What is a hedge fund? And how to get a job in one

  • Hedge fund jobs can be some of the most lucrative in finance.
  • Hedge funds are asset management firms, but with the freedom to follow more creative investment strategies.
  • Hedge funds used to be scrappy outsiders but have become far more institutional.
  •  Large hedge funds are increasingly running their own graduate recruitment schemes.

What do hedge fund jobs involve?

Hedge funds used to be the Wild West of banking but have now become far more institutionalized. They’re typically based in different locations to investment banks. In London, Mayfair is hedge fund territory. In the U.S., it’s Chicago or Connecticut, or – increasingly – Miami.

Hedge funds invest money for clients. Their clients used to be wealthy individuals, but are now far more likely to include large pension funds too. Unlike so-called “long only” asset management funds (which we cover elsewhere in this guide), which make money by investing in products that are rising in price, the term “hedge fund,” comes from the fact that hedge funds try to ‘hedge’ their bets. – They try to ensure that they can make good returns in any market. This means they seek to make money by investing in things that are falling in price as well as things that are rising.

So, how do hedge funds make money in a falling market? By “short selling.”

Short selling, or “going short” involves first borrowing shares (or some other security) and then selling them into the market before buying them back again at some point in the future. When hedge fund goes short, it’s betting that the price of the shares will drop before it buys them back again. The profit is the difference between the price it sells the shares at after it borrows them, and the (hopefully) lower price it pays when it buys them back before handing the shares back to organisations it borrowed them from.

By using short selling and other techniques to hedge their investments, hedge funds aim to generate super-charged returns for their investors. Long only funds rarely achieve returns of more than 10% when investing in ‘safe’ products like European equities, but top performing hedge funds can achieve returns of 47% (sometimes more!) in a short period of time.

Given that hedge funds have traditionally charged investors a 2% management fee (2% of the funds they invest) and a 20% performance fee (20% of the profits they earn), this can make working for a successful hedge fund very lucrative indeed.  Everything is geared towards chasing “alpha” (returns that are above and beyond the “beta” generated by a rising market), so when you work for a hedge fund you are laser-focused on investment performance.

To some extent, all hedge funds are on the look out for the same thing. – Financial products that are incorrectly priced. “Hedge funds make money by capitalizing on market inefficiencies, which are always fleeting opportunities,” says Dominique Mielle, a former partner at Canyon Capital, a hedge fund with $25bn in assets under management, writing in her memoir ‘Damsel in Distressed.’  Colin Lancaster, at hedge fund Schonfeld Strategic Advisors, who’s written a novel on his time in the industry, says the Holy Grail for hedge funds is “finding an imbalance” and then profiting from it.

What are the different types of hedge fund?

While all hedge funds are chasing imbalances, the imbalances you find will depend on the kind of strategy the hedge fund you work for is pursuing. Some of the main hedge fund strategies are:

Long/short: Long/short hedge fund managers go long some of the time. And they go short some of the time. They go long when they expect the price of a product to rise. And they go short when they expect the price of a product to fall.

Global macro: Global macro funds can go either long or short. They invest to benefit from global macroeconomic trends. Lancaster says global macro hedge fund managers look for imbalances between countries in things like economic growth, interest rates and central bank reactions. They then profit from the moves in that country’s interest rates, or from moves in its foreign exchange, equity, or credit markets.

Arbitrage: Arbitrage-focused hedge funds seek to make the most of price differentials between related securities products. At their simplest, so-called ‘statistical arbitrage’ (Stat Arb) funds put stocks into related pairs. If one pair does well and outperforms the other, it will be sold short (in the expectation that its price will then fall again). The underperforming stock will be bought (in the expectation that its price will rise to meet its pair). Arbitrage funds are often quantitative – they use complicated computer programs to determine what to buy and sell.

Event driven: Event driven hedge funds try to profit from one-off events. For example, when one company decides to buy another, it will usually pay more than the current price for the shares and event driven funds will seek to benefit from this.

Systematic/quantitative: Increasingly, hedge funds are “systematic:” they use high speed computer algorithms to unearth market inefficiencies and to place trades in the brief time period when there’s money to be made before the inefficiency is discovered by other funds in the market. Systematic hedge funds employ quants and operate across different market strategies.

Multi-strategy hedge funds: A lot of the biggest hedge funds (like Citadel, Millennium, Balyasny or Point72) are multi-strategy hedge funds: they pursue all the above strategies and more.

Hedge funds also vary by the vast range of products they invest in. For example, there are credit hedge funds (investing in credit), distressed hedge funds (investing in credit which might never be repaid), and emerging markets hedge funds (investing in emerging markets)…

Hedge fund jobs are less sexy than they used to be

To the uninitiated, hedge funds have a reputation for being at the edgier end of financial services but over the last two decades they’ve become increasingly like banks, and the biggest ones are the global multi-strategy funds.

These top hedge funds have billions and billions under management – much of it from the pension funds and other institutional investors that like nice safe returns instead of risky mavericks. As Mielle points out, the sheer size of hedge funds, combined with new technology (allowing financial statements to be accessible online), regulations (requiring the same disclosure to all investors), and competition, have eroded many of the market inefficiencies that hedge funds formerly thrived upon.

“In the beginning, hedge funds had a rebellious aspect to them, an anti-establishment mentality, and a certain scrappiness. We wanted to do things differently, discover new investing ways. We wanted to be original, innovators, inventors, explorers. It was about thinking creatively, outside the box,” writes Mielle. “In the industrialization age, we started mutating into the big, stodgy guys ourselves.”

Career paths in hedge funds

If you want to work for a hedge fund, you probably envisage yourself as a trader or portfolio manager. However, like investment banks hedge funds have teams of support staff working in areas like risk, compliance, technology and operations.

Some of the key jobs in hedge funds include:

Hedge fund analysts and researchers: Analysts spend their days poring over the financials of the companies and financial products hedge funds invest in. They help determine the fund’s investment strategy.

Hedge fund traders: You might think being a trader in a hedge fund is the most exciting job there is. You may well be wrong. Traders in hedge funds are often ‘execution traders’. Execution traders simply push the button, or ‘execute’ trades. They don’t get a chance to devise their own trading strategies, they don’t get a chance to take their own positions on the market. What they do get a chance to become experts in is, ‘market timing’. Execution traders watch the market closely and know when’s the best time to place their trades.

Hedge fund portfolio managers: Portfolio managers are at the top of the hedge fund tree. They listen to what analysts say and decide how to allocate investors’ money to achieve the highest returns. They are in charge of the whole investment portfolio (hence the name). Everyone wants to be a portfolio manager. They also make the most money.

Hedge fund sales and marketing professionalsHedge fund sales and marketing professionals liaise with investors. They help sell the merits of the fund and persuade investors to hand over their money to be invested. Investor relations professionals fall into this category.

Hedge fund quants: Hedge funds also employ quantitative specialists – all the more so if they’re pursuing a quantitative strategy. These quants develop complex mathematical equations (algorithms) which tell the fund when to trade in order to make the most money using its chosen strategy. Quants who build algorithms work with quant developers – technologists who translate the algorithm into computer software which can implement the algorithm’s strategy.

Hedge fund risk managers and compliance, legal, technology, operations professionalsAs hedge funds have become bigger (and more boring), so they have accumulated the sort of support structures only previously seen in investment banks. Hedge funds now have risk management, compliance and operations professionals. These jobs will be similar to banks – except you’ll probably have to be more of a ‘jack of all trades.’ It’s normal for compliance and legal roles to be blended in hedge funds, for example.

What skills will you need for a job in a hedge fund?

The good news is that big hedge funds have become more institutional, they’ve started running their own campus recruitment programs and training graduates of their own. – In the past, they tended only to recruit people who had first trained at an investment bank. 

As with investment banking jobs, it helps to start off as an intern. But be warned: winning a place on a hedge fund graduate program or internship is exceptionally tough. Hedge funds hire a lot less people than banks.

The hedge funds that hire graduates and interns include:

Citadel investment Group, one of the world’s largest hedge funds. Citadel offers full time positions and internships, across trading, quantitative research, operations, trading and software engineering. Openings are available in in a range of locations, most notably in London, Chicago, New York, Dublin and Hong Kong.

Point72 Asset Management runs internships and full-time graduate programs at the Point72 Academy. The academy hires students in the U.S., Asia-Pacific, or Europe. The summer internship is an eight-week program offering training by academy staff, coached by investment professionals and mentored by academy graduates. The summer internships provides a ‘gateway’ to the firm’s full-time academy associate program.

Millennium Management offers an internship programme for those looking to work in infrastructure (designing and developing the operating system) and technology, and a full-time research analyst programme for anyone looking to work in its investment teams. Millennium’s graduate scheme involves a year embedded within the equity research analyst training programme, after which graduates will return to Millennium as a research analyst on one of its investment teams.

DE Shaw & Co, which is 20% owned by Google’s Eric Schmidt, runs a 10-12 week internship programme for undergraduates. Rival quantitative fund Two Sigma offers internships across software engineering, quantitative research, business development, strategy, human resources, and its legal teams in New York.

Bluebay Asset Management and Bridgewater Associates also offer internships. AQR Capital Management runs a 10 week internship for undergraduate, graduate and doctoral students in London and New York.  Interns are given a project to work on during the summer and are taught at the fund’s Qanta Academy.

Balyasny Asset Management offers graduate programs and internships across investment and trading, technology and engineering, quant, risk and big data and business and operations. Balyasny’s internships are eight to 12 weeks long and the fund asks applicants to apply to specific divisions rather than generalist positions.

Which skills will you need for a hedge fund career?

If you want a hedge fund job, you’ll typically need to have an excellent academic record and – if you want to be an analyst or a portfolio manager – you’ll need to be no stranger to very hard work.

“The game has gotten much harder,” says Colin Lancaster. He categories the best people in hedge funds as “exceptional decision markets” who spend hours researching the markets. Mielle says analysts in hedge funds need conviction about their investment ideas – and to be willing to defend them when other analysts or portfolio managers question their validity.

While most hedge funds like people with mathematical and data skills, these aren’t enough on their own. “A widespread misconception about the hedge fund profession is that you must be either a math geek or a sleazy dealmaker to succeed,” says Mielle. In fact, she says being a successful portfolio manager or analyst is also about being able to communicate complex investment ideas, innovative thinking, generating new ideas and having flashes of intuition that can join up the dots. This might be why Citadel says it looks for candidates with sound judgement, good communication skills and “a whatever it takes attitude,” or why Two Sigma says it wants people who are “creative” and have, “intellectually curious minds.”

Not all hedge funds demand a specialist degree discipline, but for quantitative positions, applicants will need a degree in a quantitative-related field.

While DE Shaw is known for its recruitment of quantitative PhDs and coding talent, it also hires ‘generalist interns’ who’ve graduated in areas like social studies. 

Salaries and bonuses in hedge funds

The amount that you earn in a hedge fund will depend upon things like the role you’re doing, the size of the fund you’re working for (its “assets under management”) and the fund’s performance – or the performance of your unit within the fund. Most hedge funds skew pay heavily towards bonuses instead of salaries, meaning that pay can vary considerably by role.

If everything works out, you’ll be paid a lot. The eFinancialCareers salary and bonus survey indicates that hedge fund jobs are some of the best paid in the financial services industry. Juniors working in analyst/research roles in London can easily make £200k ($270k) in salary and bonus. Pay is comparable in New York.

Partners are at the top of the pay pile in hedge funds: they get a share of the profits made by the fund in each year. Funds don’t divulge how much partners are paid globally but Citadel’s London partners received an average of $2.2m each in 2020.

Download our full salary and bonus survey here. 

Download our full guide to graduate careers in finance here. 

Contact: [email protected] in the first instance. Whatsapp/Signal/Telegram also available (Telegram: @SarahButcher)

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Photo by Hayden Forde-Pogson


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