Hedge fund managers or portfolio managers as they are often called, have great latitude in the investment direction of the assets (see Hedge Fund Investment Strategies in this blog). For this reason, managers must be highly-skilled in buying and shorting across multiple asset classes.
The educational background of portfolio managers varies, but it is common to see managers with CFA designations or MBA degrees from well-respected universities. The portfolio manager is essentially the captain of the investment ship and must understand all the particulars that operate under his or her command. A well-educated, experienced portfolio manager also needs marketing skills in order to raise capital for a hedge fund.
Very often the founder of the hedge fund firm is the portfolio manager, and has overall responsibility for trading decisions, hiring, monitoring risk and managing the back office operations necessary to support the firm.
Hedge fund portfolio managers typically earn a “2 and 20” form of compensation. A manager will charge 2% of the fund’s net asset value each year as a management fee, plus 20% of the fund’s profit.
This compensation structure can be extremely lucrative, as you can imagine. Hedge fund manager John Paulson earned a record $3.7 billion in 2008 according to Alpha Magazine’s annual ranking of the 50 most highly paid hedge fund managers. The Paulson & Co. chief surpassed other well-known hedge fund managers such as George Soros and James Simons, who ranked second and third, at $2.9 billion and $2.8 billion, respectively.
Paulson reached No. 1 in Alpha’s survey by shorting the subprime mortgage market. These enormous riches, coming at a time of extreme distress in financial markets, however, have sparked a fair amount of envy and resentment toward the hedge fund industry. It has already drawn additional scrutiny from Washington and may lead to increased regulation of hedge funds.
Next time we’ll look at the specific skills and responsibilities of hedge fund portfolio managers.