A hedge fund manager is an individual or firm that manages the operations of a hedge fund. Hedge fund managers make investment decisions on placing investments on behalf of their clients using aggressive investment strategies.
Their responsibility involves helping investors with managing their investment objectives, liquidity needs, and fee structures. They typically work long hours for investment banking firms, asset managers, private equity firms, and hedge funds. Their task is mostly spent on investment analysis, building models, and meeting clients.
Understanding Hedge Funds
A hedge fund is a fund that employs a variety of investment techniques in various asset classes to generate a higher return for a given level of risk. The return sought by hedge fund managers is normally higher than what is expected on normal investments. Hedge fund managers are expected to generate a higher return consistently regardless of the market condition.
Hedging is a process of reducing risk; thus, hedge fund managers are expected to reduce total risk in portfolios without compromising the return. Using leverage, hedge fund managers can amplify the return on the investment; however, they also increase risk.
Hedge fund firms are normally owned by hedge fund managers as partnerships, limited partnerships, or limited liability companies. Hence, the partnerships are usually entitled to a share of profits if the fund is profitable. The main difference between hedge funds and ordinary type investment funds, such as mutual funds, is the strategies employed by hedge fund managers. Hedge fund strategies are on the aggressive side, and personal funds of hedge fund managers are usually invested in the fund.
Hedge fund investors should meet minimum income requirements and be in a certain net worth bracket because hedge fund investing is considered high risk; therefore, it needs high capital requirements.
Furthermore, hedge fund investing is less regulated than other investment types, necessitating more sophisticated and knowledgeable investors. Because of the aggressive investment strategies and decisions, hedge fund managers are paid handsomely. We will discuss the compensation structures in the following sections.
Good internships at major investment banking firms and top hedge funds
Comprehensive understanding of financial instruments
Knowledge of financial markets in detail
A thorough understanding of risk
In-depth knowledge of portfolio construction
Strong communication and interpersonal skills
Risk tolerance attitude
Financial modeling, quantitative and legal skills
Competitive nature and very high intellect
$85,000 to $101,000 per annum in 2020. It is highest in major financial centers such as New York and London.
Job growth of 6% to 9% per annum for the next 10 years
The most popular compensation structure for hedge fund managers is the “2 and 20” fee arrangement. It is a combination of a 2% management fee and a 20% performance fee. Management fees are charged relative to the fund value and are payable regardless of how the fund performs.
The 20% performance fee (or incentive fee) is payable on profits attained by the hedge fund manager on managing the fund above a certain predetermined benchmark. A high watermark is sometimes inserted into the incentive fee structure, meaning the performance fee is only payable after the fund value exceeds its previous high.
Top hedge fund managers are some of the most well-paid professionals in the industry and reach multiple billion dollars in net worth.
CFI is the official provider of the global Capital Markets & Securities Analyst (CMSA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful: