From the category archives:

Hedge Fund Careers

Contrary to popular opinion, earning an MBA will not necessarily earn you a spot in the hedge fund industry. According to the 2017 Hedge Fund Compensation Report, just 4 percent of those surveyed were hired by a hedge fund as students graduating with an MBA.

This is not to minimize the value of an MBA in the industry. In fact, the report revealed significant salary advantages for MBA holders, with MBAs earning about 17 percent more than non-MBA peers in terms of base pay. The size of an MBA’s bonus also exceeded his non-MBA peers, in some instances by 73 percent!

However, the MBA cannot be realistically portrayed as a path to a job in hedge funds.

What Is the Path?

While there is no single answer to this question, one thing is clear; experience is a major factor in landing a hedge fund job. Those with investment banking, asset management and sell-side experience accounted for 35 percent of the hedge fund professionals participating in the survey. In short, experience seems to trump the MBA.

While it is demonstrably true that experience in investment banking, asset management and the sell-side will increase your odds of securing a position in a hedge fund firm, the actual appeal of the hedge fund industry is the extensive variety of backgrounds that enjoy the opportunity to make it into the industry.

The report referenced earlier demonstrates that people enter the hedge fund industry from a wide variety of backgrounds, including proprietary trading, public accounting, information technology, management consulting and a host of other fields—including the legal profession.

One may correctly infer that the hedge fund industry is open to applicants with diverse backgrounds, and, while it is true that certain backgrounds are more likely to result in hedge fund employment, the possibility of work in the industry is open to all.

The Internal Career Path

Hedge funds are shining examples of meritocracy. Experience, successful experience, is the key to advancement within the hedge fund firm. For example, if you are successful at landing a position as an analyst, it will take around three to five years to become a senior analyst. To reach the level of portfolio manager will require, on average, another three to ten years…if the opportunity presents itself.

This period is fairly well established in large-sized hedge fund firms, but less so in small to medium-sized firms. Consider acquiring a CFA to accelerate the path to portfolio manager.

Hedge Fund Jobs

The competition for hedge fund jobs is fierce. For those a couple of years out of college, recruiters, job boards and, most critically, the ability to shine in the interview process are the shortest road to a junior role in a hedge fund. Go to your interview focused on developing long and short ideas. Demonstrate industry knowledge and, of course, an understanding of what is happening in the markets.

Hedge funds are packed with alums, so any failure to tap that networking resource will be to one’s detriment. This is especially true for MBAs.

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Just as the regulatory mists were beginning to dissipate under President Trump’s Sharpie and the House’s legislative action, a new fog is rolling across the financial sector—MiFID II. Although driven by European regulators, it cannot be ignored by any financial organization that engages the European markets, and this includes the hedge fund industry.

What Is MiFID II?

This acronym stands for the Markets in Financial Instruments Directive-Two, the second phase of MiFID, which has been in force across the European Union (EU) since 2007. Its stated goal is to provide a uniform regulatory framework that protects EU investors. MiFID’s first iteration was limited, primarily focused on over-the-counter transactions. However, following the penchant of all regulatory bodies, enough was not enough, and that has brought us to MiFID II, which is scheduled to take effect in January of 2018.

It’s important to note that, while this directive is driven by European regulators, MiFID II will reach deeply into the global financial industry, affecting all financial organizations that deal with the European markets.

The Goals of MiFID II

The high-level goals of MiFID II seem innocuous. They include increased market transparency, a shift toward structured marketplaces, lower cost market data, improvements in execution, trading uniformity, and removing any ambiguity regarding the costs involved in trading and investing. However, the price of achieving full compliance is likely to be dear.

The Cost of Compliance

The high cost of compliance is a result of the technological implications inherent in reporting, transparency of trading expenses, and recording telephone calls (cell & landline), texts and face-to-face meetings.

The issue of reporting seems the least daunting of these challenges. The issues of trading expenses and recording interpersonal contacts are the most intimidating challenges and this is why.

In the current scheme of things, trading costs are less than transparent. MiFID II requires separate disclosures for trading commissions and investment/research fees. If free market principles bear out, when the actual costs of an analyst’s time and work are revealed, investors will become increasingly selective with regard to what they are willing to pay for. The likely result will be a fall in demand from previous levels when such research was perceived as free.

Recording all these interpersonal contacts is without precedent in the United States. Not only does this give rise to privacy concerns, it also raises the bar to new levels in terms of cyber security. Then, one needs to determine where and how all these petabytes of data will be securely stored!

What about Hedge Fund Jobs?

Clearly, the small-sized hedge fund firms will face the biggest challenges. Funds available to address compliance costs are a function of management fees and small funds necessarily have the least financial flexibility. Of course, these small firms could choose to avoid transactions that trigger MiFID II requirements, but such a move would impose serious limitations on the fund.

Research analysts in funds of all sizes could face layoffs if demand falls as predicted. The banking sector has already trimmed its analyst staff and expectations are high that further reductions are in the pipeline. When one considers the fact that the position of research analyst is the gateway to employment for many in the hedge fund industry, the jobs picture is looking somewhat faded…thanks Europe!

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What Does an Analyst Do and What Do They Earn?

June 11, 2017

Although there are more than a few avenues leading to a job in the hedge fund industry, it can be argued that an analyst’s position is a typical entry-level position. Make no mistake; although the term entry-level often connotes the absence of a need for skills, education, prior experience or other attributes, this is not […]

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Surprisingly Investors Remain Bullish on Hedge Funds

March 5, 2017

After an inglorious 2016, many pundits jawbone about a continued investor exodus from the so-called overpriced and underperforming hedge fund industry. However, the facts are in stark contrast to the rhetoric. January 2017 redemptions total $5.2 billion, about one-quarter of the $19.3 billion outflow the hedge fund industry experienced in January 2016. Furthermore, a substantial […]

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Hedge Funds Face Fierce Headwinds in the Fight to Grow Assets

December 12, 2016

It appears that the hedge fund industry, on average, will end 2016 on the wrong side of the S&P 500, the arbitrary benchmark, which in the eyes of many, heralds a successful level of performance. The S&P 500 is up some 10.5 percent year-to-date, while average aggregate hedge fund gains hover around 4.5 percent. Another […]

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I Got the Offer – Now What?

November 14, 2016

Everyone that breaks into the hedge fund industry asks themselves that question. The education, the experience, the network of contacts, the untold hours spent writing and re-writing resumes/CVs and cover letters, interviews – it ultimately ends with the negotiation of a compensation package. Prior to the finalization of this key hiring element all one has […]

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Hedge Funds Suffer 3 Consecutive Quarters of Net Outflows

August 8, 2016

If the subject were recession, defined by the media as two or more consecutive quarters of decline, then one would correctly view the past three quarters of declining hedge fund assets under management as akin to a recession in the hedge fund industry. However, economists can find no common ground for defining a recession. Obviously, […]

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