What Are Hedge Funds and What Do Hedge Fund Professionals Do?

• Hedge fund jobs can be some of the most lucrative in finance.
• Hedge funds are asset management firms, but with the freedom to follow more creative investment strategies.
• Hedge funds used to be scrappy outsiders but have become far more institutional.
•  Large hedge funds are increasingly running their own graduate recruitment schemes.

What do hedge funds do?

Hedge funds invest money for their clients. These “clients” used to be wealthy individuals, but are now likely to include institutional investors such as pension funds, too. Unlike so-called “long only” asset management funds, which make money by investing in products that are rising in price, the term “hedge fund” comes from the fact that hedge funds try to hedge their bets – they try to ensure that they can make good returns in any market. This means they seek to make money by investing in things that are falling in price as well as things that are rising. But how do hedge funds make money in a falling market? Well, by “short selling.” 

Short selling, or “going short” involves first borrowing shares (or some other security) and then selling them into the market before buying them back again at some point in the future. When a hedge fund goes short, it’s betting that the price of the shares will drop before it buys them back again. The profit is the difference between the price it sells the shares at after it borrows them, and the (hopefully) lower price it pays when it buys them back before handing the shares back to organizations it borrowed them from. 

By using short selling and other techniques to hedge their investments, hedge funds aim to generate super-charged returns for their investors. Long-only funds rarely achieve returns of more than 10% when investing in ‘safe’ products like European equities, but top performing hedge funds can achieve returns of 50%, and sometimes more, in the same period of time. 

Given that hedge funds have traditionally charged investors a 2% management fee (2% of the funds they invest) and a 20% performance fee (20% of the profits they earn), this can make working for a successful hedge fund very lucrative indeed. Everything is geared towards chasing alpha – returns that are above and beyond the “beta” generated by a moving market. When you work for a hedge fund, you are laser-focused on investment performance. 

To some extent, all hedge funds are on the lookout for the same thing – financial products that are incorrectly priced. “Hedge funds make money by capitalizing on market inefficiencies, which are always fleeting opportunities,” says Dominique Mielle, a former partner at Canyon Capital, a hedge fund with $25bn in Assets Under Management (AUM), writing in her memoir ‘Damsel in Distressed.’

Colin Lancaster, global head of Macro & Fixed Income for Schonfeld (a hedge fund with $14bn in AUM) known for “Fed Up!”, his memoir of trading during the start of the covid pandemic, calls the goal of every hedge fund to be “finding an imbalance” – and then profiting from it.

What are the different types of hedge fund?

While all hedge funds are chasing imbalances, the imbalances you find will depend on the kind of strategy the hedge fund you work for is pursuing. Some of the main strategies are: 

Long/short: Long/short hedge fund managers go long some of the time. They also go short some of the time. They go long when they expect the price of a product to rise, and they go short when they expect the price of a product to fall.

Global macro: Macro funds invest to benefit from global macroeconomic trends (going both long and short). Lancaster says global macro hedge fund managers look for imbalances between countries in things like economic growth, interest rates and central bank reactions. They profit from the moves in that country’s interest rates, or from moves in its foreign exchange, equity, or credit markets – or rather, they profit from the reaction those moves make.

Arbitrage: Arbitrage-focused hedge funds seek to make the most of price differentials between related securities products. At their simplest, so-called ‘statistical arbitrage’ (Stat Arb) funds put stocks into related pairs. If one pair does well and outperforms the other, it will be sold short (in the expectation that its price will then fall again). The underperforming stock will be bought (in the expectation that its price will rise to meet its pair). Arbitrage funds are often quantitative – they use complicated computer programs to determine what to buy and sell.  

Event driven: Event driven hedge funds try to profit from one-off events. For example, when one company decides to buy another, it will usually pay more than the current price for the shares and event driven funds will seek to benefit from this. 

Systematic/quantitative: Increasingly, hedge funds are ‘systematic’ – they use high speed computer algorithms to unearth market inefficiencies and to place trades in the brief time period when there’s money to be made before the inefficiency is discovered by other funds in the market. Systematic hedge funds operate across different market strategies. 

Multi-strategy funds: A lot of the biggest hedge funds (like Citadel, Balyasny, Millennium, Schonfeld, or Point72) are multi-strategy hedge funds: they pursue all the strategies above, and more. More on them later.

Hedge funds also vary by the vast range of products they invest in. For example, there are credit hedge funds (which invest in credit), distressed hedge funds (which invest in credit which might never be repaid), and emerging markets hedge funds (which invest in emerging markets).

The rise of the multi-strategy hedge fund – and how hedge fund jobs are changing

To the uninitiated, hedge funds may still have a reputation for being at the edgier end of financial services (and scrutiny), but that wild west reputation has taken a more… Genteel turn over the years. Over the last two decades they’ve become increasingly like banks, and the biggest drivers of this (as well as the biggest hedge funds full stop) are the global multi-strategy funds. 

These top hedge funds have tens of billions under management, much of it from the pension funds and other institutional investors that like nice safe returns instead of risky mavericks. Those mavericks, however, are the ones delivering results – by competing against each other, within the same hedge fund. Multi-strategy funds employ “pods”, a small team and pool of capital under the purview of a portfolio manager.

Some hedge funds are so committed to their multi-pod strategy that portfolio managers don’t even know what their colleagues are doing. Their goal is, as a collective, to generate as much profit as possible, regardless of where specifically it comes from. The central structure of the fund deploys capital as it sees fit to meet its desired return and risk profile, as former hedge fund PM Marc Rubenstein explained.

As Mielle points out, the sheer size of hedge funds, combined with new technology (allowing financial statements to be accessible online), regulations (requiring the same disclosure to all investors), and competition, have eroded many of the market inefficiencies that hedge funds formerly thrived upon. 

The whole point of a multi-strategy fund is to be market neutral. The fundamental idea that Ken Griffin had was that multiple pods, following multiple strategies, with money balanced across them in the right way, would balance out the volatility inherent both in the market and in the hedge fund concept as a whole.

“In the beginning, hedge funds had a rebellious aspect to them, an anti-establishment mentality, and a certain scrappiness. We wanted to do things differently, discover new investing ways. We wanted to be original, innovators, inventors, explorers. It was about thinking creatively, outside the box,” writes Mielle. “In the industrialization age, we started mutating into the big, stodgy guys ourselves.”

And the multi-strategy funds are growing, too, at a time when banks are shedding bankers and private equity funds are just… Suffering in general. Millennium, the world’s biggest hedge fund (as measured by employees) added 260 new investment staff in the last year ending Q1 2024, a 10% increase. Citadel, the next biggest, increased investment staff numbers by 5%. Point72, the third biggest, added a whopping 15%.

The ever-increasing size of multi-strategy hedge funds can be seen in how big they’ve started debuting. Citadel, a pioneering multi-strategy fund, was founded with $4.6m of capital by Ken Griffin in 1990; nowadays, in 2024, a pioneering fund such as Bobby Jain’s Jain Global is opening with around $5bn, or a thousand times as much capital.

Career paths in hedge funds

If you want to work for a hedge fund, you probably envisage yourself as a trader or portfolio manager. However, like investment banks, hedge funds have teams of support staff working in areas like compliance, technology, risk, and operations. Some of the key jobs in hedge funds include: 

Analysts and researchers: Analysts spend their days poring over the financials of the companies and financial products hedge funds invest in. They help determine the fund’s investment strategy. 

Traders: You might think being a trader in a hedge fund is the most exciting job there is. You may well be wrong. Traders in hedge funds are often ‘execution traders’. Execution traders simply push the button, or ‘execute’ trades. They don’t get a chance to devise their own trading strategies, they don’t get a chance to take their own positions on the market. What they do get a chance to become experts in is ‘market timing’. Execution traders watch the market closely and know when’s the best time to place their trades. 

Portfolio managers: Portfolio managers are at the top of the hedge fund tree. They listen to what analysts say and decide how to allocate investors’ money to achieve the highest returns. They are in charge of the whole investment portfolio (hence the name). Everyone wants to be a portfolio manager.

Recent filings from a court case involving BlueCrest, a large family office (owned by Mike Platt) operating as a hedge fund, explained a bit more precisely how portfolio managers operate. To start with, they carry out market research to form a long-term view of the market of their investments before the rest of the market. They then construct a portfolio and seek to minimize the amount of cash that backs up the market exposure they naturally assume by taking any market position. That exposure is partly backed by cash with the balance being leverage (debt) from a counterparty such as a bank or broker.

Sales and marketing professionals: Hedge fund sales and marketing professionals liaise with investors. They help sell the merits of the fund and persuade investors to hand over their money to be invested. Investor relations professionals fall into this category.  

Quants: Hedge funds also employ quantitative specialists – all the more so if they’re pursuing a quantitative strategy. These quants develop complex mathematical equations which tell the fund when to trade in order to make the most money using its chosen strategy. Quants who build algorithms work with quant developers – technologists who translate the algorithm into computer software which can implement the algorithm’s strategy. 

Risk managers and compliance, legal, technology, and operations professionals: As hedge funds have become bigger (and more boring), they have accumulated the sort of support structures only previously seen in investment banks. Hedge funds now have risk management, compliance, and operations professionals. These jobs will be similar to banks – except you’ll probably have to be more of a ‘jack of all trades.’ It’s normal for compliance and legal roles to be blended in hedge funds, for example.

How to get a first job at a hedge fund

Getting into a hedge fund is very, very difficult. “The bar is exceptionally high,” says Ilana Weinstein, the legendary hedge fund recruiter and founder of The IDW Group, a recruitment consultant. “There are so few people that can meet that challenge.” 

What does it take to get a job with a multistrategy fund? At the very least, “good intellectual horsepower, work ethic, training, and a history of results,” says Weinstein. However, these are only a “necessary, and not a sufficient” condition of getting hired. “The other things we’re really looking for under the hood are insatiable curiosity, self-awareness, a growth mindset, coupled with an intense desire to improve and learn, and passion.” 

Specifically, she says, analysts are about “idea generation, creativity, independent research, and asking the right questions.” Portfolio managers are about “risk management, portfolio construction, hedging, sizing, the ability to build and manage a team.” 

If you want an investment role at a top hedge fund, Weinstein says it will help if you come with a record of your own performance. Even better will be, “a spreadsheet showing what you have achieved and what you might have achieved if you had been allowed to do the things you wanted to have done.” 

The good news for you is that as big hedge funds have become more institutional, they’ve started running their own campus recruitment programs and training graduates of their own. In the past, they tended only to recruit people who had first trained in an investment bank’s sales and trading team. 

As with sales and trading jobs, it helps to start off as an intern. But be warned: winning a place on a hedge fund graduate program or internship is exceptionally tough. Hedge funds hire a lot less people than banks.

Funds hire a large variety of people for a large variety of roles, and that extends to hiring students, too. These tend especially to be the biggest hedge funds, with the most AUM: Balyasny, Citadel, and Millennium for example have “traditional” summer internships. Rokos offers graduate programs. We have a whole list of hedge fund internships available here.

The most interesting, however, is probably Point72 and its academy. It has a remarkably low acceptance rate – just 0.6% for its summer program, which is somehow even less than Goldman Sachs’, but it’s a well known academy for a reason. It also pays its interns an annualized salary between $100k and $120k, which doesn’t hurt.

At the Point72 academy, you’ll learn to be an analyst – a long/short analyst, specifically. That means covering “statistics, accounting, economics, finance, modelling, financial statement analysis, M&A, corporate finance, data science, sequel and coding, operational management and balance sheets,” per the Hedge Fund Journal. Eventually, once you graduate from the academy, you’ll get the opportunity to join one of Point72’s long/short teams.

If you want a first job at a hedge fund specifically, you’ll typically need to have an excellent academic record and – if you want to be an analyst or a portfolio manager – you’ll need to be no stranger to hard work. 

“The game has gotten much harder,” says Colin Lancaster. He categories the best people in hedge funds as “exceptional decision markets” who spend hours researching the markets. Mielle says analysts in hedge funds need conviction about their investment ideas, and to be willing to defend them when other analysts or portfolio managers question their validity. 

While most hedge funds like people with mathematical and data skills, these aren’t enough on their own. “A widespread misconception about the hedge fund profession is that you must be either a math geek or a sleazy dealmaker to succeed,” says Mielle. In fact, she says being a successful portfolio manager or analyst is also about being able to communicate complex investment ideas, innovative thinking, generating new ideas and having flashes of intuition that can join up the dots.

This might be why Citadel says it looks for candidates with sound judgement, good communication skills and “a whatever it takes attitude,” or why Two Sigma says it wants people who are “creative” and have “intellectually curious minds.”

Education & qualifications for hedge fund roles

All that being said, what education would help you get a job in a hedge fund? There’s a similar pattern to what bank sales & trading teams look for, unsurprisingly.  

Our analysis of some of the new analysts at Citadel and Millennium – two of the biggest hedge funds in the world – show that hard sciences (especially mathematics and physics) are very much preferred over anything else, although there were a handful of “traditional” financial services graduates scattered throughout.

An MBA might also help your chances, particularly if you want a non-investment role – In 2023, 6% of Harvard MBAs went into hedge funds or asset management. A masters in finance or a masters in financial engineering will also be helpful, with the latter particularly helpful for quant funds. At top quant hedge funds, which use systematic investment processes, quantitative PhDs are popular. As funds make energy investments based on weather predictions it may even help to have studied meteorology. Or poetry.

Aside from a hard numbers degree (or several), it might be worth quantitative hedge fund aspirants to angle for the Certificate in Quantitative Finance (CQF), which aside from having some directly applicable knowledge, also gives you access to a well-known and well-connected alumni network.

It’s also worth pointing out that, although hedge funds recruit frequently from investment bank sales & trading programs, there’s no need to sit FINRA’s Series 7 exams. 

Salaries and bonuses in hedge funds

The amount that you earn in a hedge fund will depend upon things like the role you’re doing, the size of the fund you’re working for (measured in AUM) and the fund’s performance – or the performance of your unit within the fund.

Hedge funds pay out a much higher percentage of profit generated (called pnl) as bonus to its staff than bank sales and trading teams do. That means that top portfolio managers can earn insane amounts of money – one single team at Citadel, made up of just 20 people, split a colossal $600m bonus pot between them. That’s $30m each, on average, if you thought that was a typo.

Our 2024 salary and bonus survey was more realistic. Hedge funds pay their staff in the range of $320k to $400k in their 20s, and the really, really big numbers (seven figures) only start with serious experience – over the age of 50, we found, on average.

With additional material from Zeno Toulon.