A hedge fund manager is an individual who makes investment decisions on behalf of their clients, called limited partners (“LPs”), using aggressive and sophisticated investment strategies.
Hedge fund managers fall into the buy-side within the world of capital markets. This means that hedge funds, like other asset managers, are in the business of managing money on behalf of investors, but differ as they tend to be more actively managed, unregulated, and only offered to wealthy and sophisticated investors.
Therefore, a hedge fund is basically a private investment partnership between a hedge fund manager and their limited partners.
Stars of the investment management world
Starting from the first hedge fund started by Alfred Jones in the 1950s, hedge fund managers have been viewed as the rock stars of the investment management world. Hedge fund managers such as George Soros, Ken Griffin, John Paulson and Steve Cohen have used to their instincts, intellect, and sometimes less than scrupulous methods to amass great wealth for their investors and themselves.
Given the lucrative and elite nature of the hedge fund industry, there is intense competition, both externally and internally, for the coveted role of a hedge fund manager.
Hedge fund management strategies
There is no one generic hedge fund manager role. Instead, managers tend to be organized by the strategy or strategies that they employ.
The main hedge fund strategies are as follows:
Global macro strategies
Directional hedge fund strategies
Event-driven hedge fund
Relative value arbitrage strategies
Capital structure strategies
What Makes Someone Successful in Hedge Fund Management?
Regardless of which hedge fund management style or styles a particular manager employs, there are some skills that an individual needs to have to be successful as a hedge fund manager.
Firstly, most hedge fund managers have the relevant educational background and intellectual rigor. While many managers have advanced degrees in business, finance, economics and accounting, most of the trading styles also tend to favor candidates with strong financial modeling, data analytics and other quant skills. The most well-known hedge funds tend to attract graduates from the top schools globally with the right internship experience, so competition is fierce.
Hedge fund managers also need to have a comprehensive understanding of financial markets and instruments, as well as how to effectively hedge or leverage those risks to achieve their returns. This means that many hedge fund managers have cut their teeth working as traders or research analysts on the sell-side. We also see hedge fund managers who come from other investment management roles or have moved up from more junior roles at the same firm. But ultimately, these people all have a strong knowledge and love for the markets.
Lastly, since the hedge fund industry is highly competitive and hedge fund managers are compensated in large part for the returns they derive for their LPs, the drive to succeed is arguably the most important characteristic that hedge fund managers must need to have. Most hedge fund managers are extremely confident and have a very strong work ethic.
Typical Job Duties for a Hedge Fund Manager
Hedge fund managers work on a trading floor but there might not be as much of the hustle and bustle as a trading floor on the sell-side. But make no mistake — the stakes are just as high (if not higher) and the pressure just as palpable.
A typical day
On a typical day, hedge fund managers start very early. The first thing to do is to review overnight news and trades, peruse the latest research and see how their trades have performed in the overnight sessions. Since most hedge fund managers are not restricted by mandate to trade only certain assets in specific markets, they often trade many different markets in different time zones.
The rest of the day will be spent speaking to capital markets salespeople and traders to hear about market intelligence, flows, and trade ideas. As hedge funds are a very lucrative business for investment banks, many hedge funds work closely with these banks, most times even with special arrangements called Prime Brokerage in place. Hedge fund managers will meet with their own analysts and other internal colleagues to discuss potential trades or other ideas. They will also have to closely work with their internal risk management colleagues to ensure that they don’t breach their firm’s standards.
Lunch is almost always taken at the desk in order to read more research, work on models or formulate trading strategies. Occasionally, hedge fund managers may be entertained during lunch or attend luncheons held by prospective issuers, called roadshows. On a slow day, they might even have time to go to the gym for a quick workout over lunch.
While it is true that successful hedge funds will have lots of investors lined up out the door to throw money at them, given the large number of hedge funds nowadays, hedge fund managers will often need to actively market their fund to potential LPs to attract new investors.
Long and stressful days
The day for hedge fund managers is very long and full of stressful hours. The end of the market day doesn’t necessarily mean that they are done for the day. Many hedge fund managers run positions in overnight markets so they will need to monitor those trades, often late into the night. If they work for a large global hedge fund, they will also need to speak with colleagues, subordinates, or managers in other time zones, as well as attend investment committee conference calls. When not in the office in evenings, many hedge fund managers will attend dinners with their peers and competitors to network and talk shop.
Given the pressure, many young and successful hedge fund managers tend to believe in the “work hard, play hard” mantra and so lead exciting and sometimes hedonistic lives.
Compensation Factors and Salary Expectations for Hedge Fund Managers
With this extremely intense competition, it is perhaps no surprise that compensation for hedge fund managers is very lucrative. However, the compensation is based on performance so hedge fund managers have a “eat what you kill” mindset. Base salaries are meant to provide enough to sustain a decent lifestyle, but the bonuses are where it counts.
Successful hedge fund managers routinely pocket millions of dollars in total compensation, with the top fund managers earning paychecks in the billions of US dollars. This doesn’t include how much they personally stand to benefit from their own investments in the funds they manage. Given the 2-20 pay structure, hedge fund managers stand to make more than most of their buy-side peers in non-hedge fund investment management.
Even though part of the compensation of a hedge fund manager might be affected by the overall success of the limited partnership, most managers are not overly loyal and will jump ship if they feel that they are not being compensated fairly.
Risks of Working as a Hedge Fund Manager
However, not all hedge fund managers are guaranteed to make the big bucks — the stark figure is that one in three hedge funds fail within their first three years and the average lifespan of a hedge fund in five years. The industry is so cutthroat that underperforming managers (and teams) are routinely fired, sometimes within a quarter or two if results are not delivered.
Additionally, since hedge fund performance fees are mostly based on high-water marks, a fund that suffers a few down years may choose to voluntarily close up shop and start a new fund.
Lastly, as many successful hedge fund managers end up managing their own money exclusively, there is also the risk that a very successful fund ends up becoming a family office and closes investment to LPs, thereby reducing headcount.
Job Qualifications for Hedge Fund Managers
Roles in hedge fund management are fast-paced, competitive, and very lucrative for those who have the right skills.
New candidates are frequently recruited from highly sought-after graduate or post-graduate programs across the globe and tend to be hired for analytics and mid-office functions. Very rarely will you see someone hired fresh out of school and be given a front-office role in investing. To become a hedge fund manager, there are specific licensing courses and regulatory exams one must pass. For example, in the United States, you need to pass the Series 7 and Series 63 exams.
Those who show promise might have the opportunity to be moved from the mid-office into “alpha-generating” roles to make investment decisions. Candidates are also actively recruited from sell-side firms and other competing hedge funds.
Interviews for roles in hedge fund management are extremely grueling and demanding, given the potential of working in a hedge fund. Interviewers will routinely give very difficult tasks and scenarios to test the intellectual ability of candidates.