Reality Of Working At A Hedge Fund – An Insider’s Guide - Buyside Hustle (2024)

With all the articles online talking about the tens of millions of dollars hedge fund managers make, everyone thinks that working at a hedge fund is the easiest path to get rich. Young investment banking analysts fresh out of undergrad dream about breaking into the buyside and think it’s the promise land.

In reality, while buyside roles like hedge funds are one of the top paying jobs on wall street, working in this industry is not for everyone. Before you think about working at a hedge fund, you must set your expectations right and understand that it’s not all it’s cracked up to be.

Are there years when you can make seven figure bonuses? Yes. But there are also many who burn out and quit and years when you can receive no bonus. Make sure to really understand what it’s like to work at a hedge fund before thinking about making the move.

While working at a hedge fund can be fulfilling, it is definitely not for everyone and requires a certain skillset, introversion, level of patience, and willingness to fail that most do not have.

When you read about hedge funds online, all you see are stories of the top hedge fund managers who make $10MM to $100MM+ in just year. What you don’t read is all the guys at the large multi-managers who either were let go or received no bonus after working hard the entire year.

The realty of working on the job can be much different than what you dreamed a hedge fund job is. So let’s dive in.

Myth: Hedge Funds Are an Easy Road to Riches

One of the most common misconceptions is that hedge funds are a guaranteed path to financial success. While it’s true that hedge fund managers can earn substantial sums if they have a strategy that has worked over years, getting rich in this industry is not as easy as it sounds.

Success in the hedge fund industry requires years of dedication, years of no bonus, tons of research, stressful times that make it hard to sleep. In order to make the big bucks, you need to get to the point where you compensation is tied to performance, which makes it that you will face tremendous pressure to deliver consistent returns.

I have seen many young analysts who get defeated very early on and quit because they made less their first year at a hedge fund than they did when they were in investment banking.

Yes, you can no doubt make a lot of money in this industry. There have been years when my friends and I have made $1MM+ bonuses but also years when we have made nothing. Working at a hedge fund is one of the careers paths to get a top 1% net worth, but certainly not an easy one.

Reality: Intense Competition and Market Uncertainty

This industry is not for everyone. There is a lot of competition with top-tier firms to get the smartest people from top investment banks and colleges. It’s not easy to break into and land a job at a hedge fund without prior experience, especially a well establish fund that’s been around for over a decade.

Once you have the job, the competition doesn’t end there. You either perform or you are out. If you don’t contribute you are out. I’ve had friends who were pushed out very quickly within a year or two of the hedge fund they joined because they didn’t contribute, fit with the group or just weren’t good at their jobs (which is basically helping make your portfolio manager money).

If you are at a firm with a lot of turnover, don’t expect to be able to cruise around for years and hide behind others like you could in investment banking.

And because it is market dependent, a lot of it is somewhat out of your control. You could join a fund at the wrong time where the market doesn’t appreciate your strategy at that time, or join a great fund right before it blows up. Think about Melvin Capital, (a very well known fund with amazing returns) in early 2021 before it blew up. Think about how unfortunate it would be if you were one of those analysts who just started there right before then vs. those analysts that joined much earlier who made millions from 2015-2018.

I knew young analysts who clipped low seven figures at 24 years old at Melvin Capital in 2015 for a few years in a row. It was just perfect timing, but honestly they just got lucky being at the right place at the right time.

Myth: Hedge Fund Employees Live Luxurious Lifestyles

For some reason the news, the internet and young investment bankers glorify hedge funds as an industry where you make a ton of money and get to live a lavish lifestyle. While it’s true that successful hedge fund managers can make a lot of money, you need to understand that such cases are the exception rather than the norm.

The issue is the stories you hear all over the internet of hedge fund managers making eight or nine figures are really few and far between. That level of income at a hedge fund is really the top 1-5% of people who work in this industry. To get to that level, you either need to start your own fund and have $100 million+ under management or manage a large book at a multi-manager and have a really really good year.

Unless you have been in this industry for a while and have a good amount of money saved, you won’t be able to live a luxurious lifestyle because the job security at most places, especially the multi-manager hedge funds, does not exist. You could be employed one year and the next year you could be out of a job. So you can’t live an extravagant life with high lifestyle costs until later on in your career and only if you’ve managed to find a fund that’s had a good amount of successful years.

Reality: High Stress and Potentially Constant Long Work Hours

Depending on the type of fund, you could work long hours especially when you are just starting. There is a reason why people say at hedge funds your first 6 months is like “drinking from a fire hose.” The role is unlike investment banking or private equity. You need to get up to speed on your coverage/names and learn how to invest in stocks.

But even after that first year you get up to speed, the stress/hours don’t end. If you are at a fund like a multimanager hedge fund where every day you either make money or you don’t and your investment horizon is very short, the job will be extremely stressful.

When I used to work at a large multi-manager, my portfolio manager (who had been in the industry for 15 years) ran a $1 billion book, was constantly stressed out and his happiness for the day would be determined by whether he made or lost money each day. He literally would always say to me in this industry working if you aren’t losing sleep over your names it’s because you don’t care enough.

It’s not a 9 to 5 job at funds where you are investing with a short time horizon (think 1 to 6 months), like most of the multi-managers. The pressure to perform can be very overwhelming and will cause you to lose sleep and for many burn out over time. You will feel like you are always behind and don’t have enough time to catch up on everything because the news flow is never ending. Hours can also differ a lot depending on the type of fund and also the portfolio manager that you work for. I have seen analysts at multi-manger hedge funds work only from 8am to 6pm five days a week consistently, but I have also seen analyst at these funds work from 7:30am to 8-10pm five day a week and half a day every Sunday.

Now funds with longer-term investment horizons like distressed/credit funds, “long only” funds, or funds that invest with a private equity mindset tend to be a bit less stressful than the multi-managers as there is a lot less speculation and day to day trading that happens. So the stress and hours really depend on the type of fund and especially the portfolio manager you work for.

Work Life Balance At Hedge Funds Compared To Other Careers

Compared to all the other types of finance careers, work life balance at hedge funds is usually better than investment banking or private equity in the sense that your hours won’t be as volatile. It is very unlikely that you will stay up late working past midnight at a hedge fund.

I’ve worked at large multi-manager funds and single manager funds over the past decade and I can count on two hands the number of I’ve stayed up past midnight working. That said, your hours are usually more consistent because you have to stay on top of all the news for all the companies that you cover.

So work life balance really depends on the fund and also the team. Unfortunately, usually a good rule of thumb is the more hours a team works, the better the performance. There is no alternative to hard work if you want to be successful, especially early on in your career.

Myth: All Hedge Funds are the Same

The biggest difference between all the hedge funds out there is the investment style of each fund. Every portfolio manager has their own style of investing and every fund is different. I have seen portfolio managers invest with literally a 3-day time horizon, basically betting on whether a company’s guidance update or conference presentation is going to be “better than expected” or “worse than expected.”

The #1 piece of advice I give to people who want to break into a hedge fund is that you must find a fund where you believe in the investment style. The wrong investment style was the main reason I quit a $500K per year job working at a large multi-manager hedge fund.

So, focus on breaking into a hedge fund that fits your investment style. If you are coming from a private equity background trying to break into a hedge fund, then you will likely be shocked at how speculative the investment process at hedge funds is. There isn’t perfect information and you don’t have access to a dataroom full of very detailed financial where you get to do months of due diligence. Some hedge funds are long/short equity funds with short term investment horizons, while others may focus more on distressed/fixed income, commodities, or invest with more of a top down macro approach.

At hedge funds you aren’t going to hold onto an investment for 4-8 years like you would in private equity, a very different investment approach.

Reality: Volatile Income Stream and Low Job Security

Unless you are at a more established fund with $1 billion+ of AUM and a long-term track record, or a fund that has locked up capital (read more about fund structure below), then job security can be pretty poor. All it takes is one or two bad years, a few bad investments that you recommended, or just a 2.5% drawdown at some of these multi-managers and you are out of a job pretty quickly.

Multi-managers are notorious for not having great job security. Each team has a drawdown limit, an amount they could lose at any given point in time before the entire team is let go. These limits are pretty tight, and can be as low as $25 million on a $1 billion book.

Thinking about buying a house or starting a family? Well, you better wait until you have a few million dollars saved or a spouse with a second income stream because you could be out of a job due to reasons completely out of your control

Myth: Investing At Hedge Funds Is Like All The Value Investing Books You Read

One of the biggest things that shocked me when I landed a job at a hedge fund was that the investing style was nothing like what I read in all the classic investing books. I identified really hard with the value investing mentality before breaking into the buyside and I struggled a ton with my first job at a large single manager hedge fund.

It was the exact opposite of what I thought hedge funds were like. Sure, was I ignorant and should I have talked to people who worked at those types of funds first before joining? Absolutely. But the feeling of getting a job at one of the largest hedge funds was amazing and at the time I was on top of the world. Didn’t even think about whether I would like the work or not.

People don’t tell you this, but investing at most hedge funds is extremely speculative. They say to be a good investor at one of these types of funds you need to be right just ~53% of the time. That means if you are good, you are wrong and lose money on investments close to half the time!

I hated this style of investing. You can make a lot of money doing it but it sure isn’t for everyone. There were times when my portfolio manager asked me how a meeting with the CFO of XYZ company went and if I said “he sounded really good and optimistic” when the sentiment on the stock is low, he would automatically buy $5 to 10MM of that stock for a few days long trade.

That said, you can definitely find roles at single managers where you invest with more of a traditional value investing mindset and do a lot more work before making an investment.

Reality: Fund Structure and Investor Base is Very Important

Fund Structure

Every hedge fund has a different fee structure. If you are looking at joining a startup hedge fund, pay attention to what its fees are that are agreed upon by their LPs. Chances are if it’s a new fund, they aren’t charging 1-2% management fees and 20% performance fees, but some percentage less.

Your pay is determined primarily by the AUM of the fund and the fees the fund generates. If fees are low because AUM is low or the fund charges less in performance fees, then don’t expect to get as big of a pay days when the fund has a good year relative to more established funds with standard fees.

Additionally, most hedge funds have monthly/quarterly redemptions, which means investors’ money is not locked up and can pull their money at any point in time. So, when markets are falling apart and your fund is down a good percentage, the fund could face redemption requests at exactly the wrong point in time when you should be playing offense investing in cheap securities.

Some funds, like special situations/distressed funds have vehicles where the capital is locked up for years, which allows these funds to invest with more of a private equity like mindset and in illiquid situations. These fund structures are much more stable and provide more job security than hedge funds that have quarterly redemptions.

Investor Base

The investor base at a hedge fund is the life blood of the fund. They provide the capital, so a fund’s investor base determines how stable a fund is.

Low quality investors are usually high net worth individuals and small family offices. These types of investors tend to be more short term focused and more likely to pull their money out during volatile drawdowns.

Higher quality investors are the endowments/pension funds that have a much longer-term investment focus.

Myth: Most Hedge Funds Make Money When The Market Is Down

When I was in investment banking and thinking about leaving for a buyside role, the head of my group (who wanted me to stay on as an Associate) sat me down and tried to convince me that private equity and hedge funds are just a levered bet on the S&P 500.

He meant that basically everyone is exposed to what they call “Beta” and that most of these private equity firms that take on leverage to make acquisitions or hedge funds that buy levered stocks have been extremely lucky over the past few decades because the market has gone up a ton.

It’s much easier to make the big bucks in private equity or hedge funds when the overall market is up 10%+ for years. However, if markets are down, most funds are not going to generate good or positive returns.

That said, there are funds like the multi-manager hedge funds that run market-neutral and don’t care about the overall market.

Now after reading all the negative aspects of a hedge fund above, you must think that working in this industry is horrible and not a good place to pursue a career. But that is not the case. I simply am just telling you it is not for everyone and requires a certain individual with a key analytical/introverted skillset. I have worked in this industry for a very long time and it was one of the best decisions I have made. You just need to have realistic expectations or else you could be disappointed.

Working at a hedge fund can be extremely lucrative and there are a ton of qualities of this industry that some people would really like. Here are some of the key advantages:

1. Compensation: You can no doubt make a lot of money at hedge funds, especially if you join a team that has a good long term track record. Your income can scale significantly when you start getting a cut of the P&L and contribute to money making investments. More about hedge funds salaries and bonuses here.
2. Performance-Driven Environment: People who consistently generate strong returns are highly valued, leading to a meritocratic work environment where hard work and skill are rewarded. Can quickly rise in the ranks if you can prove you work hard and can come up with good investments.
3. Little to No Politics: It’s a no bullsh*t culture. People are generally pretty blunt and tell you if are performing well or not. This type of culture is not for everyone, but it’s nice to focus entirely on work and performance and not have to deal with the BS of corporate politics.
4. Fast-Paced, Intellectually Challenging: You are constantly learning in this industry. Both on a macro level and a micro level, there is so much news out there you need to keep up to date on so you can figure out how it impacts your team’s portfolio and if certain investments become more or less interesting in different environments. It’s a lot of reading, which some may or may not like.
5. Opportunities for Career Growth: Like I said before, performance is all that matters. If you are hard-working, contribute and come up with good investment ideas, the sky is the limit in this industry and you can move up the ranks very quickly.
6. Entrepreneurial Culture: Hedge funds are usually comprised of small teams, so it feels a bit entrepreneurial. You take ownership of your names and ideas. That said, there isn’t much guidance so there is a big learning curve if you are just breaking into the industry for the first time.
7. Networking Opportunities: Hedge funds often interact with people at other hedge funds, other investors, sell-side research firms, and company management teams. You’ll meet a lot of people in the industries that you cover.
8. Autonomy and Responsibility: There is no hand holding in this industry. Your job over time is to come up with good longs/shorts and make the life of your portfolio manager/boss easier by staying on top of your names. Autonomy is really nice to have for some people, but others may struggle. Those that try to coast without working hard and don’t provide value to the team will get weeded out over time.