The Biggest Misconceptions About Working For A Hedge FundVW Staff
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Over half of the investment considerations are based on the quality of the management team
No significant changes reported in expenses that are being passed through
The top 25 hedge fund managers earned a combined $15.4 billion last year
Institutional Investor is out with its list of top-earning hedge fund managers for 2017 and the numbers are eyepopping. Renaissance Technol-ogies' Jim Simons topped the list, earning $1.7 billion, followed by Appaloosa Management's David Tepper with $1.5 billion. Citadel's Ken Griffin brought home $1.4 billion and Bridgewater Associates' Ray Dalio made $1.3 billion.
The top 25 hedge fund managers earned a combined $15.4 billion, up 40% from 2016. Not surprisingly, hedge funds in 2017 generated their best average performance over the past several years which led to higher payouts for big managers. Hedge funds ended 2017 with positive returns in every month, the first perfect calendar year since 2003, according to hedge fund research provider HFR.
The biggest misconceptions about working for a hedge fund
Of all the misconceived stereotypes about working for a hedge fund, the biggest one is around pay. Many people underestimate how long and hard you'll have to work to achieve the eye-popping salaries and bonuses that make headlines. For every Chris Rokos, who earned around $900m over a decade working for Brevan Howard, there are plenty making decidedly less. Those who start out earn an average of $90-125k.
"One of the biggest misconceptions people have is if you work at a hedge fund then you don't really have to do a lot and you make a lot of money and you have a great life forever, but that's not reality," says Afroz Qadeer, the CEO of Kettle Hill Capital Management and a member of the Mid-Atlantic Hedge Fund Association. "People think you're essentially a master of the universe, but in reality, you put in a lot of hard work, a lot of long hours."
1. You will not earn millions working for a hedge fund unless you're very lucky. David Kochanek, the publisher of the HedgeFundCompen-sationReport.com, agrees that it is common to overestimate how much a typical hedge fund professional makes. The owners of large hedge funds regularly make the rich lists, but it's only the lucky few that earn over seven figures. "About half of the respondents in our study reported making between $100k and $300k," Kochanek says. Less than 10% reported earning more than $1m in cash compensa-tion. For those making north of a million dollars, more than 70% of their cash compensation was from their bonus, a portion of which they typically have to invest back into the fund. The Fund Compensation Report by SumZero suggests that hedge funds with between $5-10bn in assets under management are likely to pay you the most.
2. You will work incredibly hard, often outside of your job description. When you start out at a hedge fund, expect your daily routine to involve long hours and a wide range of tasks. The smaller the firm, the wider the range of responsibilities employees are required to take on. "It is difficult to get a good job working for a hedge fund," says George Schultze, the CEO of Schultze Asset Management and a member of the Hedge Fund Association's board of directors. "Most hedge funds are small businesses and therefore their employee needs may include jobs that are not that glamorous. "Expect to work hard and wear lots of hats as you break into this industry," he adds. "Know that there are limited openings so that competition can be extreme. Be prepared to work more for experience than for high levels of pay – that's the best way to enter this business if you really want in." Qadeer agrees that hedge funds tend to have a chal-lenging working environment, which is exacerbated at smaller and medium-sized firms that don't have a big support structure. "You'll be doing more than one thing and you have to be prepared to get your hands dirty," he says.
3. All hedge funds are not the same. There's a misconception that hedge funds represent a monolithic industry, says Victoria Hart, a port-folio manager at Pinnacle View Capital Management, a long/short equity hedge fund. Depending on the type, focus or investment style of the fund, the AuM, the turnover, the level of interaction with the co-founders or partners and various other characteristics, the expe-rience of working at one hedge fund can be radically different from that of another. "They get lumped together, and then many stereo-types get drawn and associated to all [hedge] funds, without understanding that there are important distinctions between funds," Hart says.
4. Making it takes a lot of time. Some aspiring and early-career-stage hedge fund professionals underestimate how long it takes to master the skills and acquire the expertise required to succeed over the long term. On the investment side, you need to have real-life experi-ence through many market cycles to appreciate how markets turn, Hart says. Sales/marketing requires time to cultivate relationships and learn the art of persuasion and selling techniques. And operations is riddled with many important details to learn, she noted. "[An-other] misperception is that you need to be a rock star at just one thing," Hart says. "All of these roles require multiple skills; you can't just be good at only one thing." You need analytical skills for an investment role, but you also need good communication skills to get your ideas across, she says. "Sales and marketing requires solid verbal and written communication skills, but also someone who is facile enough with math to understand the product."
5. It doesn't pay off to be known as a jerk who loses his temper. People who have the ability to perform well under pressure and possess the full range of skills, including emotional intelligence or "people skills," are more successful over the long haul, says one hedge fund portfolio manager. In contrast, someone who flies off the handle and has a temperament that's more volatile most of the time it means that individual's emotional IQ is lower. That can limit some people's career progression if they don't compensate for those shortcomings with other factors. Short tempers won't be tolerated in someone who can't deliver, whereas for someone who delivers consistently strong performance, there's tolerance for such behavior, even though it is not welcomed. Softer skills come into play more once a hedge fund manager becomes a bit more senior – dealing with conflicts and stress well is an important leadership skill.
Why "alpha males" make bad hedge fund managers
Having high levels of testosterone could result in worse performance — in your hedge fund portfolio, that is. High-testosterone hedge fund managers "significantly underperform" low-testosterone peers, according to research from the University of Central Florida and Singapore Management University. These "alpha males" post lower returns because they trade more frequently, tend toward high-risk, high-potential stock picks, and are reluctant to sell losing stocks, argued authors Yan Lu and Melvyn Teo. "Testosterone can shape trading behavior and lead to sub-optimal decisions," they wrote.
For the study, the pair examined the investment performance of 3,228 male fund managers from 1,901 investment firms operating hedge funds between January 1994 and December 2015. To estimate each manager's testosterone levels, Lu and Teo measured their facial width-to-height ratio — a representation of pubertal testosterone exposure that has been linked to high testosterone levels in adults. The research-ers found that managers with wider faces underperformed low-testosterone counterparts by 5.8 percent per year after adjusting for risk. These results were not explained by differences in illiquidity, fund age, or fund size. Moreover, they discovered that higher levels of testos-terone resulted in higher levels of operational risk, with these managers more likely to disclose regulatory actions and terminate their funds.
Still, Lu and Teo said at least one group of investors was more attracted to these lower-alpha, higher-risk hedge funds: investors with higher levels of testosterone. "The aggressive trading style of high-testosterone hedge funds may appeal to high-testosterone investors as it mirrors their own," they wrote. In the study, fund-of-fund managers with higher facial width-to-height ratios chose more high-testosterone manag-ers and underperformed thinner-faced peers by 5.03 percent per year. "In the context of the ultra-competitive and male-dominated hedge fund industry, where masculine traits such as aggression, competitiveness, and drive, are encouraged, expected, and even celebrated, our results on the underperformance of high-testosterone fund managers are indeed surprising," the authors concluded. "Investors will do well to go against conventional wisdom and eschew masculine fund managers."
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