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Despite heavy attrition after the 2008 credit crisis, hedge funds have managed to regain much of their former glory.  Traders and brokers all over Wall Street have been piling into these attractive and open firms.  With fewer constraints than mutual funds, hedge funds have used their trademark tools – leverage and hedging – to reap huge rewards.

Hedge funds are notorious for holding minimum wealth requirements for prospective investors and institutions to ensure their clientele are kept as elite as possible.  Access to this kind of money allows them to trade more than just your typical stocks and bonds, but currencies, commodities, and derivative securities that you sometimes need a PhD in mathematics to understand. And it isn’t all that uncommon for their analysts to have one, using their clout on Wall Street – not to mention their high salaries – to pick up some of the best in the business.  With extravagant wealth and a talented team, hedge funds have the option to play out some of the most complicated trading strategies.

Where the Cash Flows

Though hedge fund performance suffered in 2008 overall profitability bounced back strongly in 2009.  In fact, the average fund had an ROI of about 20% according to data from Hedge Fund Research, Inc. If profits continue to increase, as they did again in 2011, money should start to flow back with even greater intensity in 2012-13.

However, as David Kochanek, publisher at Hedge Fund Jobs Digest, noted, “We are not out of the woods yet. We’ll continue to see funds close their doors – especially smaller the funds – it is the nature of the beast.”

Carving Your Own Path

Analyst and manager positions will likely remain as competitive as ever as more candidates come seeking hedge fund profits and prestige.  However, credentials and financial savvy are not necessarily enough if you aren’t quick on the job.  Since hedge funds are so diverse it’s important to make sure you can learn fast and make as much profit as your coworkers on the same trades.

How might you get the opportunity to show your worth like that?

There’s no straightforward path to working in a hedge fund.  Many analysts, traders, and portfolio managers have come from other Wall Street firms. Others have come into the industry after completing a PhD in economics, math or physics.  Some even come from corporate law firms.  What drives people from such diverse backgrounds into the industry?  Base salaries are relatively stable, with portfolio managers earning about $150,000-300,000 with expected bonus payouts around 15% of the investment-portfolio

So stay sharp, and no matter what job you’re aiming for always, always do your homework. Know precisely what the hedge fund you’re applying to does.  Is it trading commodities, debt instruments?  Does it generally hold longer-term investments or work with intra-day movements?

These are important questions that will help you assess both your ability to excel in the firm and whether it’s right for you generally.  Once you’ve done that, remember to put on your game face.

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Hedge funds registered their best performance since February with a return of 1.1 percent for the month of July, but the performance still lagged the 1.4 percent gain of the Standard & Poor’s 500-stock index. The underperformance of hedge funds in relation to the S&P 500 index was even more pronounced in the first seven months period since the start of the year during which its 2.9 percent average return trailed the 11 percent return of the S&P 500 index.

Long Biased Hedge Funds Underperform

Hedge funds that employed managed futures strategies influenced the industry’s performance most positively in July with a return of 2.44 percent due in part to the return of strength in the US dollar. However returns from such funds year-to-date for the seven month period till July were smaller at 1.45 percent. Hedge funds with directional equity strategies especially those with a long bias lagged significantly in July and barely managed to generate positive returns for the month with gains of only 0.14 percent. Macro concerns such as the continuing uncertainty in the Eurozone and disappointing employment figures in the US contributed to muted returns from long biased equity hedge funds.

Hedge Fund Managers on the Defensive

According to Hennessee Group, which advises investors on various hedge funds, the continued underperformance of the hedge funds versus the broader market is a result of conservative stance of fund managers while positioning themselves in light of the continuing Eurozone crisis. Charles Gradante, managing principal of Hennessee states that some managers are utilizing ETFs, which detracted from performance in the sharp late month rally in July.

Technology, Healthcare Among the Laggards

For the month of July, hedge funds that concentrated their investments on technology and healthcare companies reported a negative return of 0.42 percent. However year-to-date these funds are up 3.35 percent.  But hedge funds focused on energy companies and commodities generated a strong 2.06 percent return in July though year-to-date these funds are down 5.75 percent. Fixed income-based relative value arbitrage hedge funds reported another strong performance in July with returns of 2.32 percent. For the seven month period since January, these hedge funds are up 9.69 percent.

The total hedge fund capital at the end of the most recent quarter declined to $2.10 trillion from $2.13 trillion at the end of Q1 as the hedge fund industry suffered a 2.7% loss in the second quarter of 2012.  Despite a modest improved performance in July, hedge fund managers continue to be conservative and adopt a cautious approach in light of the difficulty in predicting long-term trends. Such a conservative approach is likely to keep a lid on any spurt in the hedge fund job market in the near-term.

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