The Best Hedge Fund Career Paths – Part 1

If you have your mind set on a hedge fund career, you probably started thinking about your career paths very early on – either in college or shortly after you graduated. You are highly motivated to have a successful hedge fund career and armed with a concrete plan to put yourself in the best position to get to the buy side. You keep your resume up-to-date, debate taking the CFA and/or get an MBA, and proactively get in touch with recruiters.

You might’ve thought about joining a hedge fund in college, and found that it’s very tough to get into investing with no work experience. It does happen, but the ones who make the direct jump are a rare breed.

Why doesn’t the buy side typically recruit on college campuses? Because large banks and consulting firms all offer comprehensive, months-long training programs, while hedge funds are smaller and don’t have the same resource or patience to train their fresh blood.

Hedge funds expect their analysts to hit the ground running and start making money for the firm fairly quickly. Hedge funds’ best labor return/cost ratio is found among young analysts with a few years of work experience, who have a strong foundation in finance but don’t cost an arm and a leg (yet).

So for those who are a few years out of college, the question is: are you currently on a good career path to set yourself up as the strongest hedge fund athlete available?

In the article, we’ll go through the best career paths to hedge funds to see how you are stacking up. You’ll find:

  • The 5 most common career paths that buy side portfolio managers prefer to see on applicant resumes and cover letters.
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  • The skills you gain from each path, and why they are important to hedge funds.
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  • The strengths you should demonstrate on the resume and interviews.
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  • More importantly, the areas you should prepare to proactively address.

This is Part 1 of the series Best Hedge Fund Career Paths. In Part 2, I’ll go over the other careers paths that offer specialized skill sets attractive to hedge funds. There are also folks who have made the jump to the buy side from non-traditional paths, and I’ll talk about how non-traditional applicants can make the same career move.

Without further ado, let’s get started.

The Best Hedge Fund Careers Paths

 

1. Private Equity

investment

As a private equity associate after a couple years in investment banking or consulting, you are absolutely the most desirable candidates to hedge funds. You’ve gone through a rigorous hands-on introduction to M&A transactions at a reputable firm, and learned about an industry or two by working through a number of deals from start to finish.

More importantly, you have a leg up over your banking and consulting peers when it comes to recruiting for hedge funds. You can now say that you are already on the buy side. You already think and act like an investor, rather than simply facilitating transactions. Your jump to private equity is also a vote of confidence in your technical skills. A buy side firm has already picked you over other investment banking or management consulting analysts, and there’s no doubt that you can use the same skill set and attitude to make money at a hedge fund.

Private Equity to Hedge Fund:

 

Strengths to Tout:

Let your hedge fund interviewers walk away with a strong impression of:

  • Your firsthand knowledge of the investment merits and risks in the industries you cover.
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  • Your deep understanding of your portfolio companies.

If you’ve gone through a couple transactions from start to finish at the private equity fund, talk about the amount of effort and thought you’ve spent on the investment rationale and the risks. Talk about your forecasts for the upside, base and downside cases, and how you sensitized key assumptions and mitigated the risks. Let your interviews know of your work with the management team at your portfolio companies, to demonstrate your experience in operating and growing a business.

Areas to Address:

The biggest question hedge funds will have for you is – why did you choose private equity over hedge fund in the first place? You could’ve gone straight from investment banking to a hedge fund.

Perhaps you liked the transaction work and want to continue to quarterback deals from start to finish. Or perhaps you found the industry coverage at the private equity fund particularly engaging.

There are two big differences between private equity and hedge fund investing:

  • Investing in private businesses on the private equity side vs. in the public equities or credit.
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  • Quarterbacking the transaction is a different animal from just doing investment research at a hedge fund. Besides the research that you do a private equity firm, your day-to-day consists of working with lawyers, consultants, creditors, auditors and management on deals.

Address these two differences in your interviews by talking about your passion for the markets, and your preference for doing investment research rather than working on deals for your long-term career. Give examples of stocks you own in your personal account, and talk about your preference for investment research over doing deals and why.

 

2. Investment Banking

investment banking

Going through an investment banking analyst program is only second to private equity in making the transition to a hedge fund. That being said, you don’t need to go through private equity if your ultimate career goal is to invest in public securities. You can make the jump just as easily.

I’m also going to make a call that might surprise some: investment banking analysts are more attractive to hedge funds than folks from sell-side equity research.

I’ve seen time and time again that portfolio managers prefer investment banking analysts over sell-side research associates, primarily for two reasons:

  • Technical skill set. Investment banking analysts develop the same industry knowledge as a sell-side analyst, but on the investment banking side, analysts are much closer to companies because they live and breathe with management through an M&A transaction. As a result, the modeling is more detailed.
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  • The perceived stronger work ethic. Because investment banking hours are much longer, typically averaging 12 – 14 hours a day, investment banking analysts are perceived to have better endurance and stamina to crank through a research write-up if needed. I emphasize the word perceived, simply because of the difference in the average work hours. If you come from a bulge-bracket investment banking program with a strong set of deal experience, you have the discipline to get your projects done on-time, no matter the workload.

If you come from a bulge-bracket investment banking program with a strong set of deal experience, you have the discipline to get your projects done on-time, no matter the workload.

Investment Banking to Hedge Fund:

 

Strengths to Tout:

Same with private equity, show your impeccable modeling skill set and work ethic on your resume and in interviews. The best way to do this is to describe your deal experience.

Go through select transactions in detail. Talk about why the deals made sense, the risks to the transaction, and how you modeled the company projections and the valuation. This shows off your industry knowledge, modeling experience, and work ethic.

Areas to Address:

That being said, portfolio managers do have one common concern about investment banking analysts. The concern is that you might be too deep into the weeds, that you don’t have a good grasp of the overall investment thesis.

You should address this by describing the high-level thesis of each transaction in your interviews – the attractiveness of the industry, and the sources of revenues and cost synergies that the buyer is seeing which the market is missing. Describing the high-level thesis of your transactions will really set yourself apart from other investment banking analysts.

 

3. Sell-Side Research

sell-side research

Sell-side research associates and analysts naturally develop industry expertise and gain modeling experience. In addition, you get the chance to regularly interact with your hedge fund clients. As a sell-side analyst, you are very close to the market, and understand what your hedge fund clients are looking for when they speak to you about their positions. You know how to model using multiple methods – either discounted cash flows, multiples, or economic value added on a rare occasion. You have already proven your passion for the markets by picking sell-side research as your career.

Sell-Side to Hedge Fund:

 

Strengths to Tout:

Talk about the companies you cover to demonstrate knowledge in your niche. At the same time, give the interviewers a good imprint of your passion for managing money as your long-term career. Tell your interviewers about your client interactions, and how you have helped your hedge fund clients in making investment decisions.

Besides industry knowledge, you have a leg up over investment banking analysts on the markets. Talk about your views on the current market conditions, as well as stocks you have in your personal account. This not only demonstrates your market knowledge but is the best way to show your passion for investing.

Areas to Address:

Because of the shorter hours on the equity research side vs. investment banking, you want to give examples of your work ethic – the times when you went beyond the call, stuck around late after-hours to finish multiple research pieces. Talk about the tough quarterly earnings period when you covered multiple company releases and updated the models all for review the next morning.

 

4. Management Consulting

management consulting

If you are in management consulting, you’ve gotten used to analyzing business trends and developing ideas to spur growth, cut costs, streamline operations, and plan overseas expansion. You are on-site with your clients for months-end, and you’ve gotten to know the industry inside and out. Especially if you are at a top firm – McKinsey, Bain, BCG – you’ve gotten used to presenting ideas to top management. The business training is as rigorous as on the banking side.

Management Consulting to Hedge Fund:

 

Strengths to Tout:

You have a leg up over your banking peers on your understanding of company strategies and operations.

Investment banking really focuses on two financial aspects of running a business: raising capital and making acquisitions. You, on the other hand, know more than just that. You understand sales & marketing, operations, growth expansion, and cost management.

Talk about your business expertise on your resume and in interviews. Show your interviewers how much you know about the industry you’ve worked in, because at the end of the day, investing is at least half art in predicting industry and company trends and understanding risks.

Areas to Address:

It’s the other half of investing that you want to proactively address in your interviews – the science of modeling.

The common perception among hedge funds is that consultants can’t model, or that they have less modeling experience than folks from banking and sell-side research. Give examples of projects where you developed the company projections and sensitivities. Talk about the valuation you did to help a private equity firm execute on the leveraged buyout. Better yet, develop a sample pitch, attach it to your cover letter and bring it to your interviews. It’s the best way to show to portfolio managers that you can model.

 

5. Trading

trading

If you are in a sales and trading program at an investment bank, you know the markets very well. You’ve been living and breathing it every single day.

Trading is attractive to hedge funds, but only for certain types of fund strategies or in specific roles. Fundamental investing roles at a hedge fund are a bit of a reach for traders, as most of what traders do at an investment bank is not investment research. Rather, traders understand the markets well and are in-tune with short-term trading patterns of particular industries and stocks. If you are in a trading program, the best roles for you are:

  • Become a portfolio manager / trader at a macro fund.
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  • Become an execution trader at a fundamental fund.

At a macro-oriented fund, you’ll be taking positions in currencies, debt, commodities, sectors, and options to generate alpha. As an execution trader at a fundamental long/short fund, your responsibility is to get the best price available for placed orders. As you can imagine, being an execution trader has less discretionary bonus upside, but higher job security.

Trading to Hedge Fund:

 

Strength to Tout:

In your cover letters and interviews, convey your understanding of the markets you’ve been exposed to. Talk about the current market conditions and the trades you’ve made to take advantage of the current environment. Discuss industry trends with your interviewers, and share your thoughts on currencies, commodities, credit, options and market volatility.

Areas to Address:

On the flip side of sell-side research, you need to show that you can analyze businesses as well. You understand the markets better than your sell-side research counterparts, but you would stand out among traders if you can talk fundamentals. Pick a couple companies going into your interviews, and talk about why you like them. Show your valuation understanding by going through their relative valuation – P/E, EV/EBITDA, and Cash Flow Yield.

There you have it, the 5 best hedge fund career paths to get yourself to the buy side. Each path has its own strengths and weaknesses, so be sure to understand how you are perceived going into your interviews. Demonstrate your strengths by talking through your transactions, projects or market experience. Proactively address your weaknesses, which would separate you from the pack.

This is it for Part 1. In Part 2 of the Best Hedge Fund Career Paths, I’ll discuss all other available paths to getting into a hedge fund. Private equity, investment banking, sell-side research, management consulting and trading are certainly the most well-paved paths to the buy side, but by no means are other paths out of the question. In fact, folks from specialized industries are often prized talents to the right type of funds. We’ll go through all in Part 2. Until next time!

Do you have a question about your current career path to the buy side? Post a comment below and I’ll get back to you.

 

Take-Aways:

 
  • The 5 most well-paved hedge fund career paths are private equity, investment banking, sell-side research, management consulting, and trading.
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  • This might surprise some, but private equity associates and investment banking analysts are preferred over sell-side research.
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  • Private equity associates/analysts: showcase your transactions as a principal investor, and address the question of why you want to switch to a hedge fund if you are already on the buy side.
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  • Investment banking associates/analysts: walk through your deals and demonstrate that you have strong modeling experience. At the same time, talk about the merits and risks of transactions, to show that you understand the investment rationale and haven’t been too “into the weeds”.
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  • Sell-side research associates: talk about your coverage universe and demonstrate expertise in your space. Give examples of your dedication to the craft – walk through your client interactions, particularly during earning releases.
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  • Management consultants: tout the breadth of your strategic and operational experience by presenting a project or two on how you made an impact on your client’s business. On the flip side, proactively give examples of your modeling experience by going through a company forecast.
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  • Traders: you live and breathe the markets every day, so give the interviewers your take on the current market conditions and the trades you’ve done. Stand out by walking through a company or two in terms of investment thesis and risks, and talk about their relative valuation.
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  • Part 2 of the article will focus on other paths to getting into a hedge fund, which prizes talents with specialized knowledge and skills.
 

Join the discussion 2 Comments

  • Arjun says:

    Hi Kelvin,

    Thanks for this great article!

    How long should someone spend in investment banking, and then how long in private equity, in order to end up at a hedge fund? So, what is the optimum time frame for each progression?

    Thanks again!

    • Hi Arjun,

      The “most optimal” path is to spend 2 years in investment banking and then go to a hedge fund. Which means you should start job searching for hedge funds a year into the investment banking program. If you want to do PE before HF, the optimal time to spend there is also 2 years. It takes at least 2 years of experience to truly get a handle on the fundamentals of that job.

      But most of the time, people won’t get to a hedge fund following the most optimal path. Each person’s situation is different. Here’s the article on investment banking to hedge fund to get a firsthand account on a real case of “the path”.

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