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Overview

Hedge funds are privately offered, professionally managed investment vehicles that seek, like all financial investments, a positive annual return, limited variations in value, and the preservation of capital. HedgeFundFacts reports that “hedge funds play a critical role in the financial markets, broadening the use of investment strategies, increasing the number of participating investors, and enlarging the pools of capital available.” Hedge funds are considered an “alternative investment” vehicle. The term “alternative investment” is the general term under which unregulated funds operate, and the category includes private equity and real estate. Mainstream funds are investment funds that everyday investors can purchase; mutual funds are the prime example of a mainstream fund. Institutions and individuals that want to invest in hedge funds must have a minimum level of income or assets. Individuals need investments in excess of $5 million; or net worth of at least $1 million; or income of at least $200,000 in the last two years. Institutions must have total assets of at least $5 million or no less than $25 million in investments or investable assets.

Some of the basic investing strategies utilized by modern hedge funds have been in use for thousands of years. The ancient Greek philosopher Aristotle told a story of another philosopher, Thales of Miletus, who came to the conclusion that there would be a bumper crop of olives. According to the Internet Encyclopedia of Philosophy, Thales “raised the money to put a deposit on the olive presses of Miletus and Chios, so that when the harvest was ready, he was able to let them out at a rate which brought him considerable profit.” Thus Thales profited by using a contrarian trading strategy in which assets are purchased or utilized when they are performing poorly and then sold when they perform well.

The hedge fund sector as we know it today began in 1949 when Alfred Winslow Jones, a journalist and sociologist, launched a hedge fund after becoming fascinated with stock-market forecasting. His investment strategies (short selling, leverage, and incentive fees) generated better-than-average investment returns, which prompted other financial firms to jump on board and start their own hedge funds. 

Today, there are about 14,500 hedge funds in the world, although this number changes constantly as new funds open and existing funds close.

Hedge fund managers, administrators, analysts, programmers, and software engineers are the major players in this industry, but firms also need sales, legal, compliance, marketing, data analytics, investor relations, and office support workers. A bachelor’s degree is the minimum requirement for most hedge fund careers, but those working on the investment side often have a master’s degree or even a Ph.D. in finance, mathematics, economics, financial engineering, quantitative finance, programming, marketing, or business administration. Others have advanced degrees in a specialty such as engineering or accounting.

Hedge fund firms are located throughout the United States, but many are headquartered on the East Coast, especially in New York City. There are also opportunities in Europe, Asia, and other regions. The average portfolio manager earned total compensation (including bonuses, commissions, and options) of $964,025 in 2017, according to Institutional Investor’s All-American Buy Side Compensation report. Research analysts had total average income of $710,810. These are lofty salaries, but it’s important to remember that only the most experienced and talented investment professionals make this type of money.

Since the early 1990s, hedge funds have grown tremendously, not only in terms of assets under management, but also in the amount of media attention they’ve garnered for their brash strategies and the massive returns many have generated. Although they may remain largely a mystery to the general public, their effect on the global marketplace is felt more strongly with each passing day. In 2016, hedge funds worldwide managed more than $3.2 trillion in assets, according to Hedge Fund Research, up from only $1.5 trillion in managed assets in 2006.

Uppers
  • Excellent pay. In 2017, the average hedge fund portfolio manager earned $964,025 (which included bonuses, commissions, and options)), according to Institutional Investor’s All-American Buy Side Compensation report. But remember, most new hires out of college don’t make that much money. You’ll start in the $100,000 to $120,000 range—which is nothing to sneeze at.
  • Strong employment outlook. Job opportunities for financial analysts who work for securities, commodities, and other financial investment and related firms are expected to grow by more than 15 percent from 2016 to 2026, according to the U.S. Department of Labor, or much faster than the average for all careers. Employment for analysts who work with other types of investment pools and funding sources will increase by nearly 14 percent during this same time span.
  • Less formal structure than other financial sectors. On the whole, workplace culture in the hedge fund industry is less structured than it is at an investment bank or mutual fund. The work environment tends to be cohesive and collaborative since the entire firm is usually focused on the success and performance of the fund. But keep in mind that a fund’s culture depends on its owner, the fund's strategy, and your fellow team members. At some firms, business-casual attire and a relaxed, but focused, atmosphere may be the rule. At other firms, you’ll be expected to dress and act more conservatively, and a typical day may be very stressful. (Information interviews and Web sites such as GlassDoor.com can help you to determine a firm’s culture.)
  • You’re rewarded for your abilities. Working at a hedge fund is the ultimate meritocracy. Perform well and you’ll receive a major bump in salary, bonuses, and the opportunity to advance at the firm.
  • High prestige and many career paths. You’ll get the opportunity to work in a high-prestige industry (at least that’s the perception among other financial professionals) that offers a variety of career paths and specialties for those with financial and mathematical acumen.
Downers
  • Tough to break into the industry. It’s difficult to land an entry-level job unless you attended a top-tier college or have related experience in the private equity or investment banking industries.
  • You’ll work hard. Expect to put in 50-60 hours a week. New hires straight out of college work at night and on weekends, when necessary.
  • An occasionally demanding work environment. If you work as an analyst or portfolio manager, the job can be stressful because tens of millions of dollars are at stake as a result of your recommendations.
  • Little diversity. The number of minorities (and to a lesser extent women) in high-level positions in the hedge fund industry continues to fall short of these groups’ percentages of the overall U.S. population. Industry organizations such as 100 Women in Finance (http://www.100women.org) are working hard to increase the number of women in the industry.
  • Lack of geographic freedom. Although hedge fund firms are located in nearly every state, the majority of jobs in the U.S. are located in New York, as well as in Connecticut, Massachusetts, California, Texas, and Illinois, according to the Alternative Investment Management Association.
  • Working at a hedge fund is, again, the ultimate meritocracy. Underperform and you will be fired or, assuming you keep your job, you can say goodbye to significant pay raises and the opportunity to advance.