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Hedge Fund Career Path: Job Titles, Salaries & Perspectives

Kison Patel
CEO and Founder of DealRoom
Kison Patel

Kison Patel is the Founder and CEO of DealRoom, a Chicago-based diligence management software that uses Agile principles to innovate and modernize the finance industry. As a former M&A advisor with over a decade of experience, Kison developed DealRoom after seeing first hand a number of deep-seated, industry-wide structural issues and inefficiencies.

CEO and Founder of DealRoom

Although hedge funds came to real prominence in the 1990s with the ill-fated Long Term Capital Management (LTCM), hedge funds have a history that goes back to the 1940s. 

In 1949, an economist called Alfred Winslow Jones created a market neutral portfolio that separated two risks - market risk and idiosyncratic risk - enabling him to go long on equities that he predicted would rise with the market, at the same time as going short on stocks that he believed would move in the opposite direction.

This hedging strategy he developed is thought of as the first hedge fund.

Over 70 years later, the global hedge fund market was estimated at approximately $4 trillion at the start of 2022.

It employs over 90,000 people in the US alone, meaning that, despite having a reputation as a closed corner of the finance industry, it’s actually one of its biggest employers.

If you want to know how to join the ranks of those that work in the industry, keep reading. For those who want to learn finance< M&A and corporate development we recommend to subscribe to M&A Science podcast.

What do hedge funds do?

Like any other fund, hedge funds seek to invest investors cash to maximize returns.

However, with hedge funds, the emphasis is eliminating risk to arrive at arbitrate (‘risk free’) profits. They seek to do this, like Alfred Wislow Jones in the opening section, by going long on some assets and short on others.

Despite their aim to minimize risk, this is actually quite a risky way of generating profit, but average growth in US hedge funds has been in excess of 6% per year over the past decade.

how does a hedge fund work

Hedge fund roles

As you might have guessed, hedge funds draw most of their talent from quantitative backgrounds (the industry is full of mathematics and physics majors), and this is reflected in the kind of roles that characterize the ranks of most hedge funds.

The most typical roles within the hedge fund industry are as follows:

hedge fund roles

Junior/Research/Investment Analyst: 

Not unlike the junior/research/Investment analyst in other parts of the finance industry, this tends to be the dogsbody position that new entrants take up.

There is little to no chance that you anybody can gain one of these positions without some quantitative background.

The role consists of a lot of financial modeling, data gathering and analysis, and industry research. 

Hedge Fund Analyst: 

One step up the ladder from the junior analyst, the hedge fund analyst (there may be different nomenclatures, depending on the company).

This comes with some more independence, more capacity to work on independent investment theses (e.g. in event of extreme weather conditions, crops and flights will be adversely affected, but healing oil sales may benefit). 

Hedge Fund Senior Analyst/Associate:

Upon reaching the senior analyst level, it’s your responsibility to generate arbitrage-generating investment theses.

It’s likely that you’ll specialize in a certain area (fixed income or equity, or an industry specialization, for example), and pitch your ideas to the portfolio managers.

Essentially, this acts as the bridge between the back office research team and the portfolio managers (PMs).

Portfolio Manager

Like any portfolio manager, the PM in a hedge fund is responsible for how the funds are invested. The PM has the final say.

In almost all cases, the PM will be a general partner (GP), whose own funds are also invested, enabling them to show outside investors that they have “skin in the game”.

Unlike other senior areas of finance, however, this isn’t all customer facing (there is still plenty, but less). The hedge fund portfolio manager has to possess serious quantitative analysis chops.

Risk Manager

Depending on how the hedge fund is structured, or what it’s strategy is, there may be a series of risk management positions. Almost all hedge funds will have a risk manager, however.

As the name suggests, their role involves assessing the risks involved with strategies developed by analysts and portfolio managers.

Essentially, if everyone in a hedge fund team is expected to have quantitative ability, the risk manager should be the most capable in this area of all.

Skills required for working in hedge funds

As we have underlined until now, the best way to find your way into a hedge fund position is by being quantitative.

As a general rule, they’ll overlook many of the soft skills that other areas of finance like to have (Think of Dr. Michael Berry’s mildly autistic character in the Big Short movie, played by Christian Bale, to get an idea of what we mean).

That being said, the following traits are important:

  • Market knowledge: It’s one thing to be quantitative, it’s another to know what’s going on in markets and how they react - because markets don’t always react rationally. If everyone says a market is going up, but you think otherwise and can show it, this can be a huge asset to you and the fund.
  • Knowledge of financial instruments: Do you know the difference between your futures and your forwards, your obligations and your options, your debt and equity, your CDOs and your ETFs? Being able to pick a position on an event using some combination of asset classes or financial product is highly important - so you have to know how each functions.
  • Knowledge of portfolios: This bullet could just have easily been ‘knowledge of how risk functions’ but that is essentially what portfolio construction is all about. It’s about knowing how assets correlate to each other, how they move under different conditions, and how much you should have of each in the portfolio. Relatively easy on paper. Difficult in practice.

How to get a job at a hedge fund

The million dollar question.

Hedge funds typically don’t hire from undergrad universities or MBA courses. It’s far more of an industry insider position.

Essentially, if you’ve been trading millions and doing well in doing so, you’ve got an excellent chance of being called to a hedge fund.

As mentioned, because it’s not much of a ‘soft skills’- centered career, you just have to show you’ve got the smarts. And the way to do that is by successful trading over a sustained period of time.

how to get into hedge fund

How much do hedge fund employees earn?

The starting position at a hedge fund - the junior analyst - is about $100,000 a year.

The reason for this is essentially because the biggest companies are always most interested in the quantitatively gifted.

Having these people on board is the best way for the hedge fund to find those arbitrage strategies that it so desperately requires.

From there, a combination of performance-related bonuses can make the sky the limit. The salaries look something like this:

  • Junior analyst: $100K approx, split more or less evenly between a base salary and a bonus.
  • Hedge fund analyst: $150K-$200K, with bonuses typically bringing the salary above $500K in a good year.
  • Senior analyst: $1 million approximately, with most of this being the bonus. 
  • Risk manager: $500K, with some of this being bonus, but most of it being base salary.
  • Portfolio managers and general partners earn based almost entirely on bonus, so there’s little point in craps shooting a figure here. Think millions rather than hundreds of thousands.

Conclusion

Not unlike other parts of the finance industry that have shown massive growth over the past twenty years, roles in the hedge fund industry are now highly sought after.

However, this area is not one where you can just charm your way in the door. You’ll need to have serious quantitative capabilities, and good intuition about where the markets are headed, and better still if your theories go against what everybody else is saying.

For those that can fit the above criteria, the rewards are outstanding. Arbitrage profits mean that almost everybody that has  been successful in the hedge fund industry is also extraordinarily wealthy.

m&a science

Although hedge funds came to real prominence in the 1990s with the ill-fated Long Term Capital Management (LTCM), hedge funds have a history that goes back to the 1940s. 

In 1949, an economist called Alfred Winslow Jones created a market neutral portfolio that separated two risks - market risk and idiosyncratic risk - enabling him to go long on equities that he predicted would rise with the market, at the same time as going short on stocks that he believed would move in the opposite direction.

This hedging strategy he developed is thought of as the first hedge fund.

Over 70 years later, the global hedge fund market was estimated at approximately $4 trillion at the start of 2022.

It employs over 90,000 people in the US alone, meaning that, despite having a reputation as a closed corner of the finance industry, it’s actually one of its biggest employers.

If you want to know how to join the ranks of those that work in the industry, keep reading. For those who want to learn finance< M&A and corporate development we recommend to subscribe to M&A Science podcast.

What do hedge funds do?

Like any other fund, hedge funds seek to invest investors cash to maximize returns.

However, with hedge funds, the emphasis is eliminating risk to arrive at arbitrate (‘risk free’) profits. They seek to do this, like Alfred Wislow Jones in the opening section, by going long on some assets and short on others.

Despite their aim to minimize risk, this is actually quite a risky way of generating profit, but average growth in US hedge funds has been in excess of 6% per year over the past decade.

how does a hedge fund work

Hedge fund roles

As you might have guessed, hedge funds draw most of their talent from quantitative backgrounds (the industry is full of mathematics and physics majors), and this is reflected in the kind of roles that characterize the ranks of most hedge funds.

The most typical roles within the hedge fund industry are as follows:

hedge fund roles

Junior/Research/Investment Analyst: 

Not unlike the junior/research/Investment analyst in other parts of the finance industry, this tends to be the dogsbody position that new entrants take up.

There is little to no chance that you anybody can gain one of these positions without some quantitative background.

The role consists of a lot of financial modeling, data gathering and analysis, and industry research. 

Hedge Fund Analyst: 

One step up the ladder from the junior analyst, the hedge fund analyst (there may be different nomenclatures, depending on the company).

This comes with some more independence, more capacity to work on independent investment theses (e.g. in event of extreme weather conditions, crops and flights will be adversely affected, but healing oil sales may benefit). 

Hedge Fund Senior Analyst/Associate:

Upon reaching the senior analyst level, it’s your responsibility to generate arbitrage-generating investment theses.

It’s likely that you’ll specialize in a certain area (fixed income or equity, or an industry specialization, for example), and pitch your ideas to the portfolio managers.

Essentially, this acts as the bridge between the back office research team and the portfolio managers (PMs).

Portfolio Manager

Like any portfolio manager, the PM in a hedge fund is responsible for how the funds are invested. The PM has the final say.

In almost all cases, the PM will be a general partner (GP), whose own funds are also invested, enabling them to show outside investors that they have “skin in the game”.

Unlike other senior areas of finance, however, this isn’t all customer facing (there is still plenty, but less). The hedge fund portfolio manager has to possess serious quantitative analysis chops.

Risk Manager

Depending on how the hedge fund is structured, or what it’s strategy is, there may be a series of risk management positions. Almost all hedge funds will have a risk manager, however.

As the name suggests, their role involves assessing the risks involved with strategies developed by analysts and portfolio managers.

Essentially, if everyone in a hedge fund team is expected to have quantitative ability, the risk manager should be the most capable in this area of all.

Skills required for working in hedge funds

As we have underlined until now, the best way to find your way into a hedge fund position is by being quantitative.

As a general rule, they’ll overlook many of the soft skills that other areas of finance like to have (Think of Dr. Michael Berry’s mildly autistic character in the Big Short movie, played by Christian Bale, to get an idea of what we mean).

That being said, the following traits are important:

  • Market knowledge: It’s one thing to be quantitative, it’s another to know what’s going on in markets and how they react - because markets don’t always react rationally. If everyone says a market is going up, but you think otherwise and can show it, this can be a huge asset to you and the fund.
  • Knowledge of financial instruments: Do you know the difference between your futures and your forwards, your obligations and your options, your debt and equity, your CDOs and your ETFs? Being able to pick a position on an event using some combination of asset classes or financial product is highly important - so you have to know how each functions.
  • Knowledge of portfolios: This bullet could just have easily been ‘knowledge of how risk functions’ but that is essentially what portfolio construction is all about. It’s about knowing how assets correlate to each other, how they move under different conditions, and how much you should have of each in the portfolio. Relatively easy on paper. Difficult in practice.

How to get a job at a hedge fund

The million dollar question.

Hedge funds typically don’t hire from undergrad universities or MBA courses. It’s far more of an industry insider position.

Essentially, if you’ve been trading millions and doing well in doing so, you’ve got an excellent chance of being called to a hedge fund.

As mentioned, because it’s not much of a ‘soft skills’- centered career, you just have to show you’ve got the smarts. And the way to do that is by successful trading over a sustained period of time.

how to get into hedge fund

How much do hedge fund employees earn?

The starting position at a hedge fund - the junior analyst - is about $100,000 a year.

The reason for this is essentially because the biggest companies are always most interested in the quantitatively gifted.

Having these people on board is the best way for the hedge fund to find those arbitrage strategies that it so desperately requires.

From there, a combination of performance-related bonuses can make the sky the limit. The salaries look something like this:

  • Junior analyst: $100K approx, split more or less evenly between a base salary and a bonus.
  • Hedge fund analyst: $150K-$200K, with bonuses typically bringing the salary above $500K in a good year.
  • Senior analyst: $1 million approximately, with most of this being the bonus. 
  • Risk manager: $500K, with some of this being bonus, but most of it being base salary.
  • Portfolio managers and general partners earn based almost entirely on bonus, so there’s little point in craps shooting a figure here. Think millions rather than hundreds of thousands.

Conclusion

Not unlike other parts of the finance industry that have shown massive growth over the past twenty years, roles in the hedge fund industry are now highly sought after.

However, this area is not one where you can just charm your way in the door. You’ll need to have serious quantitative capabilities, and good intuition about where the markets are headed, and better still if your theories go against what everybody else is saying.

For those that can fit the above criteria, the rewards are outstanding. Arbitrage profits mean that almost everybody that has  been successful in the hedge fund industry is also extraordinarily wealthy.

m&a science

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