Posted By: Kaplan Schweser
Published: February 13, 2020
Working at a hedge fund is challenging, interesting, rewarding, and even exhilarating. It requires demonstrated investment experience, hours of research and hard work, superior networking skills, and an appetite for risk. Read this article to find out what a hedge fund is, learn what the job is like from hedge fund professionals, and discover what you need to get started and to succeed.
A hedge fund is a type of investment partnership between a professional fund manager and investors who put their money together into the fund. These investors are not ordinary. They typically have a net worth of $1 million or more. The purpose of the fund is to maximize their returns and eliminate risk. Their fee structure is commonly referred to as “2 and 20” because they charge a 2 percent asset management fee and then a 20 percent cut of any gains.
The reason that they are called hedge funds is because the types of trading they can do are based on “hedging” bets. Hedge funds can invest in anything—stocks, bonds, land, real estate, derivatives, currencies, and other alternative assets—and they can use leveraged or borrowed money to heighten their returns. They can buy a stock, commodity, or currency with the expectation that it will rise in value, which is called the “long position,” or they can “short sell.” Short selling is borrowing a security and selling it on the open market, planning to buy it back later for less money.
At a hedge fund, you will encounter consistent pressure because you are expected to make investments that deliver favorable returns. This requires complementing the financial and accounting skills used in investment banking with consulting and researching skills. If the investment is a business, for example, you will have to know it inside and out, going beyond the financials to understand everything that affects it, such as customers, competition, management, world economic trends, and more. Then, you must use what you learn when you make your projections and propose pricing.
The hours you work depend on where your hedge fund is located. If you’re on the east coast of the U.S., the hours will typically be from 7:00 am–7:00 pm. If you are on the west coast of the U.S., the typical hours are 5:30 am–5:00 pm. Because your attention will be riveted on the markets when they’re open, you will have to do research before and after market hours. This requires checking the business news, world news, finance websites, and sources, such as Bloomberg and CNBC, to find information that you can evaluate for potential investments and that can help you monitor existing investments.
On Quora, an anonymous hedge fund investment professional wrote that, although there is no typical day in a hedge fund, there was a certain rhythm. “I review my to-do list for the day and make adjustments if necessary. If a stock I’ve been following moves materially, I’ll make it a priority to look at what’s going on. I’ll also check in with the portfolio manager to see if there’s anything he’d like me to work on or to get feedback on an analysis I’m working on. Beyond that, it’s a lot of reading and analysis. Public filings, transcripts, company presentations, data analysis, forecasts, etc.”
Other descriptions of working at a hedge fund are similar. One hedge fund manager at a small firm that manages assets valued at $1 billion says that it is a “pressure cooker,” but she still has fun. Another says that “it is never boring” because you have a chance to innovate every day. Overall, most professionals emphasize that if you’re willing to put in the work and the hours and are a creative go-getter, you will enjoy the work and the rewards.
Typically, hedge fund professionals and analysts start out in investment banking, equity research, or securities trading. They usually work in these fields for at least two years before approaching a hedge fund. However, some professionals entered a hedge fund right after graduating from college, thanks to internships and intense networking.
No matter where they come from, unless they are managers who started their own funds, most hedge fund professionals begin their careers in one of these entry-level positions:
To succeed at a hedge fund, you need multifaceted knowledge, excellent communication and networking skills, and a commitment to continuous improvement and progression. The ideal hedge fund professional is a team player who has been an investment banking analyst or an equity research associate at a leading bank, a research or investment analyst at an asset management firm or mutual fund, or a stockbroker or trader. Certain financial credentials, like the CFA® charter, CAIA® charter, and the FRM® designation, can also help you in a hedge fund career.
If you do not have investment or equity experience, it is still possible to succeed at a hedge fund. Other qualities that can serve you well include:
Hedge funds value results above all else. So, even if you don’t have all the experience and qualities listed here, if you can show that you get results, you are a good fit.
CFA charterholders, CAIA charterholders, and FRM professionals are often found in hedge funds. In some funds, these credentials are considered more valuable than a graduate degree. The time someone takes to earn a graduate degree is viewed as time that could have been used to learn on the job. Exam preparation packages for these designations can go a long way to helping you earn the credentials you need to succeed in a hedge fund career.