Transcription
Of all of the industries in finance, there is none more steeped in mystery than the hedge fund. Today, I'm going to be removing some of that mystery because after speaking with a few friends who work at hedge funds, I created this video. And today, we're going to be going over the different strategies at funds, the top firms, what you do and the hierarchy, hours and lifestyle, compensation, and the pros and cons of working in this industry.
All right, so with that said, let's first go into the different strategies at hedge funds. At a hedge fund, it's all about generating alpha. This is the return above market returns, which is known as beta. And having a differentiated strategy is really what sets a hedge fund apart from other funds. Broadly speaking, hedge funds can be divided into Quant and non-Quant.
Quant strategies involve the use of mathematical and statistical models, along with coding and algorithms, in order to capitalize on market opportunities. Strategies within Quant can include statistical arbitrage, which involves identifying and exploiting price discrepancies in financial instruments; high-frequency trading, which involves using powerful algorithms to execute a large number of trades in fractions of a second; and algorithmic trading, which involves automated trading based on predefined criteria and rules. Quant firms often implement a variety of strategies and are increasingly investing more and more heavily into machine learning and AI in order to analyze large data sets to help inform trading decisions.
Moving on, non-Quant funds rely more on fundamental analysis and qualitative research to help make investment decisions. Strategies under this category include long-short equity, which involves taking long positions in undervalued stocks while shorting overvalued stocks, and this is the most common strategy that most people think about when they think of hedge funds. Then there are the macro funds, which invest based on prediction of macro trends, such as interest rates, geopolitical events, currency movements, and economic policies. Next are event-driven and special situations, which involves making investment decisions based on events such as acquisitions, bankruptcies, or regulatory changes. A related strategy is activist investing, in which the fund takes a large enough ownership in a company to have influence on company management and to catalyze change, and in theory, make the company more valuable. And last but not least are distressed debt and credit opportunities. These funds invest into the debt and credit of companies that are going through financial distress or restructuring and rely on mispricing and volatility in the credit markets. These funds buy distressed assets at a discount and sell for a profit after the company goes through recovery and restructuring processes.
Hedge funds are also differentiated based on whether they invest in equity, debt, commodities, foreign exchange, and etc. And a lot of the largest funds invest across a variety of asset classes, while smaller funds will focus only on one and never go outside of its comfort zone because then they will lose their edge.
Now, if you're watching this video because you're interested in breaking into the hedge fund industry one day, you may want to check out the Hedge Fund Investing Certificate program being offered by Wall Street Prep and Wharton, which is where I got my MBA. This program is taught by Wharton professors and Wall Street Prep program directors and includes keynote speakers from real investors, including the legendary Oak Tree co-founder Howard Marks, who I actually met at a Wharton MBA event. Through this 8-week long program, you'll learn investment fundamentals, build modeling, how to develop an investment thesis, and a whole lot more. Most students who take this course are those who already work in the finance field and are looking to sharpen their skills, but this course is open to everyone. And another important huge benefit of taking this course is access to everyone who has and will take this course in the future, so you really are able to build a network in addition to learning about hedge funds. If any of this is of interest to you, be sure to use my code RARELIQUID to get $300 off and also sign up by the early registration to get an additional $200 off. And I'll leave a link to all of this and information in this video's description.
All right, now moving on, I wanted to first discuss the different strategies at hedge funds because that's how I'm going to group them when I talk about the top firms. The eliteness of a hedge fund is really determined by performance and the assets under management, two things that really go hand in hand. And here you can see a list of all of the top hedge funds in the world based on the different strategies they fall under. A lot of the top funds are also multi-strategy funds, and so I've mostly categorized the funds based on what they're best known for. And you can pause the video here to just see the different names of the funds under their primary strategies. One note that I have to add is that there are a good number of smaller hedge funds that don't have as much AUM but perform really well every year and just crush it. And hedge funds are notoriously secretive, and so may not really be able to easily find information about a lot of the top best-performing hedge funds. But if you want to learn more, I do recommend this one book called Hedge Fund Market Wizards, which I remember reading in college was very enlightening about the hedge fund and investing world.
Next up, let's talk about the hierarchy at hedge funds and what you do on a day-to-day basis. First, going into hierarchy, at the bottom of the totem pole is the junior analyst, which you'd be at for one to two years, entering either from undergrad or a short stint from banking, equity research, or private equity. Then analyst, which goes from two to five years and could also be hired from the same, but also post-MBA. And then senior analyst, which could take another two to five years and usually only are from internal promotes or lateral hires. After the analyst position, you're promoted to portfolio manager. And once you get to this level, you could be called a sector head or senior portfolio manager afterwards. But generally speaking, this is the last level before titles like managing director or chief investment officer.
In terms of what you do, given that there are so many strategies, I'm going to list a broad range of responsibilities held at the analyst position for most non-Quant funds. These include the technical and research aspects of the job, including digging through financial statements and filings, listening to and digesting earnings calls, keeping up-to-date with economic and market news to form a macro view, reading industry reports to establish a market view, and building high-level but highly functional financial models. And then there's the more qualitative aspects, which include attending conferences to listen to company presentations and to build relationships, speaking directly with management teams, and lastly, speaking with equity research analysts. Junior analysts do a majority of the grunt work in preparing analyses and focus on gaining a fundamental understanding of the industry and companies covered, while analysts do much of the same but may start presenting more investment ideas and taking on more responsibility for specific sectors. Senior analysts often make significant contributions to investment decisions and are specialized in a specific sector. As a portfolio manager, you start managing a book, aka a big chunk of money, and you start to make high-level investment decisions and oversee analysts. And if you keep bringing in great returns, your book continues to grow. And in addition to this, you may also need to start building relationships with investors to raise funds.
Next up, let's talk about the hours and lifestyle for hedge fund investors. From speaking with my friends who work at hedge funds, typically it seems like the hours are something like 8:00 AM to 7:00 PM or 8:00 PM on weekdays and around 0 to 10 hours on weekends. So you're looking at around 55 to 70 hours per week or so. And what I do think is really important about this is that even though you may be working less than your peers in investment banking or private equity, the critical thinking and the amount of energy you have to spend on just thinking each day and hour is just quite massive in comparison. And so some of my friends who work at hedge funds, they say that after a day's work, they just come home and they just can't do anything else. They can't even pick the food that they want to eat. That's an exaggeration, but you're just so tired at the end of the day. And so even though you're working less hours, and when the market's closed, you don't have to really be spending as much time working, and your weekends are a lot more predictable, and you can really take a lot of those off, it is a really exhausting type of job.
All right, let's now go into everyone's favorite topic, which is compensation. At the junior analyst position, you're likely making a salary of about 100K to 150K and a bonus of 0 to 200%, so you're looking at a range of somewhere between 100K to 450K. At the analyst level, you're likely seeing a salary of 150K to 200K and a bonus of 0 to 300% for a range of 150K to 800K. Then at the senior level, you're looking at a salary of 200K to 250K and a bonus of 0 to 500% for a range of 200K to 1.5 million. After the analyst level, things become extremely variable. But this article states that for an investor managing 50 to 250 million, they'd earn between 600K to 3.8 million. Next, a senior portfolio manager managing around 500 million to 1 billion could earn anywhere between 6 million to 12 million per year. Next, the owner of a hedge fund that manages $1 billion with just a 10% return would make 15 to $25 million a year. And for a $10 billion fund, 10 times as much, so $150 to $250 million. Lastly, here's a chart for how much the top hedge fund managers earned in 2021, which is around at least $1 billion.
All of this, of course, sounds very lucrative, but it's important to keep in mind that the hedge fund industry is the most Darwinian of all the industries in the finance world, in that only the strongest survive. If your hedge fund does not perform well, or if you don't perform well, then you're just going to earn your measly base salary, or you could get fired.
All right, now last but not least, let's go into the pros and cons of the hedge fund industry. The first pro is extremely high pay paired with a relatively decent work-life balance. Unlike industries like investment banking, where you just have no control of your schedule for how much you get paid, you really are able to have a predictable work schedule, and usually on weekends, you're not going to have to work throughout the entire weekend, although you may want to prepare on Sundays for the week ahead. The second pro is that you only work on what really matters. And what I mean by this is that in a lot of other finance or professional business industries, you're going to have to build these presentations that never really go anywhere. At a hedge fund, you're never going to have to make your models look beautiful or spend any time on that kind of stuff. You only really care about what the final output is and how it informs your investment decisions. Third pro is extremely stimulating work. My friends and I in finance always talk about how in terms of smartness, you always have investment bankers here, and then private equity investors, and then you have hedge fund investors, then of course, you have finance YouTubers such as yourself, just kidding. But anyway, hedge fund investors are really the smartest of the bunch, and really, you cannot get there unless you really know what you're doing because you have tons of money on the line. You're also always interfacing with company management, CEOs, CFOs, etc., and you're just bumping heads with your colleagues who are really, really, really smart, otherwise they're going to get fired.
That leads to the cons. The first of which is job instability. My friend at Citadel would say that pretty much if you mess up, then you're going to get fired. And I've never heard anyone else in any other line of industry talk so much about potentially getting fired. And he also mentioned that pretty much every few months, people were getting fired at the firm. The second con is the extreme volume of work that can lead to burnout. One of my friends at a hedge fund, every earnings season, has to cover about 50 or so companies. And so when earnings season is happening, pretty much can't do anything else because you're updating tons and tons of models, making recommendations about all of these different companies. And how do you even keep track of that many companies? It's really, really hard to do well and not lose money, right? And so all of that pressure can over time really lead to burnout. Third con is that hedge fund cultures can be very toxic, just because a lot of times the main focus is just about money, right? You're not working at a nonprofit where people come from all walks of life and just really care about a certain cause. You're with a lot of people who just want to make a ton of money. And so that means that a lot of times these people may not be the best managers, but they may be really, really good at spotting what kind of investments to make, right? And so while this is true and any single environment can be toxic in any line of industry, hedge funds in particular really, really do suffer from this problem.
With that said, every single industry has its pros and cons, but not every industry is going to pay you eventually millions of dollars for what may be the inevitable suffering that you may have to encounter while working at a job. And so with that said, if you're interested in breaking into a hedge fund, you're likely first going to have to break into investment banking. And on that note, I've been building out my own how to get into investment banking course that I think is going to be super, super valuable and helpful. I'm giving out 50% discounts for those who sign up early. You can check this out in my links in the link in this video description. That said, that wraps up this video. In the next screen, you're going to see a video about the other buy-side industries: venture capital, growth equity, and private equity, so feel free to check that out if you'd like. That's said, thank you all so much for watching and hope to catch you in the next video. Thanks guys and peace out.
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