How to Become a Hedge Fund Manager
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Summary:
Becoming a hedge fund manager is extremely difficult to do, as you will need to navigate office politics, consistently turn a profit, and raise money. Most of the time, a background in finance, economics, mathematics, science, computer programming, or physics is required, but it’s not set in stone. The traditional path to becoming a hedge fund manager usually starts with you as an analyst at an investment bank and/or fund who works your way up.
Want to be a hedge fund manager? According to Forbes, there are currently 47 billionaires in the world that make their money from being hedge fund managers. That’s out of around 25,000 people who call themselves hedge fund managers worldwide. Not the worst odds!
But whether you set your sights on becoming a billionaire or you just dream of being called a hedge fund manager someday, you will have your work cut out for you. You will need to get an education and possibly certifications and work hard towards your goal. Learn more about this fascinating career path below.
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Hedge funds and hedge fund managers 101
Hedge funds are basically pooled investments, typically limited partnerships, that manage money for a pool of high-net-worth investors or institutional investors such as pension funds and university endowments. These differ from mutual funds that are available to the general public. As hedge funds are considered higher risk with higher returns, they generally charge much more than mutual funds to manage money for their investors. Hedge funds make money in two ways:
- A percentage of assets under management
- A percentage of the profit share
The standard that most hedge funds charge is “2 and 20.” That’s 2% of the assets under management and 20% of the profits. The way hedge fund managers accumulate wealth is to manage as much money as possible and deliver a decent return. For example, if a hedge fund manages $1 billion and delivers a 10% return, then the hedge fund gets $20 million in fees and $20 million in profits.
Recent 0% interest rates have been favorable to all types of financial powerhouse roles, including hedge fund managers, says Jon Dishotsky, an investing partner at Giant Ventures. “The zero-interest rate period was like everyone was floating around in a Zero-G playground with no real consequences,” he says. “We’re back to a historical mean which means the reality of turning a profit (eventually) has returned to business.”
The zero-interest rate period was like everyone was floating around in a Zero-G playground with no real consequences. - Jon Dishotsky, investing partner at Giant VenturesClick to Tweet
A hedge fund manager can manage the whole fund or a fund within a fund. Either way, someone in the manager role of a hedge fund will get a significant portion of that 20%. Thus, it is a quick path to wealth. Here’s how to progress toward a hedge fund manager role.
Step 1: Education
Most of the time, hedge fund employers will be looking for someone with a college degree, either a bachelor’s, master’s, or Ph.D. Many hedge funds look for people that also have become a chartered financial analyst (CFA). However, you don’t need a degree in finance to become a hedge fund manager. These days, hedge funds look for smart people who can bring different viewpoints, especially those with science/computing backgrounds.
One example of this is Renaissance Technologies, which is one of the most famous and best-returning hedge funds in the world. Its founder, James Simons, didn’t come from a finance/investment background but instead was a mathematics professor at MIT. Due to Simons’ background, they hire people from all walks of life with science, physics, or mathematics backgrounds, such as astrophysicists and quantum physicists.
Step 2: Decide which type of hedge fund you prefer
Decide which type of trading you like or have an aptitude for, and that might be your path to getting into the hedge fund world. Some of the different types of hedge funds are:
Quantitative hedge funds
Quant funds are funds that use mathematical analysis rather than human analysis. Many times they use high-frequency trading algorithms in which a computer does the training, not a human. Computer programming and quantitative analysis skills and background are required.
Long/short funds
Hedge funds that go long or short on equities. A standard finance, accounting, or business background could be useful.
Global macro funds
These are funds that use a macro perspective, looking at large swings caused by economic, political, and “black swan” events. They can also look at countries that are poised for development.
Activist hedge funds
These hedge funds buy up large, sometimes controlling stakes of a company and extract value by changing things around. Bill Ackman is one of the most notorious “activist investors.”
Do your research and see what type of fund you might be suited for based on what you learned in college and/or grad school and your own aptitudes.
Step 3: Get an entry-level job or internship as a hedge fund analyst
The majority of people aren’t going to be poached by a hedge fund unless they are famous computer programmers or physicists. Most people need to work their way up the ladder. Here are some tactics that might help you get an interview with a hedge fund:
- Email hedge funds with a letter (or even cold call them)
- Hire a recruiter
- Go to industry networking events
Once you have landed either an internship or a job as an analyst, you need to perform.
Step 4: Perform well at your job
Be the best analyst you can be. If you make sure everything is spot-on and the data is always right, you will be rewarded. If your data and insights perform well, then you might see trades for which you wrote the analysis become very profitable.
Not only does this include doing everything that an analyst will do, but also learning the other part of finance — networking! The more contacts you make in the industry, the better because you’ll need to be able to raise money eventually.
Step 5: Move up the chain
This means giving your superiors a reason to promote you in the hedge fund. Here’s how:
Show your unique value
How good are you at all the standards of your job, or what else can you do that puts you above and beyond others? For example, can you read Mandarin Chinese and thus be able to analyze source documents from Chinese companies?
Add to your value
If you can get a Ph.D. in quantum physics or take some auxiliary course, you can add to your value. You can also add other designations or charterships such as a CPA, CFA, or a CHA (Chartered Hedge Fund Associate). The most important part is that you execute your current role perfectly; the value-adds are a plus.
Be able to sell
The farther you move up the chain, the more your ability to raise money and sell will be crucial. Even if you have the best hedge fund in the world, if you are not able to up your assets under management, you’ll never get to the top. Most hedge fund managers will need to raise money, and the most successful hedge fund managers can raise the most.
Understand politics
At the top levels of finance, it can seem a bit like “Game of Thrones”; politics are absolutely crucial. You’ll make allies and enemies in your rise to the top, and your ability to navigate them will be of utmost importance.
6: Rise to a hedge fund manager
Once you are a hedge fund manager, either for the whole fund or a fund within a fund, you can now make a lot more money. You can also lose a lot more money, and then you won’t have any of that fat 20%, but you will have a lot of upset clients.
Pro Tip
How do venture capital, private equity, and other high-powered finance industries compare to hedge funds? Carrie Colbert, CEO of Curate Capital, says, “Private equity firms are focused on making a profit, and they may be willing to make decisions that could harm the public good in order to do so. For example, a private equity firm that owns a defense contractor might be tempted to cut corners on safety in order to save money. Or, a private equity firm that owns a food processing company might be tempted to use cheaper, lower-quality ingredients to increase profits.”
Manage your assets
If you’re fortunate enough to make the kind of money a hedge fund manager brings in, you may be ready to seek the help of a wealth management firm to manage your assets.
FAQ
Is it hard to get a job at a hedge fund?
It’s very competitive, but it’s doable if you have the right qualifications. Get a good education and be prepared to hire a recruiter, send emails, and attend events. Most hedge fund managers fall into the elite-of-the-elite category, so you need to be excellent in trading, raising money, and general business administration to achieve the manager level.
Is a hedge fund a good career?
Yes, although it’s stressful, it can be a great career. If you are interested in becoming one of the many hedge fund professionals with the goal of working your way up to hedge fund management, you could make yourself a fair amount of money.
Do hedge funds pay well?
Yes, the hedge fund industry, in general, pays very well. Hedge fund manager jobs are at the top of the heap (in the range of $90,000-$160,000 per year according to ZipRecruiter), but any type of hedge fund career will pay well.
Key takeaways
- Becoming a hedge fund manager is extremely difficult to do as you will need to both excel at your job and navigate office politics. You will also need to be able to turn a profit and raise money.
- The “2 and 20” fee model of assets under management and a portion of the profits is what drives hedge funds and hedge fund managers to make so much money.
- Although finance and accounting degrees are staples of the traditional hedge fund path, degrees in mathematics, computer science, and physics are becoming more and more prevalent.
- Moving up the chain in a hedge fund to become a manager is stressful, and you will need to succeed in an extremely competitive environment.
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