Hedge funds are a type of collective investment that utilizes assets from university endowments, pension funds, foundations and High Net Worth Individual (HNWI) investments. They operate under a different set of regulations than mutual funds and typically employ the most successful hedge fund managers. In addition to trading securities, hedge funds also trade liquid securities like bonds. They may also engage in trading practices like short selling and leveraging. Since the credit crisis of 2008, more regulation has been introduced to govern the activities of hedge funds.
Hedge fund managers are among the most highly paid professionals in all of commercial enterprise. Most managers invest their own assets in their funds, and therefore are aligned with investor interests. These funds consistently outperform other types of investment instruments with one industry agency reporting an average 11.4 percent return per year throughout the industry. Managers of hedge funds are expected to outperform the market consistently or face loss of employment.
How to Become a Hedge Fund Manager: Experience and Education
Many of the most successful fund managers are able to run their own firms, which can handle billions of dollars in assets. The most traditional route to entering the fund management profession is through investment banking or joining a firm as an analyst or trader. In order to successfully join a hedge fund firm or investment bank, candidates must provide sterling academic and professional credentials. Most of the highly successful investment banks recruit from the nation’s most prestigious universities and business schools. The interest in these positions is so high even among these limited pools of candidates that they almost never accept applications from outside these select environments.
All of these professionals in the traditional track possess at least a bachelor’s degree. Many of them have graduated at the top of their classes in finance, mathematics or economics. It is less important what field you graduate from than it is to demonstrate that you are willing and capable of achieving success in a highly challenging discipline.
Many of these analysts and associates also have Master of Business Administration (MBA). These professionals often returned to school after having achieved success in their professional careers. Once again, it is critical to gain entry to a world leading business school in order to gain consideration from the more successful firms.
An alternate route is to become an independently successful investor. Some successful hedge fund managers have achieved their position by demonstrating they can consistently outperform the markets. Although investors are more comfortable with a fund manager who has the academic and professional credentials that the financial community expects in its most successful professionals, they are more concerned with performance. Some independent traders who have had six to 12 months of consistent returns above 3% to 4% can be enough to convince some firms to discuss a possible position.
Licenses for Hedge Fund Managers
There are wide variety of certifications and licenses that can demonstrate to clients proficiency with financial services and products.
- Registered Investment Advisors (RIA) are generally required to complete the Series 66, 7 and/or 6 licensing programs with the Financial Industry Regulatory Authority (FINRA). Managers who administrate funds less than $100 million in value must register with the state they operate in, while those managing more $100 million in assets must register with the SEC.
- Chartered Financial Analyst (CFA) is a designation conferred by the CFA Institute. Three exams must be completed, which typically takes between 18 months to four years.
- Series 65 is the licensing program offered by FINRA that permits hedge fund managers to act as an investment adviser. In order to talk to clients, make trading decisions or perform analytical duties, a Series 65 license is mandatory. The exam is administered by the North American Securities Administrators Association (NASAA), and includes 150 questions that must be completed within three hours.
- Series 3 is a licensing program necessary to trade futures or commodities. The exam includes 120 questions that must be completed within two and a half hours. This exam is administered by the National Futures Association.
Salary Expectations for Hedge Fund Managers
On the upper end of the salary scale are hedge fund managers who can earn up to $3 billion in a single year. Hedge fund managers are expected to grow their funds by 20% to 30% per annum, or they may be terminated. As a result of their enormous responsibilities and expected performance they earn 2 percent of the portfolio, plus 20% of profits. This can lead to enormous payoffs for the most skillful hedge fund managers.
The highest-paid hedge fund managers of 2019 were Christopher John of TCI Fund Management, who earned $1.8 billion and James Simons of Renaissance Technologies, also $1.8 billion. Interestingly, they both had earned that money prior to the COVID-19 outbreak.