How to Break Into a Hedge Fund, Make Enough to Retire, and Travel Around the World Kiteboarding, Paragliding and Skydiving

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Hedge Fund Recruiting 101Everyone wants to work at a hedge fund.

It’s hard to resist the lure of piles of money, your own yacht, and a private jet or three.

But once you make it to that level, you run into another problem: what do you do with your life?

Our interviewee today faced the same problem, and then found a wonderful solution: take a sabbatical, go skydiving in Seville, paragliding in India, and then sail around the world on a kiteboarding expedition.

Hey, starting a nonprofit can wait.

I tracked down our interviewee during in his downtime somewhere between India and Brazil, and coerced him into answering all your questions about hedge fund recruiting, work, and how to live his lifestyle – so here’s what you’ll learn:

  • How to dominate your hedge fund interviews and what interviewers really want to see.
  • What you do at a hedge fund, day-to-day.
  • The hierarchy at a hedge fund and the different roles available.
  • And yes, how to retire early and spend your time jumping out of planes and kiting near exotic beaches (maybe).

Story Time

Q: Let’s start with how you broke into the industry and the “path” you followed, even though we all know there’s no real “path.”

A: Sure. I majored in Finance, Management Information Systems, and Economics in college, and I started working at a small private equity firm right after I graduated.

I left the private equity fund after six months and began my job search for a position at a hedge fund. Coincidentally, a close friend had been contacted by a headhunter for a fund that was looking for a junior analyst position. I gave them my resume and started the interviewing process there.

I started at the distressed, opportunistic and value-oriented fund, stayed there for almost 6 years, and then joined a long / short equity value fund after that.

I stayed there 2 years, went back to the first fund, stayed there for a year, and then left to travel around the world kiteboarding, paragliding, and skydiving.

Q: OK, so it sounds like you hopped around quite a lot but still managed to stay at that one fund for over (7 years) years – pretty amazing in this industry.

What exactly did you do at these hedge funds?

A: I was a research analyst, which means I conducted investment research and generated investment ideas for portfolio managers.

I first started covering distressed debt and equity investments all over the world, and then I began spending more time on short selling, also getting into distressed assets.

We only worked with public companies, but some funds cover private companies too.

Q: So where does “research analyst” rank in the hedge fund hierarchy?

It sounds like you were still a peon, but were you at least a highly paid or really, really, really ridiculously good-looking peon?

A: At my previous funds, the 3 major front office roles were:

  1. Portfolio Manager – The top of the ladder.
  2. Investment Analyst (IA) – The idea-generators and researchers. There are usually junior and senior analysts.
  3. Traders (ET) – There are usually two types of traders – ones that also generate ideas, and ones that simply execute ideas of others (Execution Traders).

Q: Your attention to detail is poor, because I don’t see “Research Analyst” anywhere there.

A: “Research Analyst” and “Investment Analyst” are used interchangeably, but “Investment Analyst” is probably more common so that’s the one I listed there.

Anyway, the way it works in a nutshell: the analysts generate or work on ideas generated from others and then research the ideas and present them to Portfolio Manager(s).

The PMs then ask questions to the analysts, express their concerns, and then the analysts do further research to answer their questions.

Then, the PM decides whether or not to make the investment.

Once the PM decides what to do, the trader then executes the trade and makes sure they can buy / sell everything at the right price, or as close as possible.

Remember that this is difficult because you’re often working with millions of shares / securities, so it’s not as simple as logging into your TD Ameritrade account and hitting “Execute.”

Beyond the front office roles, there are also back office roles in IT, administrative, and CFO functions.

Hedged Recruiting

Q: I’m going to cut you off right there, because let’s face it: no one really wants to learn about the back office. Let’s skip to the part that everyone reading wants to know about: how to break into the front office.

What’s the recruiting process like?

A: Sure. The process at most hedge funds is more extended than what you see with investment banking interviews – in addition to the interviews themselves, you can expect to get a problem or case study to work on for a few days.

You might, for example, get an income statement, balance sheet, and cash flow statement of a company and then be asked to provide a one-page summary of its valuation.

Q: OK, so let’s look at those 2 parts separately and let’s start with the interviews themselves.

What are the key questions to expect in hedge fund interviews?

A: Here are the most common questions you’ll get:

  1. Tell us about your background / walk us through your resume.
  2. Why do you want to work for a hedge fund?
  3. What sort of investing have you done lately?
  4. What stocks do you like?

And then there are the usual behavioral questions to determine the candidate’s personality: is he/she a person who studies all the time, or someone who likes to have a good time?

Since hedge fund teams are usually very small, we need to ensure that the candidate fits in with the firm culture.

Brainteasers can be common at some funds, but the ones I worked for didn’t use them at all.

Above all else, we want people who love investing and who have original ideas on how to trade the markets.

If you don’t follow the markets very closely and trade a lot on your own, you wouldn’t be a good fit at most hedge funds; people here actually enjoy their work.

Q: Right – that confirms a lot of what past interviewees and contributors have said about hedge funds and asset management.

What about the case study you get in interviews? Any tips on tackling that?

A: Sure. So, first off, we care mostly about how candidates simplify the problem and how they arrive at the valuation of a company.

I know you’ve stated that for private equity interviews, for example, it’s really important to give a firm yes/no answer.

But at least at the funds I worked at, we didn’t care about that quite as much if the candidate had no work experience.

We were more interested in seeing what analytical skills the junior analysts possessed, but didn’t expect them to make final investment decisions. Senior analysts would be expected to better judge whether particular ideas were good investments.

We expect candidates with a few years of investment banking experience to be able to spread the numbers, be very competent in Excel, and come up with the conclusions relatively quickly.

We’re also curious about how candidates come up with their one-page summaries: actually calling the company’s management team and asking them questions would really impress the interviewers.

Q: Let me stop you right there: you’re actually saying that it’s a good idea to go outside the scope of the case study, look up the management team’s contact information, and call them?

A: It’s not strictly necessary, but it shows initiative and indicates that you have what it takes to work at a hedge fund – we’re always uncovering hard-to-find information (in a legal way, of course).

You also spend a lot of time speaking with senior management of companies, and if you’re not comfortable doing that and getting information from them, you wouldn’t be a good fit here.

So I would do everything possible to set yourself apart – if you can’t get through to the company directly, try to find the information indirectly by speaking with suppliers, customers, and so on (all of which are listed in filings).

With the case study itself, we can usually tell how sophisticated a candidate is based a few questions we raise.

Even if candidates don’t know how to answer certain questions, as long as they can demonstrate their thorough understanding of financial statements, have strong analytical skills (i.e. being able to connect dots and solve puzzles), the ability to learn quickly and passion for the role, they can usually learn the skills on the job in a month or two.

Q: OK, so that’s what to expect in interviews and with case studies – what about the process itself?

A: We usually have 2-3 rounds of interviews over 2-3 separate days. We have 4-5 different junior people interviewing the candidate individually in 15-30 minute intervals.

The Portfolio Manager(s) would only be involved in the later stage of the interview process, when the candidate has passed through the initial interviews and met other team members.

You can check out this interview series for more on hedge fund case studies.

Q: Great, thanks for those tips and for laying out the process, at least at the funds you’ve worked at.

Anything else to know about recruiting?

A: One last point I’ll mention: your reference check can be important, and many funds actually ask for references in interviews.

So unlike at banks, where it’s rare for anyone to call your references (at least in the US), hedge funds routinely ask for this information. 

Q: That’s an interesting point, because most people can’t even list many references unless they’ve worked full-time before.

Does that mean that you’re mostly looking for people with more experience?

A: Usually candidates work at investment banks for a few years before working at hedge funds. I broke in 6 months out of college, but that was only possible because the markets were better and I happened upon a great opportunity.

If you haven’t had any work experience, you’ll be judged based on your grades and your school’s reputation. SAT scores matter, too.

I don’t have a black-and-white cutoff number for the grades or the scores, and it depends on the individuals’ other qualities. Some individuals are referred to funds, and having a strong reference can increase one’s chances significantly.

If you’re in the process of getting the CFA certification or have already done the CFA, those will also increase your chances of breaking in.

To sum it up, we look for candidates who love investing, are passionate about the markets and ideally trade their own portfolio.

And if you’ve had a few years of work experience, your work experience matters more than your degree, CFA and grades.

On the Job, Culture, Work, and Pay

Q: Right, that makes sense and confirms some previous comments on certifications.

What’s an average day in your life like? How do you spend your time at work?

A: My average day starts at around 5:00 – 5:30 AM. I read the news, check emails and Bloomberg, and see if there’s any news that affects decisions in our portfolio.

I then chose 3-4 companies I want to work on for the day.

They might be existing investments, or they might be prospective companies we’re thinking about investing in – but in either case, much of the work is the same:

  1. I read a lot of material and talk to management teams of companies.
  2. I talk to the portfolio managers here, and sometimes sell-side analysts.
  3. I do a lot of research to come up with new investment ideas and see if, for example, a certain strategy or acquisition makes sense for an existing investment.

My typical day is 12 hours, and we usually eat at our desks.

I’d say I probably spend around 60% of my time on generating investment ideas, and 40% of my time on our existing investments.

Q: Well, at least you don’t have to worry about pitch books or pulling all-nighters!

What types of technical skills and modeling know-how are required? Is math wizardry a must?

A: For what we do, the math skills required are minimal. But we do want candidates who are comfortable using Excel and who understand accounting and financial statement analysis.

Certain types of hedge funds require more math / programming skills, though – if you’re at a place that focuses on automated trading or some type of high-frequency trading strategy, it’s completely different.

Q: What about the culture compared to, say, investment banking or private equity?

A: The culture of the firm depends 100% on the portfolio manager. I worked for a firm that was very quiet (like a library), and I also worked for one that had intense pressure and was almost like working at a bank.

Overall, culture at hedge funds varies a lot more than what you see at banks and PE firms, so you really need to do your homework when you go around interviewing for these positions.

Q: And I’m assuming that the hours and pay are also 100% dependent on the PM and the policies he sets?

A: To some extent, yes, but I think pay ranges are a little more standardized because you know the management fees and the number of people at the fund in advance.

Most people with a few years of experience in IB start off with a base salary of $75 – $125K USD. Your bonus might be 2-3x your base salary, so around $150K – $375K.

That’s a wide range because bonuses are more dependent on the fund’s policies and performance.

Overall, most juniors at hedge funds earn between $200K and $500K USD all-in.

Sometimes you may make more or less than that, but stories of junior people making millions of dollars are exaggerated and/or not common.

Q: Right, I don’t think it’s realistic to expect that kind of pay, especially as the hedge fund market has gotten more crowded and the overall market has become more efficient.

What about the senior people at your fund though?

A: That’s where performance comes into play a lot more. I’ve seen senior people at hedge funds make anywhere from a couple hundred thousand USD to $1 million, $10+ million, or more.

Your salary doesn’t change much as you move up, so you make most of your money from your bonus, which is either discretionary or determined by a formula.

If your bonus is discretionary, your PM will determine the number. If your bonus is a formulaic bonus, it’s usually determined based on a percentage of your base salary, the fund’s returns, and so on.

And with PMs, the sky’s the limit for bonuses: it’s 100% linked to your returns and how many new investments you generate.

The Future of Hedge Funds

Q: From previous interviews here, it seems like few people willingly leave the world of hedge funds.

But let’s say you actually want to move on – what are the most common exit opportunities?

A: As you said, people usually stay here if they want to be in finance; otherwise, they’re usually fired or retire early.

You might get fired if you have a bad attitude or if you can’t generate ideas and make money – funds are selective about their hires, but they make mistakes occasionally.

The most common, non-firing/retiring exit opportunity is leaving to start a new hedge fund.

Q: What does the future hold for hedge funds?

Do you think they’ll still be hot in coming years, or have they already peaked?

A: It will be more competitive to work in the hedge fund industry going forward.

Back before they became popular and before news of billion-dollar paydays broke, no one wanted to work at hedge funds – but these days lots of smart kids want to go into the industry.

At the same time, though, it’s getting more difficult for hedge funds to make money because the markets have become more efficient and because competition is intensifying – so there will also be less demand in coming years.

Q: So what would you say to a smart college student who wants to work at a hedge fund today?

A: Get as much experience in investing as possible, own either a mock or a real portfolio, read books on investments, and network. All the good jobs come from networking.

A CFA also helps, because it demonstrates one’s willingness to learn about investing (but again, see my full comments on it above).

I wouldn’t say it’s a bad field to get into, but going forward I don’t think you’ll see as many out-sized success stories.

Ask yourself whether you truly enjoy the work and investing itself, or if you’re just interested in the money.

And make sure you’re truly passionate about what you’ll spend your time doing, as time itself is the most valuable asset you possess.

Q: So is that why you ended up leaving the field?

A: Pretty much – for me it was more about how I wanted to spend my time than anything else.

I had already worked in the industry for almost 10 years, and while the money was nice, I didn’t want to work 60-80 hours per week for the rest of my life.

I’ve been taking time off over the past year or so to go on adventures and travel all around the world.

I’m not going to do this forever, though, so I may do part-time consulting or some other type of remote work in the future.

Q: Great. Thanks for your time!

A: Sure, enjoyed the chat!

About the Author

has worked in institutional sales, private banking, and capital markets in the world's leading bulge bracket banks. She has advised over several hundreds of professionals, from Analysts to Directors, at leading investment banks, hedge funds, and accounting firms. She has also interviewed senior professionals in private equity, venture capital, asset management, hedge funds and investment banks for featured articles. In addition to the above, Nicole also leads our coaching services here.

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144 Comments to “How to Break Into a Hedge Fund, Make Enough to Retire, and Travel Around the World Kiteboarding, Paragliding and Skydiving”

Comments

  1. D says

    Hello,
    Just wondering what you would an interviewer would say to a MS in Cyber Security(Security Engineer) and a double major undergrad in Management Information Systems and Finance. I also am in our schools Investment Club in which with invest 1.6 million of the schools endowment…I am in between going down the career path of cyber security or being a financial advisor but do not know which one to do. I want to join a hedge fund and specific to technology/cyber specifically.
    What do you think ? I’ll get my MBA after my Cyber masters if I have to but I am not sure what to do.
    D

  2. Dan says

    Dear M&I Team,

    Sorry if this is just another naive question from a mis-informed student. It’s very difficult to get proper information on the industry from the outside. Articles like these are invaluable for someone like me!
    If I was to work a few years at an Investment Bank before i looked at going into hedge funds, what could be the best option for me out of these two: Equity research or trading? My guess would be research, especially since now proprietary trading has been banned due to the volcker rule etc. Also because research seems to give you a more in depth understanding of how to analyse companies. But am I right in these assumptions? Is it still possible to go from trading into hedge funds and then up the ranks?

    Thanks for any help you can give,
    Dan

    • M&I - Nicole says

      It really depends on what you’re great at. I’d say both works, but some people are more suited to research, others more suited to trading. Yes you can rise up the ranks at a HF

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