The Hedge Fund Trading Environment

by Derek Loosvelt | April 01, 2009

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The trading room is a fast-paced and dynamic environment. A trader at a hedge fund is responsible for buying and selling securities at the best possible price. They are the ones actually executing trades.

Depending on the structure of the specific hedge fund, a trader may or may not also be responsible for the investment decision (stock/bond picking) process . At hedge funds relying on fundamental research, for example, the trader does not make the investment decision. At these firms, research analysts and portfolio managers find the best securities to buy, sell or hedge. And in the case of a statistical arbitrage fund, a computer model will generate large lists of stocks to buy or sell. In these cases, the trader is responsible for making sure the trades generated by research analysts or computer models are accurately executed.

The trader also works to build relationships with brokers on "the J street" (Wall Street). Having strong relationships with brokers is important, as it partly determines how much commission the trader ends up paying for an execution, and even can determine access to shares for an IPO (initial public offering).

Junior Trader

This is an entry-level job that requires the Series 7 and 63 (described earlier; also see the Glossary). In this role, the junior trader helps traders or the head trader with recording trades, making sure the positions in the portfolio are accurate, monitoring daily P&L, and working with the back office staff to ensure all trades are settling with the executing brokers accurately. The position requires a thorough understanding of the securities products (equities, bonds, options), especially the securities that the specific desk trades.Junior traders typically make between $50K to $70K and can also pay commission. Commission structures vary from hedge fund to hedge fund. As a junior level, you might make 1 percent to 2 percent of what the head trader makes, depending on your level of responsibility and the hedge fund operation. Some hedge funds hire young traders solely based on commissions. Under this scenario, you are likely to get 5 percent to 10 percent of the all the profits you generate for the hedge fund.

Hedge fund trading positions are highly competitive. Generally, you need a math or finance background with a degree from a top five school, but even with those credentials, landing a job is no piece of cake. Large hedge funds occasionally recruit at top tier universities, but usually you have to be knowledgeable about the firms, approach them directly, and maybe even know someone at the hedge fund that can get your resume in the door. An MBA is preferred for trading positions. At many firms, entry-level traders can not advance without an MBA; some may attend business school while working at this position.

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