HEDGE FUND OVERVIEW
In 1996 while hedge funds seemed to be surfacing as fast as new McDonald's franchises, Martin Baker wrote a now famous book titled 'A Fool and His Money', where he used his sarcastic humor to create a formula for creating hedge funds (Baker, 1996):
"Take a speculative cocktail shaker. Add four parts public ignorance and 33 parts greed. Toss in a little perceived genius. If you don't have any freshly ground perceived genius at hand, a little dried genius status will do. Season generously with mystique. Add apparent publicity shyness to taste. Serve in opaque tumbler of awed, ill informed media coverage" 5.
Though subjective, Mr. Baker's definition is a decent representation to the reputation of the hedge fund industry.
A hedge fund is a general term describing a unit of trust3 or a pool of investments which utilizes complex hedging and arbitrage methods to make trades in the marketplace1. Often times, hedge funds are par ...
Hedge funds are unique investment vehicles in that there is very little structure or hierarchy in many of them, and the organizational structure in place is mostly a function of the assets that firm has and how many people it will take to manage them 11. Though there will be some functions which hedge funds will need to cover no matter what, the roles of the employees and their titles will differ greatly in each company 3. In some smaller companies, one employee might handle the tasks of more than one or even two employees in a company with larger trading volume 2. For these reasons, it would not be accurate to describe specific career trajectory but rather, some common positions.
In each hedge fund company, there will be at least one President/Partner or Principle who is/are either the founder(s) or owners of that company. This person is also known as the Hedge Fund Manager and is in charge of overseeing everything that takes place in the comp ...
HEDGE FUND STRATEGIES
Hedge funds are traditionally very specialized when it comes to method and focus. Over the last two decades 2, many hedge funds have broadened their scope in order to allow more options and styles when working with capital as well as serving a wider client base. The funds label themselves as 'multi-strategy' hedge funds 4 and they aim to provide more flexibility to the investors when constructing a portfolio 9.
The strategies employed vary from ...
3.) "hedge fund" A Dictionary of Finance and Banking. Ed Jonathan Law and John Smullen. Oxford University Press, 2008. Oxford Reference Online. Oxford University Press. SUNY College at Brockport. 31 August 2009 http://www.oxfordreference.com.ezproxy2.drake.brockport.edu:2048/views/ENTRY.html?subview=Main&entry=t20.e5458
5.) Martin Baker (1996) A Fool and His Money; Orion; quoted in Peter Temple (2001) Hedge Funds: The Courtesans of Capitalism; John Wiley & Sons, Chichester at 70.
It is no secret to anyone in finance- hedge fund companies will pay top dollar for their employees. Hedge funds pay their employees fairly large base salaries with a bonus, often a performance based bonus. The bonus can range significantly depending on employee's level of experience and/or knowledge, seniority with a particular company, level within their companies corporate structure, and their individual contribution to the company or measure of performance when ranked with their peers 17.
Why do you think hedge funds pay so well? The job may be lucrative, but the rewards do not come undeserved. One major reason for this is that the job is so hectic, fast paced, and stressful that many people have to practice a large amount of resilience and commitment to accomplish their daily tasks through long unconventional hours and 24/7 on-call duties, and not many people will argue that this commitment should be recognized.
There is also a greater degree of risk associated in these roles. One might compare this to a gambler in a casino. The more money that gambler uses to bet on his hand, the more his return will be if he actually wins. In application, many companies hold the mentality that the further one extends their efforts while also risking their compensation, their comfort, and even their position, the more reward they should be granted. It is important to understand, however, that employee salary is directly linked to company performance so a large portion of employee salaries will be recognized in the bonuses. If the fund performs well that year, the reward for an employee who worked for them in any capacity to make it successful will be tremendous. If, however, the fund does not do well, the bonus will be much smaller- if there is a bonus at all.
Also, the Principles and the Senior Managers of the hedge funds will always take home the majority of the profits so, though the salary will likely be incredibly rewarding, it is those who take on most of the responsibility who reap most of the rewards. Unfortunately in the hedge fund industry, if annual performance was below par, it is likely that many if not all employees will lose their jobs 13 . Even still, because it is in a fund's best interest to see their bankers bring in revenue as well, they will often take actions to ensure their employees are happy in their role by issuing a generous paycheck. Sure, money does not guarantee happiness, but it certainly doesn't hurt! In return, the hope is that the employee has some degree of commitment and desire to give back, so they will continue to work as hard as possible to continue to bring in that business.
Below is a chart of the mean and median compensation for hedge fund employees for 2007. This list has been compiled by Alpha Magazine. 12
MEAN MEDIAN LOW HIGH
|Sr Portfolio Manager||Salary||$199,022||$175,000||$178,132||$219,911|
|Jr Portfolio Manager||Salary||$152,744||$150,000||$124,144||$181,344|
Below is a chart of the highest-paid hedge fund managers for 2008. This list has been compiled by Alpha Magazine. 12
|1||James Simons||Renaissance Technologies Corp.||$2.5 billion|
|2||John Paulson||Paulson & Co.||$2 billion|
|3||John Arnold||Centaurus Energy||$1.5 billion|
|4||George Soros||Soros Fund Management||$1.1 billion|
|5||Raymond Dalio||Bridgewater Associates||$780 million|
|6||Bruce Kovner||Caxton Associates||$640 million|
|7||David Shaw||D.E. Shaw & Co.||$275 million|
|8||Stanley Druckenmiller||Duquesne Capital Management||$260 million|
|9||David Harding||Winton Capital Management||$250 million|
|9||Alan Howard||Brevan Howard Asset Management||$250 million|
|9||John Taylor Jr.||FX Concepts||$250 million|
In the hedge fund industry in particular, a college education is close to mandatory, and without a concentration in a financial discipline from a top school, it will likely be difficult to get a foot in the door with most funds. Furthermore, almost 100% of the time, one will be required to have an MBA to enter into a hedge fund at the entry level 3.
According to Salary.com, more than 37% of professionals who work as traders have their MBA, and the remaining 63% have at least their 4-year or bachelor's degree 18. For those who are currently working as Portfolio Managers, almost 55% of employees hold their MBA or Master's Degree while almost 4% of people in this field hold a doctorate degree 18. Many hedge funds seek prospective employees through college career fairs at highly prestigious schools. In some cases, hedge funds might offer a position to only the top one or two graduates from the top few business schools in the world and bring them in ...More »