Hedge Funds (HFs)

Hedge funds differ from mutual funds and asset management firms because the latter tend to target relative returns (e.g., “beat the S&P by 5%”) and they follow more traditional strategies, such as buying and holding undervalued stocks. Read more about hedge funds vs. mutual funds.

By contrast, most hedge funds target absolute returns rather than relative returns. “Absolute returns” means that if the S&P is down 25% for the year, and your hedge fund is down 15%, that’s a terrible outcome because the fund has still lost money.

But if the S&P is up 30% for the year, but your hedge fund is up only 20%, that’s a good outcome on an absolute basis because the fund has still earned money.

For detailed coverage of this topic, please see our article on the hedge fund vs private equity comparison.

Hedge funds differ from private equity firms because PE firms usually buy and sell entire companies or large stakes in companies, and most of their holdings are illiquid, while hedge funds tend to acquire much smaller stakes in liquid, publicly traded assets.

Hedge funds do share some similarities with private equity firms because both raise capital from outside investors, called Limited Partners (LP)s, and both charge a management fee on the assets under management (AUM) and a percentage of the investment profits (“carry”).

But almost everything else is different:

Hedge funds are usually classified according to the following criteria:

• By Asset Class (e.g., equities, fixed income, commodities/FX, convertibles, private deals, or a mix).
• By Industry Focus (e.g., technology, healthcare, energy, or generalist).
• By Investment Strategy (e.g., long/short equity, investment-grade debt, distressed debt, global macro, merger arbitrage, or quant).
• By Fund Model (e.g., single-manager vs multi-manager).
• By Size of Fund (e.g., under $1 billion AUM vs. $1 – 5 billion vs. over $10 billion).

There are other differences as well, such as the investment process (bureaucratic vs. relatively free), the # of names covered by each Analyst, the level of activism, the work culture, and the lifestyle, but most funds don’t publish readily available information on those points.

We’ve published articles about a few specific types of hedge funds, which you can access below:

• Activist Hedge Funds
• Distressed Hedge Funds
• Credit Hedge Funds
• Commodity Hedge Funds
• Energy Hedge Funds
• Quant Hedge Funds

You might also be interested in reading Hedge Fund Strategies: What’s the Fastest Path to $1 Billion?.

Hedge funds tend to be lesser-known than large investment banks or private equity firms, and there’s always debate about which fund is “the best.”

On a more objective note, though, some of the top hedge funds in the world by assets under management (AUM), or total capital raised, are as follows:

Hedge funds are good if you’re extremely passionate about the public markets, and you want to follow companies and other securities rather than work on deals.

The money is a big draw as well: if you’re at the right fund and you perform well, you can earn into the mid-six-figures, up to $1 million+, even as a junior-level employee.

The top individual Portfolio Managers can earn hundreds of millions or billions each year.

Hedge funds offer a much higher pay ceiling than investment banking, (sometimes) better hours and work/life balance, and the chance to do more interesting work.

The downsides are that your exit opportunities out of a hedge fund will be more limited, it’s still a very stressful job even though you work fewer hours, and if your fund blows up or otherwise shuts down, you’ll be out of a job.

Also, many people are pessimistic about the future of the hedge fund industry because of the rise of index funds, passive and automated investing, and AI.

It’s not going to disappear overnight, and you can still make money even in a declining industry, but the best time to enter a hedge fund was a long time ago (e.g., the 1980s or 1990s) when there were more opportunities and fewer threats on the horizon.

Most non-quant hedge funds are divided into three main areas:

1. Investment Team – The Research/Investment Analysts and Portfolio Managers who generate and evaluate ideas and make investment decisions. We cover these roles in our deep dive on the Hedge Fund Analyst role.
2. Trading Team – The Execution Traders who implement the Investment Team’s strategies and aim for the best price on each trade.
3. Middle and Back Office – The back office at a hedge fund consists of supporting areas such as compliance, accounting, operations, and IT.

There are other areas as well, such as Risk Management and Investor Relations, which may be separate or part of the ones above.

We focus on front-office roles (i.e., the Investment Team and Trading Team) on this site because most of our content relates to careers that lead there.

They are considered the most prestigious jobs, pay the most, and offer the highest advancement potential and the best career opportunities.

At some funds, there are additional roles – for example, at quant hedge funds, there are also quants and programmers with math/statistics/computer science backgrounds.

It’s extremely difficult to break into hedge funds, and once you’re in, the job is stressful and requires long hours and sacrifices.

But if you perform well, you can advance quickly and earn high salaries, bonuses, and carry (the profit share from investment returns) in the process.

Here’s what a “typical” career progression might look like at a mid-sized-to-large hedge fund firm based in New York City, including estimates for total compensation (i.e., base salary + annual bonus) in USD:

We are not listing “carry” (percentage of investment returns earned) in the table above because it works a bit differently than it does in private equity, and exact figures are difficult to pin down.

Suffice to say that you won’t see much at the junior levels, but at the PM level, it could significantly increase your compensation if you perform well.

For more on these topics, please see our article on the hedge fund career path.

There are two main entry points into hedge funds: directly out of undergraduate as a Junior Analyst or Research Associate, or as an Analyst, after you work for several years in a field like investment banking, equity research, asset management, or sales & trading.

You can’t “join” as a Portfolio Manager, as you need to prove yourself in the industry and advance into that position first.

And to join as an Execution Trader, you need experience in sales & trading, at a prop trading firm, or something else that’s highly relevant.

The following professionals have the best chance of winning Investment Analyst roles at hedge funds:

1. Investment Banking Analysts at bulge bracket and elite boutique banks, and sometimes ones who followed the “2 + 2” path (i.e., two years of IB followed by two years of PE).
2. Equity Research Associates at bulge bracket banks.
3. Research/Investment Analysts at traditional asset management firms or mutual funds.
4. Some Sales & Trading professionals who happen to work in highly relevant groups, such as the rates trading desk or the equity derivatives desk.
5. Occasionally, university graduates who have completed relevant internships, such as ones in asset management at a pension fund, win full-time hedge fund offers straight out of undergrad without another full-time role first.

Of these categories, many U.S.-based hedge funds prefer IB Analysts – at least funds that use strategies such as long/short equity, merger arbitrage, and anything else related to fundamental analysis or deals.

Funds that use strategies such as global macro (i.e., trading FX, commodities, etc. based on changes in government policy, economic or trade policy, and interest rates) may prefer S&T professionals who have worked in areas like the rates trading desk.

Hedge funds want professionals who have a passion for the markets and investing, the ability to think independently while still being a team player, and emotional stability (all investors lose money sometimes!).

The stock pitch is a critical component of any interview/recruiting process, and you’ll spend the most time on your stock (or other investment) pitches as you prepare.

The overall process for winning a hedge fund job looks like this:

1. Research and screen for funds.
2. Network with hedge fund professionals.
3. Prepare for interviews.
4. Follow up after the interviews and provide references.

For more about the recruiting process, networking, and interviews, see our comprehensive guide on how to get a job at a hedge fund.