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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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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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Can Hedge Funds Help Pension Funds Meet the $400 Trillion Challenge?

May 29, 2017

A child born in 2007 can look forward to a lifespan in excess of 100 years. Although this is marvelous news for those born in this millennia, it only adds to the woes of pension fund managers struggling with monumental shortfalls, estimated to be in the range of $400 trillion worldwide. The U. S. share […]

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Hedge Fund Hiring in Quarter One

May 16, 2017

Many have the preconceived notion that jobs in the hedge fund industry entail hundred hour work weeks that wear down employees in a matter of months, not years. While it is true that a small percentage of firms may have this view, it is equally true that there are multiple roles in a hedge fund […]

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Trump Executive Order Puts Dodd-Frank in the Cross Hairs

May 1, 2017

President Trump’s executive order, signed January 30 of this year places Dodd-Frank squarely in the administration’s cross hairs. The impact of this executive order would not be so daunting if the legislative process had not been outsourced to the Federal agencies charged with implementing the legislators’ perceived wishes through regulation—a defect that future lawmakers might […]

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Hedge Fund First Quarter Gains Are in the Black

April 17, 2017

Hedge funds posted an aggregate 2.3 percent gain through the first quarter, which marks the strongest start for the industry since 2013. Long/short equity strategies lead the pack with composite returns of 3.2 percent. Back to Reality At first blush, this sounds terrific but, realistically, the industry is beating a very low bar—its own performance […]

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Hedge Fund Jobs and the Rise of the Machines

April 3, 2017

Robots, once the bane of blue-collar workers, may now threaten the livelihoods of hedge fund professionals. Taxi and Uber drivers are menaced by driver-less technology, fast food workers are marginalized by robots capable of making a burger in less than ten seconds, and BlackRock, Inc. is implementing data-driven, artificial intelligence (AI) programs that will ultimately […]

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