Hedge Fund Interviews Preparation: A Practical Guide

The hedge fund industry has been well documented in the last half-century, academically and in popular media.

With the publicised bailout of the Long Term Capital Management, the interest in hedge fund industry grew significantly.

Hedge funds became a prominent class of investment vehicle which, in the modern times, offers a lot of employment scope and on the other hand, a platform for investors to “make money out of money”.

No miracle pill prepares you for hedge fund interviews overnight. The miracle lies in your knowledge, sincerity, dedication and a smart mind. In this guide, we’ll talk about preparing for hedge fund interviews.

The Hedge Fund Market and Recruitment

The hedge fund market sustains itself in a growth mode with continued activities in merger arbitrage, pairs trading, and global macro arbitrage and so on.

There is continued interest in SEC regulations and over the years, we’ve seen the evolution of two kinds of hedge fund: established funds and start-up funds.

If we talk about the hedge fund recruitment trends, there are enough opportunities and companies stress on the finding the ‘right fit’ for the organisation.

The growth mode in hedge funds is dissimilar to consulting firms, investment banks and other verticals. Usually, there aren’t any formal “hiring seasons” and there exists the “silver bullet” mentality.

The recruitment market is fragmented. Getting a job with hedge funds can be actualised through listing yourself with recruiters, personal network, alumni network, on-campus recruitment and various job boards.

How to Prepare for Hedge Fund Interviews?

Preparation for hedge fund interview begins with educating yourself on the industry. Start by reading few books on investing and different hedge fund strategies adopted by managers.

Get your hands on these books:

  • Stock Market Wizards: Interviews with America’s Top Stock Traders – Jack D. Schwager
  • The New Market Wizards: Conversations with America’s Top Traders – Jack D. Schwager
  • Market – Neutral Investing: Long / Short Hedge Fund Strategies – Joseph G. Nicholas
  • Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor – Seth A. Klarman

Following the market on a regular basis will help you to form constructive opinions about hedge funds.

An analytical mind is necessary because working in the hedge fund industry is all about picking the right investment that makes money.

Moreover, if you’re shifting to the hedge fund industry, analyse whether your skills is transferable to the hedge fund world.

To begin with, identify which of hedge fund categories are suited for your skill set, in terms of:

  • Asset Class: currencies, fixed income, equity and others
  • Organisation: Generalist organisation vs. industry-specific organisation
  • Investment Style: risk arbitration, long term vs. short term, distressed debt, momentum

Your choice of a hedge fund organisation should match your current portfolio. Look for pointers like inception date, fund size and personality fit.

Hedge Fund Career Track

Again, there is no fixed set of answers. It depends on your skills, qualifications, and interest scale and fund type. Take a look at some of these options.

  • Trading

Hedge Fund Career Trading

  • Analyst

Hedge Fund Analyst Career

We hope your idea of a hedge fund career track is clearer. Again, there are no specific pathways, it all depends on YOU and how you want to GROW.

Also, check out the informative post on how to become a hedge fund analyst.

Hedge Fund Compensation Structure

Hedge funds is a diverse field, and thus, it is certainly a tough task to present its compensation structure in a linear fashion.

To understand its compensation structures, you need to understand various hedge fund working positions, roles and responsibilities and the associated compensation.

  • Hedge Fund Manager (HFM) – The person has complete control over the fund.
  • Portfolio Manager (PM) – The person is a decision-maker, responsible for a portfolio’s growth.
  • Sector Head – The person is in-charge of “sectors” working within a fund, such as the healthcare sector or the technology sector.
  • Analyst – The person who researches and sells ideas to the PM.

These four positions form the core of a hedge fund enterprise. Together, they build various types of funds. Let’s see what they are:

  • Single Manager Funds

These funds comprise a couple of analysts, sector heads and one PM. In this fund type, people have direct access to the decision maker and generally, there is a good mentoring environment and less bureaucracy.

The processes are transparent and sometimes, the analysts even contribute to the core decision-making process. The single manager fund team usually don’t have more than ten members.

The pay is varied with the PM getting about 50% of the total profits.

  • Multi-Manager Funds

When a single manager fund grows too much, making it difficult for a PM to manage, it is split up into multiple funds, with each fund having its own PM or sector heads. They are given complete discretion over the assigned portfolios.

The decision maker is usually the PM but is restricted to one kind of fund. Or, there are Chief Investment Officers who are involved with all the funds.

In this kind, there is less access to the senior personnel but sector heads and analysts can still communicate with the PM directly. There aren’t any generalist roles.

The pay is similar to single manager funds. Analysts, on the other hand, get a bit less since the Fund Manager and the PM both get a share of the P/L.

  • Multi-Manager Platforms

This type has a lot of Portfolio Managers running independent funds.

All the involved managers are entrusted with the task of implementing various strategies and in the end, a specific fee is paid to the ‘platform’. SAC and Citadel are well-known examples of multi-manager platforms.

There are strict limitations on risk; there is extensive leverage use, and more capital is poured to the best performing funds and the underperformers are terminated.

Working at a multi-manager hedge fund is fraught with pressure, which is not always competitive. A significant advantage here is that since the platform takes care of the administrative part, the PMs and the analysts can focus on the investment, singularly.

The pay depends on the platform and its relation with the PM, and the relation between PM and the analyst.

We do understand that the above data doesn’t shed much light on what hedge funds pay. This is because there are no fixed payment benchmarks. However, we did come across some data that shows hedge funds don’t always pay well, at least, it’s not always about champagnes flowing and traveling around the world, which is dominantly portrayed in media.

SumZero did a research with 2500 participants which showed that hedge fund analysts earn almost similar to what traditional professionals make.

This report was based on the median of reported compensation. In career beginning, most analysts earn between 72,500 USD to 190,000 USD, and as their experience grows, the pay scale broadens to range between 225,000 USD to 700,000 USD yearly.

Commenting on this, the COO of SumZero, Nicholas Kapoor said:

“What you see here is that (1) yes, individuals are quite well-paid in the middle quartiles as you might expect, but (2) they’re not paid at levels that are out of scope given their levels of advanced education / experience. In fact, these are salary ranges that are not uncommon for doctors, dentists, lawyers, engineers, etc. at comparable points in their careers”.

Moreover, the extreme growth rate was only experienced by a handful of hedge fund analysts, as seen in the figure below.

sumzero

SumZero also gives a graphical representation of the bonuses and median base pays, which is dependent on the fund size.

Hedge Fund salary

If you go by asset class:

asset class

If you go by location:

Hedge Fund Pay Location

If you go by fund type:

Hedge Fund Compensation

You can get the detailed report here.

Hedge Fund Interview Questions

Compared to investment banking or management consulting jobs, the hedge fund interviews are less structured, as in, they are more informal.

The first round usually comprises of behavioural questions, designed to eliminate candidates that don't meet the organisations requirements. This round is managed by senior analysts or portfolio managers.

To clear hedge fund interviews, you need to have two main qualities:

  1. Pick the right investment portfolio
  2. Pitch short-term and long-term investments

The second round is a technical round to check proficiency.

There are questions on Valuation, Financial Statement Analysis and Accounting. There will be technical questions that are similar in ways to those answered during an investment banking interview but in hedge fund, they come with higher detailed-oriented perspective.

The third round is based on a case study, which can either be done in-house or in take-home format. Here, you’re given a company profile and asked to build a financial model and its investment opinion. If it's in-house task, you have about 3-hours, and if it’s in take-home format, you get about a week.

In this link, you’ll find a list of 100+ updated behavioural and technical questions. DO read and practice.

Before going for hedge fund interview, you also need to understand the company and how it operates.

Doing the initial research is important.

Begin by giving a detailed read through the company’s “business overview” section.

Go through the company’s last few earnings conference calls and read at least the sell-side initiation reports.

Read reports on sell-side equity research, what investors think about the company in general and other industry competition. Knowing all this factors and your articulation during the interview process will create a favourable impression.

To understand how your hedge fund resume should be, check out this article.

Over to You

A career in a hedge fund is certainly lucrative but only approach this career path if you’re ready to hustle and possess the necessary skills.

Hedge Fund Interviews Preparation: A Practical Guide 1
Hedge Fund Interviews Preparation: A Practical Guide 2
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