Hedge fund managers consistently top the highest earners worldwide, so becoming one is certainly one of the fastest ways to financial independence one could think of. This goes for hedge fund managers and analysts – don’t be fooled into thinking that you will become a millionaire by getting a hedge fund job in investor relations or operations.
Is it for you?
Hedge fund investing is about managing rich people’s money to provide them with (preferably superior) returns that have a low correlation with equity indices. It can include speculating on share and bond prices of individual companies, equity indices, commodities, foreign exchange and government debt. Investments can last anything from five minutes to one or two years, so it is important to be flexible and quick on your feet. You have to be okay with having a job that is essentially just about money. You will of course be exposed to a wide range of ideas, approaches, industries, people, but in the end it is about how much money you make, and this is what you will be judged on, so you need to be okay with that. You also need to be okay with working alongside people who care mainly about how much money you make. They can still be very nice, don’t get me wrong, but it’s important to keep in mind what the preferences and values of your colleagues are likely to be. If you can say yes to the above, then beyond that working in a hedge fund requires intellectual originality, deep curiosity and mental flexibility, attention to detail (preferably) and diligence.
The $$$ factor
With all the press reports on billionaire hedge fund managers, it’s easy for forget about the profits a PM is required to generate to make those sums. Base salaries in hedge funds used to be very attractive, but can be below those of investment bankers since banks started raising base salaries to deal with regulation of bank bonuses. I have even heard PMs complaining that it is really hard for them to hire investment bankers now because they are just too expensive. It will very likely be a six figure salary of course, especially if you are compensated in dollars, but we’re talking $100,000 or $150,000 rather than $400,000. The serious money is made from performance fees, which is just a share of the profit you generate. Whereas in banks, you are likely to just get 2-5% of your profits on a flow desk and up to 10% on a prop desk, in hedge funds PMs tend to get 10-20% of their profits. Keep in mind though that depending on the hedge fund you work for and your level of seniority, you may be taking smaller positions than you would be able to take as a bank trader, so your absolute profits might be smaller at first.
Another constraint on your hedge fund compensation is the fact that many don’t start out as PMs but as analysts working for PMs. As an analyst, the PM will have trade ideas and will ask you to research them, adding your perspective and your own ideas, and he will use your work as input in investment decisions. So you need three things: your PM needs to be a good investor who makes high profits. You need to be able to show that you contributed to these profits with your own ideas and analyses in a quantifiable way. And your PM needs to be a good guy so that he actually rewards you for your work rather than just pocketing the money himself.
It’s also important to think long-term, so you want to work for a PM who develops you and teaches you how to make money and how to become a PM eventually, rather than just using you for grunt work, and it helps to work for a respected fund so that you can switch to other funds later if needed. If you are not going to be a PM straight away, which is likely unless you have a solid track record as a trader previously, the sixfigure factor as well as your long-term prospects as an investor will depend on you working for a very competent and pleasant PM.
Lifestyle and the lady factor
Expect to work between 50-60 hours, as most hedge fund analysts and PMs I know tend to work from 7am to 6 or 7pm. Some who focus on US markets out of London might work from 9am to 9pm rather, but in general expect to work 10-12 hours. The nice part is you don’t sit in front of your computer all day, there may be CEOs and CFOs visiting to talk to you, you might go to company presentations or investor trips and if you want, you can get the salespeople from the bank s to take you out to dinners and clubs if that’s what you’re after.
It will not be news to you that there are very very few women investors in hedge funds. Most likely, if you become an analyst or PM, you will be the only one in your hedge fund. If you were a trader before, this will be familiar, although there are probably more female traders in banks than there are investors in hedge funds. There will be women in the office of course – the receptionist will be a woman, the accountant and controller or COO may be a woman, in the larger hedge funds the investor relations or HR may be run by a woman, but there will be very few women investors. In my experience, that doesn’t have to mean it is a bad environment for women at all though. I have always found that if you work with nice, good people, it shouldn’t matter, but if people aren’t nice, it doesn’t matter if they’re men or women, they can be nasty in different ways but they will still be nasty. At the hedge fund I worked at, I was certainly the only woman investor, working alongside six PMs and two analysts (in this fund, most of the guys were PMs and only the two most senior PMs had analysts working for them), but I could not think of one stupid comment they made or of any situation in which they made me feel bad. My boss, the head of the fund, sometimes mentioned he was astounded why not more women worked in hedge funds and just didn’t understand it.
The small situations where I still noticed awkwardness on my side was when I noticed that the investment banks often chose very beautiful young girls to work in hedge fund sales, and of course the guys liked it, but I couldn’t blame them for it. I also remembered once they wanted to go clubbing in Mayfair and I didn’t feel comfortable coming along, but just because I pictured myself going out with these guys, most of who were single (it was only the younger PMs going clubbing, not the senior PMs who were family guys), and I thought I would probably just spoil their fun if I came along. It was just my own issue though, because the next morning I found out that the female accountant who was about ten years older than me had joined them and apparently they had had a lot of fun together. If this sounds too good to be true, I have heard worse stories from other friends in other hedge funds, usually stories of sexist comments, but my point here is that there are nice, sensitive people in hedge funds and there are idiots, and you will usually get a feel for that during the interviews. Especially as hedge funds grill people repeatedly before extending offers, you will have ample time to get a feel for the culture of the place. You could even ask to have lunch or dinner with them before making a decision, which will be a good opportunity to look out for warning signs.
How to get in
Most hedge fund managers are senior traders or proprietary traders from investment banks with at the very least a solid 3 year track record of managing money successfully. This is particularly true for fixed income hedge funds. For hedge fund managers on the equity and credit side, you might also find those who were research analysts or M&A bankers, and more rarely salespeople who were picked by the clients they covered. Gaining several years of sell-side experience, really understanding the markets and building up a wide range of investment ideas and financial knowledge are a very good way to prepare for a hedge fund job, but there are many bankers who dream of switching to a hedge fund and don’t make it, so it is not a direct path.
You can also join hedge funds as investment analysts supporting a portfolio manager, and you might be able to get this job with less of a money management track record, even straight out of business school (especially in the US – in London this is less common, but possible). As a general rule, the less concrete experience you have, the more the hedge fund will require pure brains and they will ensure you have the intellectual potential to come up with original ideas, research investment opportunities thoroughly and efficiently, and be able to multitask. I went through numerous brainteasers, tests and stress interviews just to intern at a hedge fund during business school, so it is absolutely essential to know your stuff and be fresh and awake during the interviews. If you have never managed money in a bank, they are very likely to ask you about your personal investment experience, and it will certainly help if you have invested your own money so that you have gone through the basic mistakes and learnt what it feels like to lose money. It doesn’t have to be anything spectacular, but having researched a few investment ideas and made decisions, put them into action and being able to talk about why you took those decisions and how they worked out will really help you. If you don’t trust yourself to invest $500 privately, why should they let you to manage millions?
Inventing Money: The Story of Long Term Capital Management and the Legends behind it
This is the best book on the lives of Fischer, Black, Scholes, and Merton, the fathers of modern derivative pricing. It gives an excellent introduction into how and why derivatives were developed and how the industry grew. It might be a bit heavy if you have no background whatsoever, but even then I think it will familiarize you with the concepts important in trading.
Reminiscences of a Stock Operator
This is the autobiography of one of the first speculators in the 20th century, who made his fortunes in the 1929 crash shorting stock prices. He seems to have had a very unusual gift for interpreting stock prices and where they were likely to go, so much so that brokerages would refuse to take his orders, forcing him to operate anonymously even when he was in his teens. His insight on trading and investing are as true today as they were 80 years ago.
How I made $2m in the stock market
Despite the dodgy title, this is actually an excellent book on stock picking. It was written by Nicolas Darvas in the late 50s and follows a very similar investment style to Jesse Livermore, the author of reminiscences of a stock operator. It is a great introduction to technical analysis versus a fundamentals based approach to investing. It is also a very easy read and a great way to get started on investing.
Inside the House of Money: Top Hedge Fund Traders on Profiting in the Global Markets
As stupid as the title sounds (what is it with finance book titles???), this is actually a great book full of interviews with macro traders, i.e. investors who analyze global economic trends in currencies, interest rates and commodities to take positions on large movements and trends. It is fascinating how they interpret current events and what connections they make. You have to be interested in macro investing to like this book, as it is unrelated to corporate finance or technical aspects of trading.
Market Wizards: Interviews with Top Traders
This is something like the original of Inside the House of Money, a collection of interviews with successful traders from the 70s. Lots of their stories are focused on how they made money shorting soybeans or wheat in the Chicago trading pits, but there are lots of characters here that became famous hedge fund managers later. It does get technical when they describe exactly what they sold when and why, so again you need to be interested in investing to read this book.
A much lighter read, this is quite an entertaining book on the hedge fund industry and the characters in it (managers, investors, wives, journalists, funds of funds etc.). It is written by Barton Biggs, formerly head of Morgan Stanley investment management. He has a degree in literature, is well-read and has a healthy distance to the finance industry. He can be quite sarcastic at times and I laughed a lot reading it.