Career Choice: Asset Management vs Hedge Fund

Nobody invests to live like a church mouse. The types of investors who make it into hedge funds have to meet certain accreditation standards – they have to have a million in assets and $200,000 a year in income to actually invest in a hedge fund. Hedge fund managers are drawn to the profession for a number of reasons, and the class of investor is fairly high on the list. The primary motivation, however, is money. While tech stock founders get the glory, hedge fund managers tend to make comparable amounts of money with considerably less risk.

Two And TwentyA number of hedge fund managers get a return of 2% of the assets they’re investing each year, and 20% of any returns they make on investment. Some hedge fund managers can make more than a billion a year; John Paulson made a series of bets on the collapse of the subprime crisis in 2007 and netted 3.7 billion in earnings that year. While Paulson is an outlier, in years where the markets go up, hedge fund managers can easily get into the 500 million a year club, and billion dollar annual payouts aren’t unheard of.

Risk Comparison to Mutual Funds

Now, the downside of those big paydays is that hedge funds, compared to being a mutual fund manager, are much riskier. Mutual fund managers make about an order of magnitude less than hedge fund managers, but they also undertake a lot less risk. If you’re not quite ready to jump into the pond with the hedge fund crew, running a mutual fund can still net you a handsome income.

Hedge fund (and mutual fund) managers work long hours – the typical workweek starts at 60 hours a week and can exceed 100 when the markets are volatile. Hedge fund managers are likelier to go from making a lot of money to collecting unemployment than a typical mutual fund manager. The career risk is higher in the hedge fund industry.

Investment Styles

Hedge fund managers focus on absolute returns, while money managers focus on relative returns. If that’s a little opaque, we’ll clarify it. Money managers manage relative to an index, whether it’s the NASDAQ, FTSE or the S&P 500. Their performance is graded on how well they worked compared to that index – if the index dropped by 37%, and their fund only dropped by 33%, it was a “good year” for them – even if it’s a financial calamity. A hedge fund manager whose prospectus dropped by 33% would be out of a job, and very likely personally broke, depending on how heavily leveraged he was. Conversely, a hedge fund manager who rides a hot market can find his assets growing tremendously, particularly if he gets new investors because he’s got the hot hand.

Getting Into Hedge Fund Management

Getting into hedge fund management takes one of two paths: You build a reputation as a top manager in investment banking or private equity, as an option you can become a  chartered financial analyst. The sell side way involve getting in sell side research than buy side research then into fund management.