eFinancialCareers

High risks and high rewards for the lucky few.

Hedge fund managers are the maverick outsiders of the financial services world. Most are highly successful former traders or fund managers who’ve decided to go it alone. The name ‘hedge fund’ comes from the idea that money managers can hedge their bets to ensure they make money – whether the market goes up or down.

One method of making money in a falling market is through so-called ‘short selling’. Short sellers first borrow the stock they believe to be overvalued, and then sell it on at that price. When the price (hopefully) falls, they buy the stock back at the lower price and return it to the lender – simple!

Most hedge funds follow a particular investment strategy of this kind. The most popular strategies are:

• Global macro – Global macro funds operate a strategy similar to that used by short sellers. But they focus on global trends rather than movements in particular stocks.

• Event driven – Event-driven funds try to profit from one-off events such as mergers and acquisitions or bankruptcies. For example, if one company decides to buy another, it will usually have to pay more than the current market price for the shares.

• Relative arbitrage funds – Aim to exploit differences in prices for the same products. For example, a barrel of crude oil might cost $135 in London and $134.8 in Hong Kong. The fund would buy where it’s cheaper and simultaneously sell where it’s more expensive.

Because hedge funds are considered risky, investors can also put their money into ‘funds of hedge funds’. These invest money across several different hedge funds with the intention of spreading the risk.

Key players

London continues to be the key region for hedge funds within Europe, with 75 of the 372 ‘global billion dollar’ firms headquartered there (second only to New York), against just six in France. Key European players, according to Alpha Magazine’s Hedge Fund 100 ranking, include Barclays Global Investors with $26.2bn under management, GLG with $23.9bn, and Brevan Howard with $21bn. But there are also plenty of smaller ones to choose from.

Roles and career paths

Jobs in hedge funds tend to fall into four categories:

• Analysis – Analysing the companies, markets and financial products a hedge fund invests in.

• Sales and marketing – Liaising with investors and helping sell the merits of the fund.

• Trading – Executing the investment strategy and buying and selling financial products according to analysts’ recommendations.

• Risk management and back office – Settling trades, working out a hedge fund’s risk exposure and making sure everything flows smoothly. In many small funds this is outsourced to ‘prime brokerage’ divisions in investment banks.

There’s not much movement between roles. If you join as a risk manager the chances of graduating to become an analyst are slim. However, it’s not unknown for analysts to become traders.

The bad news is that, as a new graduate, you will be lucky to walk into a hedge fund. Most are small organisations without the time or resources to train graduates themselves. Instead, they prefer to recruit people with a few years’ experience from investment banks. On the rare occasions that recent graduates are hired into hedge funds, it is normally because they have a contact in the fund. For example, an alumni of their university.

Pay

Hedge fund traders earn the most – their bonuses are unlimited. According to the US-based Alpha Magazine, the 25 highest-earning hedge fund managers earned an average of $892m in 2007. The top earner – John Paulson – took home $3.7bn.

However, a survey by Morgan McKinley suggests a lowly junior fund manager can expect a salary of £38k-£45k, plus an unspecified bonus. In France, by comparison, a junior fund manager can take home a salary of €65k-€80k, with a bonus of between €30k-€60k, according to recruitment firm Robert Walters.

Skills

Hedge funds look for bright, numerate graduates with a top-flight academic record. But if you want to work in a hedge fund you will also need to be a strong communicator, says Johan Zeller, hedge fund adviser at Geneva-based Union Bancaire Privée.

At the same time, you’ll have to be able to assimilate lot of information quickly and accurately. “It can be very rewarding intellectually. Hedge fund managers are often considered to be the best traders in the world, so you will be working with people who are the best in the field,” says Zeller.

Dermot Coleman, a partner at UK event-driven hedge fund Sisu Capital, says quantitative skills tend to be paramount. “To work for us, it’s not necessary to have done an MSc or a PhD in a mathematical subject, but we would generally expect some maths at degree level. That could come as much from engineering as economics.”

Click here to read the profile of a portfolio manager and senior analyst investing in hedge funds.

Click here to find out about global trends in the hedge funds sector.