by Brian DeChesare Comments (16)

Hedge Fund vs Private Equity: Recruiting, Careers and Salaries Compared

Hedge Fund vs Private Equity

The “hedge fund vs private equity” question could refer to many things:

  1. Investment vehicles – If you’re wealthy, should you invest in hedge funds or private equity funds? Also, how do they invest, and how do they charge fees?
  2. Exit opportunities – If you’re currently in investment banking, sales & trading, or equity research, which one is best for the next step in your career?
  3. Long-term careers – What are the trade-offs in terms of day-to-day work, advancement, and salaries, and will these industries be around for the next few decades?

Around 90% of the articles I found addressed point #1, often copying and pasting the same text, while completely ignoring points #2 and #3.

But we don’t use $5-per-hour writers in 3rd world countries on this site, so I’m going to explain the differences and focus on hedge funds and private equity from a careers, compensation, promotion and exit opportunities perspective:

Hedge Funds vs Private Equity: What Do They Do?

Both private equity (PE) firms and hedge funds (HFs) are classified as “alternative investments” and share some high-level similarities.

For example, they both raise capital from outside investors, called Limited Partners (LPs), and then invest that capital into companies or other assets.

They attempt to earn a high return, and in exchange, they take a percentage of that return for their performance fee.

They also charge a management fee on the total amount of capital raised.

After that, however, almost everything else is different.

The biggest difference is that PE firms tend to acquire entire companies using equity and debt, while HFs acquire very small stakes in companies or other liquid, financial assets such as bonds, currencies, commodities, and derivatives.

As a result, PE firms have a long-term focus (often 3-5+ years for individual companies) and spend more time on operations and growth for their portfolio companies.

Hedge funds focus on finding mispriced financial assets and benefiting from quick gains in near-term, 12-month periods.

Because of this longer-term focus, PE firms require longer lock-up periods from their LPs, while redemptions are easier at HFs.

While both types of firms have management fees and performance fees, hedge funds usually charge lower percentages for both because of market factors and poor post-financial-crisis performance.

Private equity fees have fallen a bit over time, but they’ve remained close to the traditional “2 and 20” model – a 2% management fee and 20% performance fee – while the average hedge fund now charges a management fee of under 1.5% and a ~15% performance fee.

And the trend is toward even lower management fees, with performance fees that scale up or down based on annual returns.

Finally, “performance” is measured differently; it’s linked to IRRs and hurdle rates at PE firms, but net asset value (NAV) relative to the high-water mark at hedge funds.

So, if the fund’s previous highest NAV was $200, and it ends this year at $180, the performance fee will be $0 even if the fund earned a positive return in this year.

That exists because LPs don’t want to pay fees on returns that offset losses from previous years.

Is This Description Still True?

The description above is the “classical view” of the hedge fund vs private equity comparison.

However, both fund types are increasingly converging.

For example, many hedge funds have been moving into deals and acquisitions of entire companies.

And large private equity firms like Blackstone have been moving into hedge fund-like strategies, sometimes even acting as funds of hedge funds.

So, it’s not quite as clear a division as it once was, and you need to read the fine print about a firm’s strategy before making a decision.

Hedge Fund vs Private Equity Recruiting and Candidates

In both fields, candidates who attended top universities or business schools, earned high grades, and worked at the top investment banks have an advantage.

But recruiting is quite different once you go beyond that.

Private equity is “Investment Banking 2.0,” so it attracts mostly former investment bankers, as well as some consultants and Big 4 and corporate development professionals.

On-cycle recruiting is highly structured, with rounds of interviews, modeling tests, and quick timelines (e.g., “We interviewed you this weekend and gave you an offer on Sunday – respond by Monday”).

To get in, you need to understand accounting, valuation, and financial modeling, but you must also have deal experience and know how to source, execute, and manage large transactions.

Hedge funds attract more diverse candidates, including investment bankers, equity research associates, buy-side analysts at other firms, and sales & trading professionals.

Quant hedge funds also hire many math, computer science, and engineering students who can program and build mathematical models for the markets.

Most hedge fund recruiting is “off-cycle” and unstructured: you must screen for funds, network with professionals, and prepare for interviews independently.

You don’t know when you’ll hear back, how many rounds there will be, or how they’ll make a decision.

If you recruit for a hedge fund that does “fundamental analysis” (e.g., long/short equity, merger arbitrage, credit, etc.), then your knowledge of accounting and valuation is crucial, but you do not need deal experience in the same way you do for private equity.

Your passion for the markets and ability to generate, validate, and execute investment ideas are much more important.

For more about these differences, see our articles on how to get into private equity and how to get a job at a hedge fund.

Hedge Funds vs Private Equity: The Nature of the Work

The day-to-day tasks as a junior-level person in private equity include:

  • Deal sourcing.
  • Reviewing potential investments.
  • Valuation and financial modeling.
  • Monitoring portfolio companies.
  • Assisting with add-on acquisitions or preparing portfolio companies to sell.
  • Coordinating due diligence on potential deals.
  • Administrative work such as editing NDAs or other deal documents.
  • Meeting with bankers, lawyers, lenders, and other industry contacts.
  • Preparing marketing materials for the fundraising process.

Similar to investment banking, you’ll spend a lot of time in Word, Excel, and PowerPoint, but you’ll take a critical eye to each company rather than selling your client(s).

That requires more brainpower, but it also means that you’ll spend a lot of time looking at marketing documents like the CIM and finding reasons to say “no” to deals.

By contrast, the daily tasks at traditional hedge funds fall into just two categories: research and analysis.

Everything is shorter-term and higher-tempo, there are no deals, and portfolio companies don’t exist in the same way, so you spend the bulk of your time:

  1. Coming up with investment ideas;
  2. Building models and doing research to support your ideas; and
  3. Pitching your ideas to the senior team.

You still monitor your current positions, but many of the logistical and fund-wide issues are up to the Portfolio Manager, not the Analyst or Senior Analyst.

Both fields use valuation and financial modeling, but on average, financial models are more granular in private equity because of the longer holding periods.

You don’t need to create a 5,000-row Excel model to validate a quick arbitrage opportunity at a hedge fund – you just need to verify that, very roughly, the stock’s current price is way off.

Lifestyle and Culture

You should expect around 60-70 hours per week in both fields, with more consistent, market-based hours at hedge funds.

In private equity, the hours spike up and down with deal activity, and when a deal is in its final stages, you might be at the office all day and all night.

At hedge funds, hours can increase during earnings season – and if your fund hasn’t performed well in the year to date, and the end of the year is approaching.

At “mega-funds” in both industries, expect something more like investment banking hours (80+ per week).

The stress in private equity comes from deal deadlines and negotiating with other parties, while the stress in hedge funds comes from the market moving against you.

You may do some business travel at a hedge fund – to do channel checks, for example – but it’s far more common in private equity since you work with entire companies over many years.

The culture in private equity is much closer to the one in investment banking, with a similar amount of formality and similar people (high-achieving, “work hard, play hard” types).

You’re more likely to find eccentrics and oddballs at hedge funds because they care less about your formal credentials as long as you can generate high returns.

Founders and Portfolio Managers also tend to come from more diverse backgrounds, so the culture varies a lot more.

Hedge Fund vs Private Equity Careers, Advancement, and Salaries

Just as the work in private equity tends to be more structured and hierarchical, so too are careers.

We covered this in detail in the private equity career path article, but there’s a well-defined hierarchy (Analyst, Associate, Senior Associate, VP, Director/Principal, and MD/Partner), and your work and responsibilities change at each level.

Initially, you spend more time crunching numbers, churning out documents and analysis, and quarterbacking deals, but as you move up, you become more of a manager, then a negotiator, and finally a decision maker, fundraiser, and firm representative.

Firms look at specific criteria to decide whether or not you’ll advance to the next level, and almost everyone stays in each level for a specific number of years.

Hedge funds are different because the advancement process is more random, there are fewer levels in the hierarchy, and the nature of the job doesn’t change quite as much as you advance.

At the junior levels (Junior Analyst, Analyst, Research Associate), you spend time crunching numbers, doing research, and building investment theses.

But beyond that, even Senior Analysts, Sector Heads, and Portfolio Managers do some of those tasks as well.

PMs do have other responsibilities, such as fundraising, LP relations, risk management, and investment logistics, but the job is not as different as the private equity job at the Associate vs. Partner levels.

We gave approximate promotion time frames in the hedge fund career path article, but in practice, these vary widely.

Some people who “kill it” consistently might reach PM in only a few years, while others could reach Senior Analyst and stay there for a long time.

For a quick summary, plus salaries and bonuses, please see these tables:

Private Equity Compensation:

Position TitleTypical Age RangeBase Salary + Bonus (USD)CarryTime for Promotion to Next Level
Analyst22-25$100-$150KUnlikely2-3 years
Associate24-28$150-$300KUnlikely2-3 years
Senior Associate26-32$250-$400KSmall2-3 years
Vice President (VP)30-35$350-$500KGrowing3-4 years
Director or Principal33-39$450-$700KLarge3-4 years
Managing Director (MD) or Partner36+$700-$2MVery LargeN/A

Hedge Fund Compensation:

Position TitleTypical Age RangeBase Salary + Bonus (USD)Time for Promotion to Next Level
Junior Analyst or Research Associate22-25$100K - $150K2-3 years
Analyst24-30$200K - $600K3-4 years
Senior Analyst or Sector Head28-33$500K - $1 million3-5 years
Portfolio Manager32+$500K - $3 millionN/A

Hedge fund compensation is more variable than private equity compensation, but at the junior levels, you’ll most likely earn a bit more in private equity.

At the top levels, a star hedge fund PM who has a great year could easily earn more than an MD in private equity – depending on the fund size and structure.

The average case is similar, with total earnings in the high-six-figure-to-low-seven-figure range.

Exit Opportunities: Private Equity Wins

Private equity has the clear advantage in the breadth of exit opportunities: you could move to a normal company in a corporate finance, corporate development, or strategy role, you could move into venture capital, or (gasp) you could even move back into IB.

There’s also business school, starting your own company, and moving into other buy-side roles, such as hedge funds or asset management.

You develop a broader skill set that’s based on people and processes, along with financial analysis, so you’ll have a good number of exit options.

By contrast, it’s much harder to move into most of these fields if you’ve worked at a hedge fund for a significant period.

You won’t have the deal skills that PE firms and corporate development teams look for, you won’t look that appealing to most VC firms, and you won’t have enough “management” experience to join most normal companies.

So… you will most likely stay in hedge funds, move into asset management, or maybe do an MBA to make a complete switch.

You could also start your own company, especially in a field like fintech, but that option is not specific to hedge funds.

Future Outlook

If we focus on traditional/fundamental hedge funds vs. private equity, PE has a better outlook for a few reasons:

  1. Post-financial-crisis hedge fund performance has been quite bad, significantly trailing the S&P 500.
  2. Central banks have manipulated financial markets with QE and permanently low interest rates, making it harder for public markets investors to perform well.
  3. Huge amounts of capital have moved out of active strategies and into passive and automated strategies.
  4. Private equity performance has still been decent, partially because there’s more asymmetric information about private assets.

That said, I don’t think these trends will continue forever.

As soon as there’s another market crash or recession, I expect the passive investing bubble to deflate as people realize the risks of doing the same thing as everyone else.

Private equity still has the advantage, but hedge funds will probably do a bit better once one or more of the factors above changes.

Hedge Fund vs Private Equity: Summary

Summing up everything above, private equity is better if:

  • You want to work on long-term investments, and you like structure, process, and relationship-building.
  • You’re analytical, but you don’t like math enough to be a “quant,” and you want a variety of day-to-day work.
  • You come from a traditional investment banking background, and you want to continue working on deals.
  • You don’t mind hours that fluctuate with deal activity as well as a decent amount of business travel.
  • You like the structured hierarchy and advancement process and the career visibility that accompanies them.
  • You’re not 100% sure what you want to do in the future, and you want to leave your options open.

Hedge funds are better if:

  • You are extremely passionate about the public markets and investing, and you want to spend the bulk of your time coming up with ideas and making investments.
  • (For quant funds) You have a math, engineering, or computer science background, and you want to use it in a technical role.
  • You don’t fit the mold of a “typical banker” (i.e., top undergrad, top bank, high grades), but you can make money in the markets.
  • You like regular, predictable hours and a consistent location with less frequent travel.
  • You don’t mind the random/unpredictable advancement process, and you can tolerate significant uncertainty.
  • You’re very certain that you want a long-term career in investing, and you have no interest in joining a normal company or doing something outside of finance.

OK, But Which One is Right for You?

Instead of making “hedge fund vs private equity” an either/or question, it might be better to think of it as a sequence – because many people end up doing both.

The pattern I’ve seen repeatedly goes like this:

  1. IB Analyst –> Person gets tired of the grunt work, office politics, and long hours.
  2. PE Associate –> Person then gets tired of the process work, the need to monitor companies, and the continued emphasis on dotting i’s and crossing t’s.
  3. Possible MBA Program or Other Firm –> Person then realizes that switching didn’t solve anything and that maybe hedge funds are better.
  4. Hedge Fund Analyst / Senior Analyst –> Finally! After learning the ropes elsewhere, the person can now focus on investing.

So, if you still can’t decide, don’t panic.

Do both, and see what the last career standing is.

M&I - Brian

About the Author

Brian DeChesare is the Founder of Mergers & Inquisitions and Breaking Into Wall Street. In his spare time, he enjoys memorizing obscure Excel functions, editing resumes, obsessing over TV shows, traveling like a drug dealer, and defeating Sauron.

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  1. Where do you get your compensation data from? Which pays more PE or HF at a $5B+ firm for somebody successful in their mid 30s? mid 40s?

    1. Compensation data is widely available from reports that are published online. You can look at a range of reports to get an idea of what the normal ranges are.

      For your second question, you need to specify your job title at that point… Partner/Managing Director? Sector Head/Senior Analyst or Principal?

      As a general rule, private equity pays more consistently, and you don’t see as much variability until you earn significant carry at the highest levels. Hedge fund pay can vary a lot more because so much depends on the fund’s annual performance and shorter-term investments, the PM’s practices, your team size, etc.

      You have a higher ceiling at a hedge fund, but the median and mean pay are probably higher in private equity, at least in the AUM range you are asking about.

  2. Avatar
    Ali Elfadl

    It’s interesting that when I ever google for topics related to IB, PE or hedge funds I find myself landing on your website. Now rather than searching on google I come straight and look for what I want to learn about here.

    I would love to find more articles about quant hedge funds.

    I am not undergrad yet and I am so lost that I don’t know what career to pursue.

    On the PE side: I love to buy companies, operate and improve them, and then sell them to realize a return on their investment. I love to see things grow and make money out of them. I don’t mind to work on long-term investments, and I like structure, process, and relationship-building.

    On hedge fund side: (I feel more interested in quant hedge funds rather than traditional ones), AND I AM SO PASSIONATE ABOUT INVESTING, as well as I am so good with math and programming (C++, Python, R) and computer science in general, I really love finding new ideas to invest and so on, but on the other hand I am not really sure do I like the public markets or not. I don’t even understand it.

    what side do you think I should lean on? I am I a deal person or public market person? I feel so confused

    1. Thanks, we do put a fair amount of effort into SEO.

      We only have the single article on quant funds for now because most such funds are very secretive about what they do. We hope to add more in the future.

      I don’t really know what to tell you because you just said, “I like/am good at these two things. Which one is right for me?” Answering that in-person would be extremely difficult, and it’s virtually impossible to answer it in a comment on the internet.

      1. Avatar
        Ali Elfadl

        Thank you for your reply,
        I know, me myself I feel overwhelmed.

        To know what exactly suits me, do you provide advisory service?

        1. We don’t offer coaching/consulting on picking the area that’s best for you. We only offer services for applying for jobs and winning interviews via networking / on-campus recruiting once you have decided on your area of focus.

  3. Your articles are always enlightening.
    As an investment bank associate working in Asia (Tokyo/HK), I am more interested about PE (corporate things?broader exit options), and I plan to move to US.

    Internal transfer and landing an IBD/PE offer directly in US from abroad is very difficult (visa is also a headache). However, there might be HF opportunities by which I can go to US directly.

    If you were in my shoes, what would you consider? Would it possible to switch from HF to PE or IBD in US?
    Guess my question adds another angle to compare HF and PE. Thanks!

    1. Thanks. I think it would be quite difficult to go from IB in Asia to a HF in the US to PE in the US because most people move from PE to HF, not the other way around. If you really want to do this, your best bet is to find a hedge fund that operates more like a PE firm (credit or distressed focus, activist investing, etc.) so you can gain specific deal experience there and point to that in interviews.

      Otherwise, if you don’t want to move to the US, you should stay in IB and then recruit directly for PE roles in Asia.

  4. Hey Brian,

    Couple questions for you. Is private credit easier to get into from a non-track background than private equity? Also, I have a bit of a weird background with TAS -> HF and am looking at basically anything to make a shift. Would the combination of an intense accounting background as well as a direct investing role overcome the lack of IB on my resume for typical roles like corp dev, strat, RX consulting etc?

    Thanks

    1. Yes, private credit is easier because there’s less competition and overall compensation is lower. I think it would be difficult to get into IB if you have only TAS and HF experience – same for corporate development because they usually want to see deal experience and evidence that you can coordinate deal teams. You would have a better shot at turnaround consulting or maybe something related to your HF’s strategy (e.g., direct lending or private credit if it uses a credit strategy).

  5. Brian,

    Where did the IB Fashion post for men go? Can’t seem to find it – but would love to read it bc I have no clue what to wear during my internship at a BB next summer in IB.

    Thanks!

    1. We deleted it because it was out of date and caused too much controversy, and I didn’t want to think about revising/updating it… for now. Just too much going on at the moment, but we might revisit it in the future.

      In short, you can never go wrong with ~2 suits, 5-10 blue and white dress shirts, 2-3 pairs of shoes, 3-4 ties, 5-10 dress socks, 3-4 dress slacks and 2-3 belts. Maybe just one suit for an internship. Avoid pure black suits and stick to charcoal, grey, and navy blue instead. Avoid cufflinks or anything else fancy and stick to black or brown for belts and shoes, and blue and white for shirts.

      I strongly recommend this book as well: https://www.amazon.com/Dressing-Man-Mastering-Permanent-Fashion/dp/0060191449

  6. Hi Brian,

    I’m an accountant with a few years of experience in public and private along with my CPA. I’ve become very interested in pivoting my career towards VC or Corp Restructuring Consulting. Two different paths, but I find both interesting. My city is a large US city, but it doesnt have a ton of opportunities in either field, so I think the one I go with could come down to what job opens at the right time.

    I receive my experience isnt a match for VC yet and my opportunities in restructuring would be narrow so I figured I could move into Big 4 Valuation. Would that be a good fit to pivot to one of these opportunities? I figured with valuation, you’d learn a lot of the modeling and skill sets that are needed for either career.

    1. Yes, potentially, but Big 4 valuation is more relevant for restructuring/turnaround consulting (see: https://www.mergersandinquisitions.com/restructuring-turnaround-consulting/). I’m not sure how much it would help for VC since they usually want to see tech + finance or biotech + finance for that. Technical skills matter less than market knowledge and your network.

      1. Thanks for your response Brian. At my current company, I could move into their corporate strategy group within 6 months or so. That team works with FP&A, acquisitions, & corporate strategy. Would that role be better over a Big 4 valuation role or is it pretty even?

        1. I think it would be about the same, Big 4 might be better if your current company is not that big or well-known, but otherwise not much of a difference.

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