that you may not have otherwise thought of.

Attend social and professional events to get your face known. Set up a LinkedIn profile to connect with people having the same interests and share useful information with those who need it. You can go one step ahead and organize events and meetings with influential people. Do this without stressing yourself or feeling ‘pushy.’

5. Participate in internships

Once you have got a mentor and acquired good knowledge about the finance industry, the next step is to look for an internship. It doesn’t have to be a hedge fund company. Any company that gives you experience with market research, trading techniques, or AI tools is worthwhile.

In fact, you can work as an intern in multiple companies at the same time. Prefer on-site work, but don’t let go of the opportunity if the only way to learn is by working remotely. The more you gain experience, the better qualified you will be.

6. Search for hedge fund firms

There are several tools available on the internet that can provide you with a list of finance companies. The Investment Banking Networking Toolkit, for example, contains names and descriptions for over 4,500 hedge funds, 5,200+ investment banks, and 15,800+ private equity firms, organized by region. It includes email addresses, physical addresses, and phone numbers of each firm.

7. Apply for entry-level jobs

If you have completed your internship, you may have a rough idea of which firm and what position would suit you the best. There are more than 3,800 hedge fund businesses in the United States. Few of them work with people who have less than three years of experience.

With decent qualifications and months of experience working directly within the finance industry, you should have a high chance of getting your first job in a hedge fund firm.

8. Select a niche

Once you get an entry-level position, you will be working with senior analysts and connecting with clients. Over time you will develop more knowledge and specialize in a particular field of finance.

Then you can apply for senior roles. However, it usually takes 3 to 6 years to move up the corporate ladder. Based on the performance and talent you show along the way, you may get a chance to manage the entire hedge fund.

Working Environment

While landing a job in a hedge fund firm is lucrative, it is also highly competitive and stressful. You typically work long hours (50+ hours per week) in a high-pressure environment. Some employees only get a couple of weeks per year to spend with their families.

Most of your time is spent monitoring global markets, studying vast financial information, and making investment decisions. It involves a lot of reading, analysis, public filings, attending company presentations, and making forecasts. You also need to keep up with the latest technologies and developments in the finance industry.

Plus, there is always an element of risk. If your firm can’t generate good returns for investors on a consistent basis, it may impact your career growth.

Salary and Perks

The salary of any person depends on the level of experience he has gained over the years as well as the reputation he has earned within the industry. The average hedge fund manager in the United States makes $145,000 per year.

Most hedge funds use the “Two and Twenty” compensation structure. It is the combination of 2% of the total value of the investments and 20% of the profit made by the fund above a minimum rate of return.

In their early career, hedge fund managers (with less than 4 years of experience) earn an average total compensation of $105,000. The compensation includes overtime pay, bonus, and tips. In mid-career (with less than 9 years of experience), they earn a compensation of $135,000. Experienced managers (with 10-20 years of experience) get average total compensation of $200,000.

According to Payscale, the top 10% of earners make about $500,000 per year. In 2021, the top hedge fund earner was Israel Englander of Millennium Management, making $3.8 billion. Such a high salary should not be considered typical but it demonstrates how much the pay can vary for this role.

Most Successful Hedge Fund Managers

Although hedge funds have performed exceptionally well in the past few years, these people have been working in the industry for decades. You should read about them, how they started their career, and what funds they managed from the beginning.

Jim Simons

Unlike other successful people in the finance industry, Jim Simons started trading at the age of 40. In 1978, he started a quantitative hedge fund called Renaissance Technologies. The fund uses mathematical models to generate profits from market inefficiencies. It has more than $165 billion in discretionary assets under

Ray Dalio

Ray Dalio founded Bridgewater Associates in 1975, which currently has 1,500+ employees and more than $140 billion in assets under management. Dalio has popularized many widely used practices, including currency overlay, portable alpha, risk parity, and global inflation-indexed bond management.

Kenneth Griffin

Kenneth Griffin owns 80% of Citadel LLC, a multinational hedge fund and financial services company. He is also the owner of Citadel Securities, which has been at the forefront of the modernization of markets and market structures. It serves 1,600+ clients, including many of the world’s largest central banks and sovereign wealth funds.

Chris Hohn

Chris Hohn formed a value-based hedge fund in 2003. The fund (called The Children’s Investment Fund Management) is known for making long-term investments in fundamentally sound companies across the world. It currently manages more than $30 billion.

Key Market Trends

The total value of assets managed by hedge funds worldwide has increased significantly in the past two decades. The US hedge funds account for about 75% of the Asset Under Management (AUM) across the world, followed by the UK.

Despite the rapid growth in hedge fund activity in other countries, the United States accounts for 3,300+ of the 5,400+ active hedge fund managers and 3,400+ of the 5,500+ institutional investors active in hedge funds.

Hedge funds are also heavily investing in artificial intelligence and machine learning tools to enhance operational efficiencies and improve returns.

These advanced tools help managers make decisions based on past patterns and non-traditional information, such as credit card transactions and geolocation data. Unlike conventional quant investing, machine learning algorithms can decipher change and adapt the time frames of their measurements and price estimations across different market conditions.

The industry has also started incorporating the ESG framework (Environmental, Social, and Governance factors). Several European companies have already integrated ESG into the investment process, and it is more likely to become a new standard.

Hedge fund managers can now filter corporations based on third-party reviews, and those corporations with poor ESG scores can be excluded from the core investment portfolio.

More to Know

Different types of hedge fund managers

Hedge fund managers can be divided into two types: active and passive.

Active fund managers buy and sell assets more frequently to rake in higher returns. They try to outperform benchmark indexes and their competitors. In addition to generating more returns for investors, other goals of active management can be minimizing taxes, increasing dividends or interest, and managing risk. Most hedge funds and many mutual funds are actively managed, which explains their higher fees.

Passive fund managers, on the other hand, simply copy the market index or benchmark as closely as possible. Vanguard 500 Index Fund, for example, copies the S&P 500 Index. It contains the same 500 stocks in the same weightage.

According to the report published by Morningstar, only 26% of all actively managed funds beat the returns of their passive fund rivals over the long term. Plus, passive funds have low fees, tax benefits, and low risk. This is why most retail investors are shifting to index funds these days.

What’s the difference between a hedge fund and a mutual fund?

While both funds pool money from a large number of investors, they use different strategies to generate returns. Mutual funds stick to the traditional and safer approach to generate reliable returns. Hedge funds, on the other hand, employ high-risk high-return strategies.

Hedge Funds Mutual Funds
Can make high-risk investments Do not usually make high-risk investments
Available to high-net-worth individuals Available to the general public
Charge a performance fee (about 20%) from the profit Do not take a profit share
Not heavily regulated by the SEC Regulated by the SEC
Read More

14 Largest Hedge Funds In The World

11 Best Paper Trading Apps and Platforms

15 Largest Banks In The World By Total Assets

Written by
Varun Kumar

Varun Kumar is a professional science and technology journalist and a big fan of AI, machines, and space exploration. He received a Master's degree in computer science from GGSIPU University. To find out about his latest projects, feel free to directly email him at [email protected] 

View all articles
Leave a reply