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 have 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.

What distinguishes a hedge fund from a traditional fund is its willingness to push the boundaries of normal investment techniques to achieve unusually high returns.

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

• Short selling: a short seller borrows stocks that they believe are overvalued and sells them on. When the price (hopefully) falls, they buy the stocks back at a lower price and return them to the lender;
• 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 to pay more than the current market price for the shares.

Trends

If you want to work in a hedge fund, London – or more particularly, Mayfair – is increasingly the place to be. According to the Financial Times, hedge fund assets are growing at a rate of 63% annually in the UK, and just 13% annually in the US. At the same time, London now plays host to 12 of the largest hedge funds in the world, up from just three in 2002, while New York has seen its share of the biggest funds dwindle from 28 to 18.

Wherever they are based, hedge funds are exempt from normal financial services regulation, partly because the minimum investment is high (typically US$1m) and regulators believe the rich do not need the same protection as investors of average means.

Figures from Hedge Fund Research suggest investors put a monumental US$127bn (€98bn) into hedge funds in 2006, almost three times more than in 2005.

However, even big funds can come unstuck very quickly. Vega Asset Management, formerly one of Europe’s larger funds, saw its assets under management plummet from US$10.1bn in 2004 to US$2.7bn in 2006, for example.

As more and more hedge funds pile into the market, it’s becoming harder for established funds to make good returns. As a result, funds are investing in ever more obscure areas – such as art, wine and Hollywood films. Some funds have also begun to behave like banks and lend money directly to clients.

Key players

Who are some of the biggest boys in the European hedge fund universe? Look no further than the likes of Brevan Howard, with a total of US$12.1bn under management; Cheyne Capital with US$11.2bn under management; or BlueBay Asset Management, with US$9.6bn under management.

But while the big hedge funds get all the headlines, there are also plenty of small funds. In 2006, US$100bn of London’s hedge fund assets were managed by firms with less than US$1bn under management, according to HedgeFund Intelligence.

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.

Most roles are distinct: 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.

Pay

According to a survey by US-based Alpha Magazine, the 25 highest-earning hedge fund managers earned an average of US$570m in 2006, up 36% on 2005. More to the point, the top three hedge fund managers each took home more than US$1bn.

Not everyone earns such sums. A salary survey by Morgan McKinley suggests a lowly junior fund manager can expect a salary of £38k to £45k, plus an unspecified bonus. Hedge fund traders earn the most – after a few years, salaries are £80k plus and bonuses are unlimited.

Skills

“For bright, numerate graduates who are strong at financial analysis and spreadsheets, and who have honed their skills in an investment bank, the leap can be made,” says David Howell, managing director of E-M Financial Services. “But you do have to have proved yourself in the investment bank community. If you go to one of the top-tier banks you can use it as a springboard to any number of different options, normally in around two years,” he says.

Hedge funds like people who are communicative, innovative and numerate and have a good academic record from a leading university, says John Capaldi, a managing director and head of product development at Financial Risk Management. “Financial markets and hedge funds are dynamic, so adaptability and creativity are key attributes,” he adds.

Dermot Coleman, a partner at 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.”