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Careers in Hedge Funds

A hedge fund manager runs all or part of a hedge fund, with the goal of maximizing return. The hedge fund manager makes calls on a wide range of financial assets - from corporate bonds to stocks to currencies. This is one of the most "white knuckle" jobs in all of capitalism. The compensation for working in a hedge fund can be unusually high. It is not uncommon to see a person in their late 20s or early 30s pull down $5 million a year or more in one of the right positions at the big funds. But, of course, there are many others who make much less and and many more who fail altogether. All who participate in this industry take on high risk. It comes down to skill, timing and a little luck. In our recent salary review of starting compensation for recent graduates of the largest MBA programs, the highest average starting pay was in hedge funds (check out the salary ranges).

What is a hedge fund anyway? At its core, a hedge fund manages a pool of money for large investors. The fund compensates itself for that service by taking a hefty management fee (typically 2% of assets under management per year) and a carry (a percentage of returns over a benchmark) that is paid for performance.
The typical carry is 20%. You can see the attraction of running a hedge fund. A hedge fund with $2 billion under management and a 2/20 compensation scheme would generate $40 million in management fees plus whatever is made on the carry.

Unlike traditional money managers of mutual funds and closed ended funds, hedge fund managers routinely engage in short selling - that is betting that a security will decline in value. There are many flavors of hedge funds but the most common variety is a long/short equity fund. This would be a fund that will try to be market neutral and instead make an excess return ("alpha" as it is called) by being right on security selection - shorting stocks headed down and going long those headed up. Hedge funds can also use leverage to enhance return. This means borrowing against assets in the fund in order to buy more securities. This, of course, can enhance return on the upside and it is not uncommon to see hedge funds close down because they suffered negative returns that would cause no one to want to invest in the fund again.

As we write this career description in late 2009, we are in a period of unusual turbulence in the hedge fund world. Due to the financial crisis many hedge funds have shut down and undoubtedly more closures are to come. But, like the landscape after a forest fire it turns out that many trees are still left standing and stronger. And, lots of new plants, bushes and trees are on the way. Hedge funds are here to stay and will, in fact, probably rise to new heights before long. The reason is that opportunities for alpha are out there and there is no better time than the present to exploit those opportunities.

A hedge fund career is considered one of the most desirable paths in the finance field - although some working in these funds might wonder why. While the senior fund managers pull down a huge share of the compensation, a newly minted MBA does not start at a hedge fund managing his or her own pool of money. Depending on the size and structure of the hedge fund, there may be many (or few) other positions they might take, some of which can also eventually involve steep compensation. These include working at a hedge fund as a junior trader; strategist; analyst; quant; software developer; risk manager; and in various administrative roles. As in most financial institutions, the closer you are to the money, the more of it you get to take home. In other words, the jobs in which you can easily and directly measure the profit due to your performance - and for which that number is large - tend to be the most highly compensated.

Interestingly, a review of the placement reports of a few schools like Chicago, Columbia, Harvard Business School and Stanford will show that there was a fair bit of MBA hiring into hedge funds in 2007 and 2008. This hiring will undoubtedly decline for the classes of 2009/2010 but there is still plenty of opportunity to be had.

The typical hedge fund will have an internal recruiter or two or, if small, will use an external recruiter. Only the very biggest places will show up with any regularity for university recruiting - this might be seen with a Citadel or Maverick. This is a classic area in which to pursue a self directed job search. You need to get out and hit the pavement and meet people in the industry and look for openings. The openings aren't necessarily scheduled on an annual cycle but tend to occur in real time when a fund is taking in more capital or experiencing strong returns. You'll maximize your chances of finding a good position by pursuing funds that are doing well. To make the search process more interesting, there are thousands of hedge funds. This is a gigantic and somewhat disorganized industry. The result is an inefficient job market that you can exploit by putting in the time to make connections with potential hiring managers.

The typical hedge fund manager comes out of the sell side - that is, an investment bank. Many persons who learn to trade or analyze securities in a research position on the sell side gravitate towards hedge fund positions in mid-career. And because hedge funds typically have no training programs they like to hire persons who have already learned the ropes of investments in an investment bank or another investment management firm. Key skills in demand are (1) high intelligence, (2) strong domain knowledge, (3) consistency and attention to detail, (4) deep investing and finance knowledge, (5) strong quantitative and legal skills and (6) the ability to dive deep on an investment story.

There is high demand for individuals with specialized skills and advanced degrees - Ph.D's that know currencies and macroeconomics; M.D.'s that know drugs and devices and can figure out which ones will succeed and which will fail; J.D.s that can tear apart credit agreements or bet on the outcome of merger deals in the antitrust agencies; mathematicians that can build quantitative trading algorithms etc. This is a field that attracts the best and the brightest. The career outcomes are highly variable but the ride can be exhilarating.

Good luck as you contemplate a hedge fund career!

Articles Worth Reading

Books Worth Reading

The World's Largest Hedge Funds

Total Capital ($ millions)
1 Bridgewater Associates
2 JPMorgan Asset Management
3 Paulson & Co.
4 D.E. Shaw & Co.
5 Brevan Howard Asset Management
6 Man Investments
7 Och-Ziff Capital Management Group
8 Soros Fund Management
9 Goldman Sachs Asset Management
10 Farallon Capital Management
10 Renaissance Technologies Corp.
Source: Alpha Magazine, April 21, 2009

"What you're really buying when you invest in a hedge fund is your claim on a manager's skill and insight... The problem is not that there are too few good managers, it's that there are too many good managers looking to exploit what are now too few 'mistakes' in the market."

Cal Brown, The Monitor Group

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