Hedge Funds (HFs)

An Overview of Hedge Funds, Including Key Functions, Top Companies, and Careers & Salaries

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What Are Hedge Funds?

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 an investment firm that seeks out alternative investments to beat the overall market or reduce the risk of unforeseen events.

They use a diverse range of investment strategies, most of which are not available to mutual firms or traditional asset management firms. 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 vs Mutual Funds

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.

But 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 vs Private Equity

For detailed coverage of this topic, please see our article on the hedge fund vs private equity comparison.

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, while hedge funds tend to acquire much smaller stakes in liquid, publicly traded assets.

Hedge funds do share some similarities with private equity firms because both raise capital from outside investors, called Limited Partners (LP)s, and both charge a management fee on the assets under management (AUM) and a percentage of the investment profits (“carry”).

But almost everything else is different:

  • Types of Investments: 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.
  • Investing Strategies: PE firms tend to become more involved their portfolio companies’ operations and business growth since they hold the companies for the long term (3-7 years); hedge funds focus more on short-term profits over 12-month periods from financial, rather than operational, sources.
  • Investor Lockup: Due to the long-term nature of their investments, PE firms often require their LPs to lock up their money for years. But since hedge funds invest in highly liquid financial assets, redemptions tend to be much easier.
  • Risk: All else being equal, hedge funds are probably riskier because they do not control the assets they trade, and it’s very difficult to beat, or even match, the performance of the public markets.
  • Fee Structure: Both firms charge a management fee on assets under management and take a percentage of investment profits (carry), but these percentages tend to be lower for HFs, and performance is measured a bit differently (NAV for hedge funds vs. IRR and hurdle rates for PE firms).
  • Candidates (Who Gets In): Private equity overwhelmingly attracts former investment bankers, along with some consultants and Big 4 and corporate development professionals; hedge funds attract a more varied crowd, including investment bankers, equity research professionals, buy-side analysts at other firms, and sales & trading professionals.
  • Recruiting Process: Most private equity recruiting is highly structured and “on-cycle,” while most hedge fund recruiting is unstructured and “off-cycle.”
  • Work and Culture: Private equity is essentially Investment Banking 2.0, with similar people and on-the-job stress; hedge funds vary a lot more because founders and portfolio managers come from more diverse backgrounds.
  • Required Skill Set: To work at a hedge fund, you must understand valuation and how to find mispriced financial assets. You also need valuation skills for private equity, but in addition, you must understand deals and how to source and execute them.

Hedge Funds vs Investment Banks

Hedge funds and investment banks are completely different because investment bankers act as agents, representing companies, helping them execute transactions such as M&A deals and equity and debt issuances, and earning commissions on those transactions.

By contrast, hedge funds are investment firms that do not earn money based on commissions but rather based on a management fee and a percentage of investment returns.

You can earn a lot of money if you’re successful in either field, but the ceiling is far higher in hedge funds for the same reason the ceiling is higher for real estate investors than it is for real estate brokers: if an asset’s price increases by 2x, 5x, or 10x, the investors reap all the gains.

Many people argue that the work in hedge funds is more interesting and intellectually engaging, that the lifestyle is better, and that it’s a superior long-term career.

Undergraduates often start as investment banking analysts and then use the experience to move into other fields (“exit opportunities”), such as private equity, hedge funds, and corporate development, after a few years.

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Types of Hedge Funds and Hedge Fund Strategies

Hedge funds are usually classified according to the following criteria:

  • By Asset Class (e.g., equities, fixed income, commodities/FX, convertibles, private deals, or a mix).
  • By Industry Focus (e.g., technology, healthcare, energy, or generalist).
  • By Investment Strategy (e.g., long/short equity, investment-grade debt, distressed debt, global macro, merger arbitrage, or quant).
  • By Fund Model (e.g., single-manager vs multi-manager).
  • By Size of Fund (e.g., under $1 billion AUM vs. $1 – 5 billion vs. over $10 billion).

There are other differences as well, such as the investment process (bureaucratic vs. relatively free), the # of names covered by each Analyst, the level of activism, the work culture, and the lifestyle, but most funds don’t publish readily available information on those points.

We’ve published articles about a few specific types of hedge funds, which you can access below:

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Top Hedge Funds

Hedge funds tend to be lesser-known than large investment banks or private equity firms, and there’s always debate about which fund is “the best.”

On a more objective note, though, some of the top hedge funds in the world by assets under management (AUM), or total capital raised, are as follows:

Top Hedge Funds

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Why Work at a Hedge Fund?

Hedge funds are good if you’re extremely passionate about the public markets, and you want to follow companies and other securities rather than work on deals.

The money is a big draw as well: 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.

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.

The downsides are that your exit opportunities out of a hedge fund will be more limited, it’s still a very stressful job even though you work fewer hours, and if your fund blows up or otherwise shuts down, you’ll be out of a job.

Also, many people are pessimistic about the future of the hedge fund industry because of the rise of index funds, passive and automated investing, and AI.

It’s not going to disappear overnight, and you can still make money even in a declining industry, but the best time to enter a hedge fund was a long time ago (e.g., the 1980s or 1990s) when there were more opportunities and fewer threats on the horizon.

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Key Roles Within Hedge Funds

Most non-quant hedge funds are divided into three main areas:

  1. Investment Team – The Research/Investment Analysts and Portfolio Managers who generate and evaluate ideas and make investment decisions.
  2. Trading Team – The Execution Traders who implement the Investment Team’s strategies and aim for the best price on each trade.
  3. Middle and Back Office – The back office at a hedge fund consists of supporting areas such as compliance, accounting, operations, and IT.

There are other areas as well, such as Risk Management and Investor Relations, which may be separate or part of the ones above.

We focus on front-office roles (i.e., the Investment Team and Trading Team) on this site because most of our content relates to careers that lead there.

They are considered the most prestigious jobs, pay the most, and offer the highest advancement potential and the best career opportunities.

At some funds, there are additional roles – for example, at quant hedge funds, there are also quants and programmers with math/statistics/computer science backgrounds.

Hedge Fund Jobs, Salaries & Compensation

It’s extremely difficult to break into hedge funds, and once you’re in, the job is stressful and requires long hours and sacrifices.

But if you perform well, you can advance quickly and earn high salaries, bonuses, and carry (the profit share from investment returns) in the process.

Here’s what a “typical” career progression might look like at a mid-sized-to-large hedge fund firm based in New York City, including estimates for total compensation (i.e., base salary + annual bonus) in USD:

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

We are not listing “carry” (percentage of investment returns earned) in the table above because it works a bit differently than it does in private equity, and exact figures are difficult to pin down.

Suffice to say that you won’t see much at the junior levels, but at the PM level, it could significantly increase your compensation if you perform well.

For more on these topics, please see our article on the hedge fund career path.

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How to Get a Job at a Hedge Fund

There are two main entry points into hedge funds: directly out of undergraduate as a Junior Analyst or Research Associate, or as an Analyst, after you work for several years in a field like investment banking, equity research, asset management, or sales & trading.

You can’t “join” as a Portfolio Manager, as you need to prove yourself in the industry and advance into that position first.

And to join as an Execution Trader, you need experience in sales & trading, at a prop trading firm, or something else that’s highly relevant.

The following professionals have the best chance of winning Investment Analyst roles at hedge funds:

  1. Investment Banking Analysts at bulge-bracket and elite-boutique banks, and sometimes ones who followed the “2 + 2” path (i.e., two years of IB followed by two years of PE).
  2. Equity Research Associates at bulge-bracket banks.
  3. Research/Investment Analysts at traditional asset management firms or mutual funds.
  4. Some Sales & Trading professionals who happen to work in highly relevant groups, such as the rates trading desk or the equity derivatives desk.
  5. Occasionally, university graduates who have completed relevant internships, such as ones in asset management at a pension fund, win full-time hedge fund offers straight out of undergrad without another full-time role first.

Of these categories, many U.S.-based hedge funds prefer IB Analysts – at least funds that use strategies such as long/short equity, merger arbitrage, and anything else related to fundamental analysis or deals.

Funds that use strategies such as global macro (i.e., trading FX, commodities, etc. based on changes in government policy, economic or trade policy, and interest rates) may prefer S&T professionals who have worked in areas like the rates trading desk.

Hedge funds want professionals who have a passion for the markets and investing, the ability to think independently while still being a team player, and emotional stability (all investors lose money sometimes!).

The stock pitch is a critical component of any interview/recruiting process, and you’ll spend the most time on your stock (or other investment) pitches as you prepare.

The overall process for winning a hedge fund job looks like this:

  1. Research and screen for funds.
  2. Network with hedge fund professionals.
  3. Prepare for interviews.
  4. Follow up after the interviews and provide references.

For more about the recruiting process, networking, and interviews, see our comprehensive guide on how to get a job at a hedge fund.

Hedge Fund Courses

Hedge funds have become a highly competitive and sought-after field.

Hedge funds want people who are technically proficient and who demonstrate strong “fit” and passion for the markets because firms and teams are far smaller than those in investment banking.

Banks might have tens of thousands of employees to perform grunt work, but hedge funds have no such armies; they want to hire small teams of the top professionals who can hit the ground running and add value from day one.

That’s why many aspiring hedge fund professionals 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 Breaking Into Wall Street include:

Completing these courses will help you win interviews and job offers for roles that pay $150K+, and position you for careers in hedge funds.

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