What is a Hedge Fund Manager?
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.
To get a comprehensive overview of hedge funds, check out CFI’s Introduction to Hedge Funds course!
Functions of Hedge Fund Managers
The main function of hedge fund managers is to oversee and manage the short-term and long-term investments in hedge fund portfolios. Below are a few additional functions:
- Make investment decisions on each portfolio with the hedge fund.
- Perform constant market research and trend analysis.
- Use software programs to analyze investment metrics to come up with superior investment decisions.
- Analyze investment options to choose the best option possible for each investor.
- Understand investor needs and make sure that all investment processes meet these objectives.
- Offer investment advisory services to investors and communicate new investment products and portfolio performance of each investor.
- Manage a pool of investment analysts, traders, quantitative analysts, and accountants.
- Design and implement training activities.
- Reconcile investment values on a daily or monthly basis.
- Bachelor’s degree in Finance, Economics, Quants, Accounting
- Master’s in Business Administration (MBA)
- Chartered Financial Analyst (CFA)
- Chartered Alternative Investment Analyst (CAIA)
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: