From the category archives:

Hedge Fund Careers

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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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 the usual scenario for an entry-level position in the hedge fund industry.

What They Do

An analyst is responsible for evaluating company financials, bonds, commodities, real estate, currencies and hard assets in the context of current (and future) economic and market conditions to ascertain their suitability as an investment in the hedge fund with a perspective to the fund’s strategy.

This requires the ability to analyze financial statements and prepare financial models to facilitate risk evaluation and alignment with a particular investment strategy.

What Are the Prerequisites?

The disciplines most valued are in the areas of accounting, economics, mathematics and statistics. It should be said that although there is a strong preference for these educational backgrounds, nothing is etched in stone. That said, aspiring analysts must demonstrate the ability to research, analyze and evaluate. The analyst must also possess excellent communication skills, an ability to work under pressure, meet deadlines, and multi-task in a fast-paced work environment. This requires a high degree of self-confidence, personal initiative and tenacity.

Apart from strong mathematical proficiency and quantitative skills, prospective applicants must be able to work effectively in a team environment. Analysts must also demonstrate flexibility and an innovative spark coupled with an interest in current affairs and insights on their impact on the markets. Equally important is a demonstrated commitment to further study, the pursuit of additional formal qualifications and a global mindset.

Clearly, computer literacy is essential, especially with respect to Excel, which is required for financial modeling and projection work.

Small vs. Large Hedge funds

Small hedge funds, generally speaking, seek candidates with broad knowledge bases. Large hedge funds are much more likely to seek a candidate with an industry specific or regional knowledge base. One example would be a knowledge base specific to the pharmaceutical industry.

What They Earn

According to the 2017 Hedge Fund Compensation Report, analysts in hedge firms with assets under management (AUM) of less than $100 million, earn a mean base pay of $110 thousand annually. In contrast, analysts in firms with an AUM greater than $1 billion earn a mean base pay of $157 thousand. The report also reveals mean bonus pay of $62 thousand in small firms as compared to mean bonus pay of $176 thousand in the larger firms.

Analysts are also going to earn a great deal of unpaid overtime, untold hours of telephone calls, endless meetings and inescapable amounts travel time in the bargain! These are the elements necessary for success.

For those willing to make the needed sacrifices, a hedge fund career can be extremely rewarding, which is doubtless the reason for the incredible level of competition encountered by anyone pursuing a job in the hedge fund industry.

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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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Are Hedge Funds Truly Failing to Attract Graduating MBAs?

July 25, 2016

While it may be true that fewer MBA holders are entering the hedge fund industry, it is certainly true that recent headlines suggesting that these students “scorn” hedge funds or that fewer MBAs “want to work” for a hedge fund border on fiction. Here Are the Facts The articles referenced above are inspired by Training […]

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