Hedge Fund Definition: A hedge fund is an investment fund that raises capital from institutional and accredited investors and then invests it in financial assets – usually liquid, publicly traded assets.
In simple terms, a hedge fund is a type of investment company that seeks out alternative investments to beat the market or reduce the risk of unforeseen events.
They use a diverse range of investment strategies. For example, they may short-sell securities, use derivatives, bet on mergers going through or failing, and they may become directly involved in events like spin-offs and restructurings.
Hedge funds differ from private equity firms because PE firms usually buy and sell entire companies or large stakes in companies, and most of their holdings are illiquid.
Hedge funds differ from mutual funds and asset management firms because the latter tend to target relative returns (e.g., “beat the S&P by 5%”) and they follow more traditional strategies, such as buying and holding undervalued stocks.
By contrast, most hedge funds target absolute returns rather than relative returns. “Absolute returns” means that if the S&P is down 25% for the year, and your hedge fund is down 15%, that’s a terrible outcome because the fund has still lost money.
Conversely, if the S&P is up 30% for the year, but your hedge fund is up only 20%, that’s a good outcome on an absolute basis because the fund has still earned money.
Hedge Funds are frequently organized in the following ways:
Hedge funds tend to be less well known than large investment banks or private equity firms. 10 of the most prominent hedge funds in the world include:
Hedge Funds are divided into front office, middle office and back office activities.
Front office roles are usually considered the most prestigious roles, and include:
And at some types of funds, there are additional roles – for example, at quant hedge funds, there are also quants and programmers with math/statistics/computer science backgrounds.
Middle and Back-Office roles are “OK” for early-stage internships, but if you want the highest compensation and advancement opportunities, you should aim for a front-office position.
It tends to be extremely difficult to switch out of middle and back-office roles, particularly in smaller markets.
If you’re at the right fund and you perform well, you can earn into the mid-six-figures, up to $1 million+, even as a junior-level employee.
And the top individual Portfolio Managers can earn hundreds of millions or billions each year.
Hedge funds offer a much higher pay ceiling than investment banking, (sometimes) better hours and work/life balance, and the chance to do more interesting work.
Total compensation is highly dependent on personal and team performance and overall market conditions.
These professionals stand the best chance of winning roles at hedge funds:
Regardless of your pathway, you’ll need solid academic credentials, passion for the markets and investing/risk-taking, independent thinking, the ability to be a team player, and emotional stability in order to break in.
If you follow and implement this process, you’ll be better-equipped to breaking into a hedge fund than ~95% of candidates.
Hedge Funds have become highly-competitive and sought-after workplaces.
In fact, many hedge funds are not interested in broadly marketing themselves to candidates.
That’s why many aspiring hedge fund managers invest in specialized courses and training to help them get noticed, get hired, and get promoted.
Some of the courses offered by Mergers & Inquisitions and our sister website Breaking Into Wall Street include:
Completing these courses will help you win interviews and job offers for roles that pay high salaries and position you for a lucrative career path within hedge funds.