The Benefits and Drawbacks of Becoming a Hedge Fund Manager
Becoming a hedge fund manager is the dream of many investment professionals, but is it all it’s cracked up to be?
If you’ve been in the investment game for a long time, you’re probably pretty clued in on how the system works.
Being a hedge fund manager, however, takes a similar but more diverse set of skills. It’s probably the most lucrative investment job you can have; being involved in a hedge fund formation requires taking a lot of risks, but with great risk comes great reward.
Today, we’re going to give you the lowdown on what a hedge fund manager is, what they do, and finish with the pros and cons of being one. Do you have what it takes?
What is a Hedge Fund Manager?
A hedge fund manager is an individual who makes investment decisions and manages the overall operation of a hedge fund. In order to be successful, a hedge fund manager needs to have:
- A clearly defined investment strategy;
- Adequate capital;
- A marketing and sales plan;
- A risk management strategy;
- And consider what their competitive advantage is.
Although the title ‘manager’ can make it seem like you’d be on a lower rung of the hedge fund, managers are actually more like the CEOs of the fund. They usually own them outright, and are entitled to all the profits they make.
All the operating expenses are taken care of by the investors. So, as long as you have the knowledge and skills to be a hedge fund manager, you can make money at little cost to your own wallet.
The manager takes a portion of the profits from the investments they make, and often receive a performance fee for investing well. Because hedge fund managers are so good at what they do, and take on huge investments from wealthy people, they are one of the most well-paid positions in any industry. For example, some of the highest-grossing managers make close to £4 billion a year.
However, this number needs to be taken with a pinch of salt. If you’re not super successful at managing hedge funds and investing your client’s money, you won’t make much profit at all.
What Does a Hedge Fund Manager Do?
Now that we have an idea of what a hedge fund manager is, and how much money they can make if they’re successful, it’s time to look at what they actually do.
The average workday of a hedge fund manager starts with early mornings and ends late into the evening. If you thought this would be a 40-hour-a-week job, think again.
As we said in the last section, a hedge fund manager is in charge of making investments with a pool of capital provided by the fund’s investors. This is similar to the way a mutual fund or exchange-traded fund works, except a little more difficult.
Hedge funds usually deal with higher-risk portfolios which means the manager has to keep a close eye on them. They also need to be more hands on with their management to make sure the investments are sound.
A Day in the Life of a Hedge Fund Manager
The hedge fund manager is usually supported by a team of analysts and traders who do most of the research and trade execution. The work the manager actually does is as follows:
- New investments/new memos: you still have to research as a fund manager and evaluate the research of your analysts. Your ultimate goal is to improve investment performance, so it’s important to send an email or memo to your PM and staff with your findings and have them work it out with you.
- Source and structure deals: a lot of your daily work will involve deciding on the structure of the terms on liquid assets. You also need to put these deals into presentations for clients.
- Investment updates: hedge fund managers work on lots of different holdings which can fluctuate and change quite frequently. If any major change occurs which could impact the investment, you need to provide updates. You might even have to change the whole way the deal is structured.
- Marketing materials: working for your clients is important, but you also have to attract new clients to grow your fund. Creating marketing materials about the size of your fund, the benchmark, alpha/beta, sharp ratio, etc. will help you attract new clients to the fund.
Benefits and Drawbacks of Being a Hedge Fund Manager
Okay, so you’re probably already in the midst of deciding whether being a hedge fund manager is right for you based on what we’ve already said. If you need that final push one way or the other, here is our list of hedge fund manager benefits and drawbacks.
To really highlight the difference between hedge funds and other investment jobs, we’re going to do a little hedge fund manager vs investment banker comparison for you.
Benefits of Being a Hedge Fund Manager
1. More money in the long run
As a hedge fund manager, you need to build yourself up by taking financial modelling training, enrolling yourself in a Chartered Financial Analyst (CFA) program, and joining academic/investment clubs. The more value you can bring to the fund the more you can earn.
Learning all of this obviously takes time. When you first start working as a hedge fund manager you won’t make much money, whereas investment bankers make lots of money early.
However, after 10 years in the industry, investment bankers make millions to tens of millions max. Hedge fund managers can make billions if they run a successful fund.
2. The hours are better than other investment jobs
In most investment banking jobs, the work-life balance is horrific. They tend to work between 12-16 hours a day and spend at least two or three nights a week pulling an all-nighter to finish a deal.
Hedge fund managers, however, work hard but the hours aren’t as hectic as investment bankers. They do work around 12 hours a day, and will occasionally have to pull an all-nighter, but not as often. Although these hours still don’t leave much room for spending time with their family, it’s more so than an investment banker.
3. The works is challenging and keeps you on your toes
Not that investment bankers aren’t kept on their toes but, if you’re a thrill seeker who likes to take a gamble on high-risk investments, hedge fund managing is the one for you. You have to constantly monitor your investments, seek out new investments, and attract new investors. It’s fast paced, it’s exciting, it’s rewarding.
Drawbacks of Being a Hedge Fund Manager
1. Slow starter
As we said in the benefits section, hedge fund managers start slow, but they earn more in the long run. The problem is, if you don’t want to be waiting around for 10 years and constantly training to make yourself more investable, you’ll have to be poor for a while.
When an investment banker starts out, they earn big money straight away because the job is to raise capital. All they have to do is bridge the gap between investment and capital to make their money.
Hedge fund managers, however, work in a meritocracy. You need to actually be a good investor and handle things on your own. The harsh truth is, if you’re not good enough, you won’t be making money any time soon.
2. Volatile market
The reason hedge fund managers have to be slick investors is because the market they trade in is volatile. Opportunities in the field can also grow and shrink, which is why careful management is so important.
Also, no matter how good you are, sometimes your investments are going to fail and you’re probably going to get stressed out. To be a hedge fund manager you have to be able to deal with high bouts of stress like this and move past them.
So, Should You Become a Hedge Fund Manager?
In this post, we’ve covered what hedge fund managers are, what they do and what the main benefits and drawbacks are.
This job isn’t easy; you have to be shrewd, slick, well-educated on markets, and strong enough to deal with failure and move on. The big money people promise from this career is only as big as you make it through your own efforts. If you don’t have a strong work ethic and aren’t interested in becoming a fountain of knowledge on investments, then this position probably isn’t for you.
The choice is yours! Thank you for reading this post and good luck with your future investments.
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