Intro: What Is a Hedge Fund Manager’s Function & How To Become A Hedge Fund Manager

A lucrative career can be simple if you are savvy enough to navigate the stock market, but it also comes with the potential for a hefty amount of risk. Hedge fund managers navigate these waters daily, overseeing the funds that are pooled together for investment under their watchful eye. 

If you’re looking to make a career change into a more lucrative field that has limitless earning potential, understanding how to become a hedge fund manager might be an important first step. To help you along, we’re going to teach you the basics by answering questions like: 

  • What are hedge fund managers?
  • What do hedge fund managers do?
  • How do you become a hedge fund manager?

Hopefully, you’ll leave with a greater understanding of what the next steps are if this is a career path that you are interested in pursuing.

What Is a Hedge Fund Manager’s Function & How To Become A Hedge Fund ManagerImage Source: Pexels

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What Is a Hedge Fund Manager?

Before we can come up with a hedge fund manager definition, we must first look at the definition of a hedge fund itself. A hedge fund is an alternative form of investing, where money is pooled together to be used in a multitude of investment strategies.

They can be managed in a number of ways, from aggressive to more laidback and hands-off, making the best use of leverage to bring higher returns. Hedge funds can be a popular way to diversify investment portfolios because they do not typically correspond to the same highs and lows seen with stocks and bonds.

Hedge funds are very similar to mutual funds, but they lack the same strict regulations that mutual funds have. They are usually completely private as opposed to being publicly traded and advertised. They are still monitored by the same anti-fraud measures, but some investors feel that the looser regulations are an asset to their investment portfolio.

A good hedge fund manager definition would simply be someone who manages these investments through any of the strategies mentioned earlier. Hedge fund managers are typically large investors in the funds they manage, meaning they have a lot of personal wealth at stake in the business decisions. Investors will typically cover the operating expenses and the performance fees to the managers, but the managers themselves usually benefit from the performance of the fund as a whole.

Hedge fund managers can make a very lucrative living, with the average hedge fund manager salary being upwards of 2 million each year. But what do you really need to become a hedge fund manager?

How to Become a Hedge Fund Manager

Now that we can answer the question, “What is a hedge fund manager?” with our clear hedge fund manager definition, we will look more closely at how to become a hedge fund manager, either at a firm or independently.

Hedge fund managers aren’t necessarily required to have advanced degrees in any field, though it certainly doesn’t hurt. Good investors have knowledge – inside and out – of at least one area where they will be doing their primary investments (real estate, health care, oil, etc.).

While many of the more successful hedge fund managers do have MBA degrees from prestigious universities, the only real requirements are access to capital and an investment strategy that can outperform benchmarks. Significant investments are required up front if you will be starting your own hedge fund. In order to increase the chances of your hedge fund being successful, your seed money coupled with operating expenses, attorneys’ fees, administrative costs, and marketing could be close to $6 million.

While not all of that money will come from your personal assets, a chunk of it certainly will, and the rest will be funded through investors. With the size and scope of investment you would be asking for, many people will want to know your qualifications, investment history, previous employment experience, and strategy for how you will manage the money in your care.

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Personality plays a big part in becoming a hedge fund manager also. Can you learn how to be a hedge fund manager successfully? If you have some of the below traits, it might come very naturally to you:

  • Analytical: You can analyze lots of data and market trends quickly and easily. You’re familiar with the way that different types of investments work (land, real estate, mutual funds, stock market, etc.) and can take a look at opportunities quickly.
  • Strategic: You are good not only at seeing the patterns quickly and easily but developing a strategy based off of them.
  • Social connections: If you find that you are able to make social connections quickly and easily, you would align perfectly with our hedge fund manager definition. You should be able to leverage your relationships and contacts to make the most of business opportunities as well as with investors. Since investors prefer credible sources when deciding where to invest their assets, if you have a background in investing, it may be easier to find your first clients.
  • Competitive: You have to have the competitive desire and edge to want to do better than the other hedge funds you’re up against. In order to learn how to become a hedge fund manager, you must focus on maintaining one of the top hedge funds as your primary goal, actively searching out opportunities to improve your investment strategies, and diversifying your current investments.

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What Do Hedge Fund Managers Do?

Now that we’ve answered “What is a hedge fund manager?” we will need to look more in depth at what they actually spend their time doing. What do hedge fund managers do on a typical day?

Since hedge funds are only open to what The Economist refers to as “sophisticated investors,” a portion of the day may be spent looking for individuals with a certain net worth to partner alongside for their investments. Hedge funds are typically crafted with borrowed money in this way, though hedge fund managers do usually front a significant portion of their own assets as part of the initial investment.

They are responsible for making all of the decisions about the investments made with the pooled money. It takes patience and a calm personality to continue to put in the hours, day after day, searching for upcoming investment opportunities, networking with new and well-established companies, and analyzing current trends through the media and stock market fluctuations.

So, what is the real answer to “What do hedge fund managers do?” Simply put, they spend their days working hard to find investors, making savvier investment plans, and continuing to educate themselves on the current state of the market.

It’s not unheard of to find hedge fund managers who put in work weeks in excess of 100 hours. It might sound like the above job description for our hedge fund manager definition is simple and could easily fit into the confines of a stable 9-to-5 desk job. However, the reality is that accomplishing those tasks is a lengthy endeavor that requires a significant time investment as well as financial investment.

How Are Hedge Fund Managers Paid?

If you’re interested in how to become a hedge fund manager, chances are you’re also interested in how hedge fund managers get paid for the work they do. Most funds use a “two and twenty” method so that at least a portion of their salary is dictated by the performance of the investments.

In the two and twenty method, a hedge fund manager will automatically collect a two percent fee based on the assets value. This portion is taken as a management fee for overseeing the accounts and continuing to make good investment strategies as well as to cover operating expenses.

The twenty portion helps to ensure that hedge fund managers are motivated to do the work necessary to keep their hedge fund outperforming the bench marks. Most hedge fund managers will ask for an additional twenty percent of the profits that are earned. This means that the majority of their income is performance-based.

Certainly, this can be stressful to individuals who are used to steady and dependable salaries instead of being a slave to the trends of the market and the success of their investment strategies. Make sure that you are prepared both financially and mentally for the drain that the unknown paycheck might mean for you personally as well as for your family.

If you already have the tendency of being anxious when it comes to your personal finances, you may want to reconsider your interest in how to become a hedge fund manager as a career choice.

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Conclusion: What Is A Hedge Fund Manager & How To Become A Hedge Fund Manager

Are you still interested in learning how to be a hedge fund manager? While many highly trained and successful hedge fund traders can make an easy living from managing their hedge funds, it can be a risky endeavor to undertake without the proper training and preparation.

We’ve answered the questions, “What are hedge fund managers?” and “What do hedge fund managers do?” Now, you have to decide if you can follow through in the process of becoming one.

You might have what it takes to be a hedge fund manager if:

  • You have a credible reputation for successful investments, preferably with borrowed money
  • You have the personality traits that correspond to a stressful and fast-paced work environment where your pay is determined by your performance
  • You don’t mind the potential for long work weeks or uncertainty
  • You can invest heavily in the startup costs for your own hedge fund or find many investors through your social networking to begin one if you intend to manage your own fund

While, at first glance, these may not be roadblocks on your path to becoming a hedge fund manager, you should consider the implications of each one for every aspect of your life. If you decide to move forward, hopefully you’ll have a much better understanding of how to be a hedge fund manager successfully.

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