Many MBA graduates would part with their last dime to become successful hedge fund managers. The “Benjamins” are, of course, the obvious main attraction. And we aren’t talking about any “handsome salaries” or “decent commissions” but really big bucks.
The annual earnings of the top hedge fund managers easily cross $1 billion each: think of Ray Dalio, George Soros, Ken Griffin, Bill Ackman, and James Simons. To put this in perspective, each of them makes more in a year than the top-ten Wall Street movies have made together at the box office.
First, a little about this diamond mine called hedge fund (HF). By definition, a hedge fund is a pooled fund, a private investment partnership, set up by a money manager or an investment advisor in the form of a limited partnership or limited liability company. After raising money from investors, the fund invests it according to strategies agreed upon with the investors.
HFs can invest in almost anything, from stocks, bonds, and mutual funds to foreign currencies, real estate, and art. The total assets of the HF industry, comprising about 8,000 funds, have grown to $3 trillion. Most of the funds are worth under $100 million each, but HFs over $5 billion control 65 percent of the assets under management (AUM).
HF can use strategies that mutual funds cannot use, such as short-selling (betting against a stock by borrowing shares and selling them without actually owning them). Investors in HFs have to commit their funds for a lock-in period, when they don’t have access to the funds.
Only an accredited and sophisticated investor can invest in a hedge fund, and there are quite a few conditions. The HF managers receive the standard 2 percent of the value of the AUM annually and 20 percent of profits, and there lies the story for fund professionals.
Here’s an example to understand how hedge funds work. Let’s suppose an investment manager/company launches an HF and an investor puts in $100 million. The fund manager makes a contract with the investor, and let’s say they agree that the manager receives 2 percent of the AUM and 20 percent of the profits earned annually above 3 percent and the investor receives the rest. Assume that the HF starts business with the investor’s $100 million and it becomes so successful that it earns $100 million in the first year.
Now, according to the contract, the HF manager receives 2 percent of the AUM ($2 million). Of the profit, the first 3 percent goes to the investor, which is $3 million here. Of the $97 million profit remaining, the investor receives 80 percent, or $77.5 million, and the fund manager 20 percent, or $19.5 million.
Therefore, the investor makes a total of $80.5 million ($3 million + $77.5 million) and the fund manager $21.5 million ($2 million + $19.5 million) in this rather extreme example.
The first hedge fund was launched in 1949 by Andrew Winslow Jones, writer and sociologist. The idea came to him when he was writing an article about investment trends for Fortune. He raised $100,000, including $40,000, from his own earnings, and invested it, while trying to minimize the risk involved (hedging) in holding long-term stocks by short-selling other stocks. HF investments rose to prominence in the 1990s when George Soros speculated against the pound, forcing it out of the exchange rate mechanism.
According to the 2017 Hedge Fund 100 list, of the Institutional Investor’s Alpha, the top five HFs are currently Bridgewater Associates (firm capital $122.2 billion), AQR Capital Management ($69.6 billion), JP Morgan Asset Management ($45 billion), Renaissance Technologies ($42 billion), and Two Sigma ($38.9 billion), as reported by Business Insider.
The year 2016 was tough for HFs, with returns of only around 5.4 percent, compared with 11.9 percent that S&P 500 returned. Because of high fees and poor performance, $70 billion was withdrawn from HFs. But many top HFs recorded double-digit growth.
Hedge funds are choosy about the academic qualifications of job candidates, says an article in eFinancialCareers. They are known to be partial to graduates from Ivy League schools with straight “A”s and spotless academic records.
The most common qualification is a master’s degree (22 percent), followed by CFA (Chartered Financial Analyst, 20 percent), MBA (14 percent), CAIA (Chartered Alternative Investment Analyst, 3 percent), and PhD (3 percent). HFs once used to focus mainly on track record at work. But with a shortage of talent, they are once again giving importance to top degrees and professional qualifications.
HFs are increasing their recruitment of MBAs along with asset managers, says an article in efinancialcareers.com. However, some reports say there have been fluctuations in MBA intake. In any case, MBAs have better chances if they have gone to top schools. Among the MBAs most likely to find jobs in HFs and other buy-side organizations are those from Ivy League schools in the US, the London Business School in the UK, and INSEAD and HEC in Europe and Asia.
The top b-schools for HF, PE, and asset management jobs in the US are Columbia Business School, Wharton, Stern, Harvard, Booth, Stanford, Yale, MIT Sloan, Tuck, and Johnson. In Europe, the top schools, apart from LBS, are INSEAD, HEC Paris, and Oxford Said. Chinese institutions — CEIBS, the Fudan University School of Management, and the University of Hong Kong—are also talent resources for hedge funds. US organizations tend to hire more MBAs than those in Europe, where funds recruit fresh graduates and train them, instead of hiring MBAs paying high salaries.
The highest percentage of MBA graduates working in HFs come from Stern (7 percent), followed by Columbia, Booth, Wharton (all 5 percent), and Harvard Business School (4 percent). In Europe, LBS and INSEAD are the biggest contributors of MBAs to HFs (2 percent), followed by HEC Paris, SDA Bocconi, Cambridge Judge, and Oxford Said (1 percent), according to efinancialcareers.com. This does not denote annual intake: for example, just 0.9 percent of the class of 2016 at Stern joined an HF.
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Can a top MBA by itself guarantee a hedge fund job? No. It may be important to go to a top b-school, but work experience in a hedge fund before school is what often counts, says a Quora participant. The alternative is experience in investment banking or a private equity fund. If you don’t have this experience, it is going to be tough to get into a hedge fund even with an MBA.
While working toward your MBA, you need to specialize in economics, finance, and accounting, advises an article in bizfluent.com. You could apply for an entry-level position in an investment bank, a job that will give you experience and prepare for a position in an HF. This is helpful because HFs don’t have training programs and like to hire people with basic knowledge of finance.
The article also says that you need to stay abreast of developments in the HF industry by reading the Wall Street Journal and HedgeWeek. Your resume should highlight your investment industry experience, including how much money you brought to your firm. Other resume tips: be descriptive about your deals and transactions; explain the roles you played; stick to a one-page format; mind the presentation and legibility; include GPA and test scores; be clear about where you worked and when; don’t leave any gaps; and be honest.
Among other tips: take networking seriously and follow up on leads from friends connected to HFs; document good investment ideas gained from your professional experience or interest; and market yourself aggressively. Another track to an HF job is to join an investment bank and then apply to an HF after two or three years.
For an MBA graduate who managed to get an HF job after b-school, work experience at as a sell-side analyst helped, according to this person’s Quora post. He showed that he loves the challenges of making investments. This person developed a personal trading portfolio while at b-school, making case studies into investment puzzles and assignments into investment research opportunities. Based on the research, this person traded in the company concerned using an e-trade account, which demonstrated to future recruiters an interest in trading. “Being a proven money-maker is the best way to get hired,” says another Quora contributor.
What is a “proven money-maker” made of? The ability to make money depends on strong math and computation skills, street smartness, and a pleasant personality that clients will like, according to a Quora post. If you make the best use of your education and apprenticeship, that will help very much, too.
Investopedia gives some general tips for how to get a job at a hedge fund: be sure you want to work for an HF; study the HF industry; use the three-circles strategy (involving your passion, experience, and considerations of high profitability); identify HF career mentors; complete internships; develop your USP (such as a specialization in the emerging funds market); take networking and cold-calling seriously (since HFs don’t always advertise jobs); and consider HF service-provide jobs.
Skills across finance, operations, front office, risk, and compliance are sought-after in the HFs industry, says a career advisor at Aston Business School, UK, quoted in BusinessBecause.
HF jobs are attractive because, even in a bad year, an HF will earn the “asset management fee,” which is usually 2 percent of the assets, which itself may run into millions for the fund. Of course, a good year would also provide 20 percent of profits from investments.
At Columbia Business School, a Class of 2016 MBA received a job offer from an HF with $325,000 annual base salary, $200,000 more than the median base salary, reports Poets&Quants. A couple of Class of 2015 MBAs landed $250,000 annual salary at HFs/investment management firms. At Stanford, at least one 2015 MBA graduate received a $267,000 base salary. An INSEAD graduate accepted an HF/investment management firm in Latin America with a salary of $200,000.
The average total compensation for a hedge fund professional in 2015 was $368,000, according to the 2015 Hedge Fund Compensation Report quoted in financialcareeroptions.com. But the money comes at a price: the report said 80 percent of HF professionals worked between 40 and 60 extremely stressful hours a week, with very little job security.
There are three investment-management hiring groups: large managers; HFs and mid-sized managers; and boutique and small firms, according to a post on wallstreetoasis.com. Large managers run internship programs from which they recruit employees; the interns’ pool may be very small and only very few of them would be offered full-time jobs. HFs depend on networking as they generally don’t post job ads; small firms may post only full-time positions.
As already discussed, an MBA is not a big plus for a HF job-seeker, according to a Slideshare presentation developed by Glocap Search. MBAs can expect fierce competition from lateral HF and PE/VC candidates. A majority of successful MBA applicants have previous buy-side experience (HF, PE, long-only).
Much MBA hiring takes place for junior and mid-levels (two to eight years’ experience). These new recruits command relatively low salaries and come with some knowledge/training. Although some funds have shown renewed interest in hiring MBAs, they don’t place a premium on the degree. In fact, MBA candidates might be rejected for their attitude, high salary expectations, and time spent out of the job market during their program.
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References: 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16, 17, 18, 19, 20