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How to Become a Hedge Fund Manager

What does it take to get into this high-powered corporate role? And is it really worth it?
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Hedge funds have certainly seen their ups and downs in the 21st century. After bursting onto the scene in the 90s, they took an oversized role in global investments. Come 2008, the financial crisis (one they were, in part, responsible for) nearly wiped them off the map along with the myth that investing in hedge funds ensured your money's security even during economic downturns.

Once the dust settled and people were no longer clambering to get their evaporating money back, hedge funds slowly rebuilt their reputation and their market share with it.

Managing one of these investments can be a lucrative gig, with incomes typically structured to net 2% of all assets in annual management fees plus 20% of all returns in annual performance fees. With a large enough asset pool and the right management, this can lead to huge paychecks, but it takes a lot of knowledge, experience, and work to get there.

What Does a Hedge Fund Manager Do?

To understand what a hedge fund manager does, you first have to understand what a hedge fund is. Put briefly, a hedge fund is a pool of funds given by typically high net-worth individuals (those with a net worth of at least $1 million or annual income at or exceeding $200,000) to a manager who will invest those funds in a way meant to minimize risk while maximizing returns.

It's important to understand the difference between this and a mutual fund. For one, hedge funds place a greater emphasis on high returns, partially because that's what their high net-worth clients are looking for and partially because a strong profit motive exists for the managers who get a cut of all returns. Because of this, even though both hedge funds and mutual funds tighten themselves as a way of maximizing returns at minimum risk, a hedge fund will be more aggressive and less risk-averse than its mutual fund counterparts when investing its clients' funds. This often means higher returns, but it can also mean getting a chunk of your money wiped out with unexpected downturns in the market. In addition, mutual funds operate under the regulation of the SEC and are required to make regular public disclosure on the performance of its assets, further encouraging the prioritization of stable, safe investments rather than risky, but potentially lucrative gambles.

Pulling off the role of hedge fund manager means understanding and executing a variety of complex financial techniques (labeled hedging transactions) that should anticipate short, medium, and long term trends in the economy while diversifying investments accordingly. This usually will mean working around the clock to monitor funds, with 100-hour workweeks being far from unheard of.

Due to the size of liquid assets the manager has access to, he or she has far more investment opportunities than the average individual. These include options, derivatives, and futures trading--all of which a manager will typically need to interact with in order to grow and protect clients' investments.

Along with managing clients' funds, working face-to-face with clients is another part of the manager's job. This encompasses both initial meetings to convince investors to pool their money into the hedge fund and then further meetings discussing the progress of said hedge fund and convincing the investor to keep their money in. As such, communication skills play an essential role in the job. Without it, both attracting and retaining the high-profile customers a hedge fund needs to stay afloat would be impossible.

How to Become a Hedge Fund Manager: 6 Steps

  • Get the Necessary Education

To even consider becoming a hedge fund manager, you'll typically need a few educational qualifications. These vary from state to state, but the bare minimum would be a bachelor's in business or accounting. A master's in finance, accounting, or business administration may also be necessary or, at the very least, helpful in opening up the path to becoming a hedge fund manager.

  • Make the Industry Your Hobby

While getting the right education goes a long way, having the drive needed to be a successful hedge fund manager means making the job your passion. Fostering lifetime habits through subscribing to hedge fund newsletters, regularly reading articles and books on the subject, and joining hedge fund associations go a long way in giving you a handle on the industry, who its major players are, and what makes or breaks a manager.

  • Cut Your Teeth in the Business 

Once you know a bit about the industry, you should seek out internships at hedge funds. Even if you can only fit in time for a part-time position, it still has a useful role in acquainting you with the first-hand workings of the industry and connect you with those that could widen the door into a real position.

  • Acquire a CFA/CAIA

While not necessary for those with any of the aforementioned master's degrees, a CFA/CAIA is another way to prove your qualifications to employers. Getting these will require passing a series of exams and filling out an application that verifies your knowledge of the industry, either through experience or education.

  • Distinguish Yourself as an Analyst 

Short of starting your own, it's virtually impossible to enter immediately into a managerial position at a hedge fund. If you've completed all the aforementioned steps, you'll have a shot at getting a position as an analyst at one of these funds. By demonstrating your skill in this position, you can move up the ranks to a senior analyst and then get promoted or apply to the role of the hedge fund manager. Moving up this corporate ladder typically takes a minimum of 3-5 years, though this can all change depending on the culture of the company you work for and the talent you show along the way.

Hedge Fund Manager Salary

The structure of a hedge fund manager's salary typically follows what's known as a 2 and 20 model. This means annual salary comes out to a base fee of 2% of all assets under management and a performance fee of 20% of all returns made through the hedge fund, hence the strong profit motive among hedge fund managers.

While this means income varies depending on the success of the hedge fund, it typically proves a very lucrative venture for those who make it to the manager. Junior managers can typically net anywhere between $300,000 to $3 million annually while senior managers often take over $10 million in a year.