Overview of The Hedge Fund Career
- Peak Frameworks Team
- Sep 24
- 6 min read
If you're interested in breaking into hedge funds, check out our Hedge Fund Course. Our courses have helped thousands of candidates land top jobs every year.
Overview
The hedge fund career is arguably the most common path to exceptionally high earnings. Although the variance is high, working at a top quartile hedge fund consistently offers recent graduates the highest earnings upside.
This earnings upside is a result of the scalable business model and fee structure: fund managers can deploy capital quickly and earn returns while maintaining a relatively lean headcount.
The equity hedge fund path is particularly popular amongst those who have gone through private equity, investment banking, and consulting. It is a rare opportunity to study business and earn capital for shrewd risk taking.
The opportunity to take risks by staking large amounts of money on your team’s recommendation can be nerve-wracking, but having skin in the game is directly related to high payouts relative to other jobs in finance. You would effectively be tracking P&L daily which truly is unique to hedge funds.
In this post, we’ll go over some basic aspects of the hedge fund industry at a high level and discuss what can set it apart from other careers in finance.
Recruiting Summary
Hedge fund teams are relatively small and do not hire on an annual basis which can lead to lumpy recruiting timelines when compared to the process for private equity. However, opportunities frequently arise related to new fund launches, coverage expansion of existing teams due to increased capital, or natural attrition.
In private equity, a lot of the recruitment happens around the time new investment banking analysts hit the desk. By contrast, hedge fund recruitment reflects a lower sense of time urgency; headhunters typically reach out to new analysts a few months after they hit the desk as funds benefit from people having a bit more experience when speaking and thinking about public markets.
Smaller single-manager funds typically rely on external recruiters to help filter candidates (our Hedge Fund Course outlines 100+ hedge fund recruiter relationships and provides access to an exclusive resume database used by top equity hedge funds). Larger multi-managers tend to have in-house talent/HR teams but also use external recruiters.
Paths to a hedge fund job can be more varied when compared to private equity, but there are some paths which have proven to be effective over time.
At the undergraduate level, some opportunities do exist. Larger multi-manager funds like Citadel, Point72 and DE Shaw have the infrastructure to directly hire and train undergraduates out of school.
For experienced hires, the majority of long/short and long-only funds hire candidates directly out of investment banks or private equity firms as their on-the-job training covers many of the basic functions required of a hedge fund role (navigating excel models and being knowledgeable about an industry).
In the grand scheme of things, starting your career in banking or private equity would not delay your entry into a hedge fund by a meaningful amount of time. Headhunters frequently reach out to candidates within months of hitting the desk, even if it is their first job out of school.
A notable number of seats also come from equity research due to the career’s focus on covering an industry or company that might directly overlap with a hedge fund’s hiring needs, though there are fewer equity research jobs to pursue as someone trying to break into the industry.
If working at a hedge fund is ultimately your goal, pursuing a job at an investment bank would maximize your chances of getting a related job in the industry while keeping more options open.
Funds also hire directly out of MBA programs with a focus on candidates with some prior finance experience. This can offer a higher likelihood path of getting a first look particularly if you didn’t come out of a top undergraduate school, or even if you have no past finance experience.
Types of Fundamental Equity Hedge Funds
We’ll focus on two main types of hedge funds in this post: 1) single manager funds, and 2) multi-managers/pods shops.
1) Single-manager funds deploy capital in accordance with a strategy developed by just one Chief Investment Officer (CIO) or portfolio manager (PM). These funds typically focus on enacting one strategy (such as long/shorty equity, event-driven or activist-style investing) and may opportunistically pursue other strategies.
Some examples of prominent single-manager funds include Pershing Square, Third Point, or Maverick Capital.
2) Multi-managers allocate capital to independently-run teams or “pods” run by a PM. The pods functionally work as independent investment teams that manage their own P&L by enacting trades within their sector focus. The strength of this structure lies in what the centralized platform offers to the individual pods.
The overall firm provides infrastructure supportive of access to more comprehensive data sets, trading systems, and robust compliance procedures. The return of an investor in this structure depends on the performance of the overall fund and not any individual pod.
As such, two of the most widely accepted benefits of this structure include the centralized risk management tools only possible through large scale investing (through hedging factors across different PMs and sectors) and leverage which amplifies modest returns (many multi-strategy funds report leverage of ~5x). A downside of the high leverage used is that pods don’t tolerate large drawdowns, referring to a percentage decline in asset value below a recent peak.
Some examples of multi-manager funds include Citadel, Point72, and Millennium.
Compensation
Pay in the hedge fund industry is relatively opaque as data relies on surveying active members of the industry. However, the distributable bonus pool follows logic related to a fund’s fee structure and is directly tied to performance.
Base pay is between $120k-$250k depending on seniority and tends to be a relatively small portion of total compensation in good performance years. Bonuses can initially represent ~50% of total compensation but can exceed 75% at more senior levels. While base pay is still high on an absolute basis, hedge funds are incentivized to keep base pay relatively lower as a proportion of total compensation to incentivize performance and retention.
Within a fund, the actual allocation of the bonus pool is up to the discretion of the PM.
At the junior level, bonus payouts are discretionary. While this means that large payouts may not be typical for juniors even during great years, some PMs like to “smooth” out the bonus distribution for juniors to allow them to receive a bonus even during bad years. The takeaway is there is no set rule and payout is truly discretionary at this level.
At more senior levels, bonuses are tied directly to P&L and the fund’s performance fee structure. PMs would keep what their team earns after earnings are fairly distributed across the team. The charts below show data gathered by Dynamic Search Partners surveying hedge fund employees across various tenures and fund sizes.
Returns generated at funds with higher AUMs understandably result in higher absolute dollar amounts to be distributed as bonuses which explains why pay is higher at larger funds.
Fee Structure
Hedge funds generate income in two ways:
Management fees. These are paid as a percentage of fund size and are typically 1%–2% of AUM. They cover recurring costs such as base salaries, subscriptions to data providers, and other essential infrastructure like Bloomberg terminals.
Performance fees. These fees are paid as a percentage of profits earned (typically 15%–20%) above a hurdle rate and previous high-water mark.
A hurdle rate is the minimum rate of return a fund must generate before it can begin to charge fees on any excess return above that threshold.
A high-water mark refers to the peak value of a fund which must be cleared before any incentive fees are paid. This ensures funds are not compensated for generating returns that merely recover prior losses.
Benefits and Considerations of Working at a Hedge Fund
Pros
Highest earnings potential. You can get close to earning $1mm in annual compensation by ~30 years old (especially at larger and successful funds).
Greater focus on investing. Time on the job is spent almost exclusively on work related to generating trade ideas such as researching companies, and building and maintaining models.
Relatively better work/life balance than in Private Equity and Investment Banking, even if stress can be much higher.
Environment promotes intellectual depth and curiosity. You are around and working with incredibly smart people.
Good exit opportunities. If you build a strong track record, moving to other buy-side opportunities or raising money to start your own fund becomes easier.
Cons
Extremely stressful environment. Your performance can be tracked daily, and decisions to cut teams (especially at multi-manager funds) can happen quickly after poor performance.
Compensation is highly volatile. Tough market environments can lead to bad performance despite otherwise good trade ideas if hedges are not positioned correctly.
Opportunity set can be dictated by your investable universe. Your past experience might limit seats available to you. For example, it might be tough (but not impossible) to secure a semiconductor investing seat if you previously covered financials.
Summary
Hedge funds offer one of the most lucrative and intellectually demanding career paths in finance. Junior analysts spend much of their time working on tasks directly related to the investment process which can lead to rapid development and provides the opportunity for deploying capital behind your own ideas at much earlier points in a career which can result in atypical compensation when compared to other jobs.
