Hedge Funds

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

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What Is A Hedge Fund?

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.


Types Of Hedge Funds

Hedge Funds are frequently organized in the following ways:

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


Top Global Hedge Funds

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:

  • Bridgewater Associates
  • AQR Capital Management
  • Man Group
  • Renaissance Technologies
  • Two Sigma Investments
  • Millennium Management
  • Elliott Management
  • Marshall Wace
  • Davidson Kempner Capital Management
  • Baupost Group


Key Roles Within Hedge Funds

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:

  1. Investment Analysts (IAs) or Research Analysts
    They are the junior employees who generate investment ideas, do the analysis, and present their ideas to the senior team.
  2. Traders or Execution Traders (ETs)
    They receive directions from the PMs and execute their ideas, using their knowledge of buyers and sellers in the market.
  3. Portfolio Managers (PMs)
    They review the Investment Analysts’ work and then decide which investments to pursue.

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.

Hedge Fund Jobs, Salaries & Compensation

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.


How to Get a Job At A Hedge Fund

These professionals stand the best chance of winning 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.

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.

4-Step Process For Getting A Job At A Hedge Fund

  1. Step 1: Research and Screen for Funds
    Before you begin searching for anyone, you need to figure out the type of fund you want to work at. If you’re not focused in your search, you will get nowhere – no matter your experience level or approach.
  2. Step 2: Network with Professionals
    Once you have a preliminary list of funds – perhaps 20-30 to start with – go on LinkedIn and your alumni database and start searching for professionals at these funds. Contact them with a view to connecting via phone.
  3. Step 3: Prepare for Hedge Fund Interviews
    Hedge fund interviews are mostly about one thing: your stock or other investment pitches. Yes, you will get the standard “fit” questions, technical questions, your views on the market and your resume walkthrough. But your success in HF interviews will depend largely on your pitches.
  4. Step 4: Post-Interview Action
    If you get a positive result and the fund wants to hire you, they will then ask for references – which is a major difference vs. investment banking interviews. If you get an actual “no,” you could try to push back and press your case. But for that to work, you must be very confident that they got something specific about you very wrong.

If you follow and implement this process, you’ll be better-equipped to breaking into a hedge fund than ~95% of candidates.

Hedge Fund Career Development Courses

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:

  1. Investment Banking Networking Toolkit
  2. Investment Banking Interview Guide
  3. Excel & Financial Modeling Fundamentals
  4. BIWS Premium – Ultra-advanced Excel and Financial Modeling training, including 10+ global case studies of real deals
  5. BIWS Platinum – Our entire collection of courses for a deep discount off the regular price.

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.