When I was at J.P. Morgan, I thought about this debate along with most analysts around the bullpen. “What do you think it’s like working at a hedge fund vs. private equity?”
Venture capital and entrepreneurship hadn’t taken off then. Hedge fund and private equity were the 2 paths that seemed the most logical for those who wanted to stay in finance.
I leaned towards private equity. I was in distressed debt investing at the time working with private equity funds. They bought and sold distressed investments from us, which was very interesting work through the financial recession.
But after a while, the stress of bankruptcy negotiations and legal proceedings finally got to me. Having worked in the field for 3 years, I knew exactly what private equity associates did and what their career trajectories looked like. I wanted to get there.
So I applied to business school, with the goal of getting over to private equity.
I took on private equity internships every semester. I learned about the deal process, the investment committee meetings, and portfolio company operations.
Yet, after I had walked the walk, I ultimately decided to pursue asset management. Here’s why.
There are 4 reasons for my switch: the nature of the work, the lifestyle, the career trajectory, and the compensation structure.
Hedge Fund vs. Private Equity: the Nature of Work
Being an analyst in private equity is very similar to being an investment banking analyst for the most part.
The private equity work centers on deal transactions, which is as follows:
- Source deals through public auctions and private relationships.
- Conduct initial company due diligence.
- Forecast financial projections, develop upside / downside scenarios, and calculate rates of return.
- Draft investment committee presentation and get follow-up items
- Perform due diligence on follow-up items, potentially with a third-party consultant.
- Meet with investment bankers and private lenders to receive debt financing.
- Review and comment on legal documents.
- Close the deal and coordinate funds flow with banks, company and lawyers.
- Interview new management and board of directors (if the existing management is to be replaced).
- Help the CEO, CFO, Treasurer on company strategies, operations, and quarterly financial reports.
- Prepare the company for sale when company financial goals are achieved (the typical private equity investment holding period is 3-5 years).
As you go through this list, you see that the private equity work is more than just company research and valuation.
Research and modeling are essential parts of the private equity skill set, but quarterbacking the deal process with consultants, banks, lawyers will take up the majority of your time.
On the other hand, hedge funds don’t have the transaction work.
Hedge fund analysts focus on investing in liquid public market securities, which are bought and sold with just a couple clicks to execute the trades. Hedge fund analysts spend the vast majority of their time building industry expertise, doing company research, forecasting financials, and making investment decisions.
Analysts at hedge funds are expected to cover more companies than their private equity counterparts, and the research is done at a much faster pace.
Hedge Fund vs. Private Equity: Lifestyle
The nature of work between private equity and investment banking is similar. As a result, the hours and lifestyle are comparable as well.
Because private equity revolves around analyzing and closing deals, it’s all hands on deck when a potential deal comes along. When a company is being sold through an auction, private equity firms are competing against each other to make informed, timely bids.
The work is intense around the clock until the ink’s dry on the closing legal documents.
When you are a private equity analyst, you can expect to work on average 70 hours a week without active deals, and up to 100 hours when deals are almost closing.
On the hedge fund side, the work revolves around market hours. It can be just as long as in private equity depending on the culture of the firm. However, the hours are more consistent.
There are no deals to rush to the finish line. You can expect to put in a consistent 60 – 80 hours at a hedge fund.
There are still busy seasons on the hedge fund side. When companies release quarterly earnings, expect to stay a bit longer to analyze the new financials, adjust your models and revisit your investment theses.
Hedge Fund vs. Private Equity: Career Trajectory
The goal for both private equity and hedge fund analysts is to earn carry and get to the partner level. However, there’s a difference in the skills needed to move up the private equity vs. hedge fund ladder.
Let’s review what’s important to be successful in private equity:
- The ability to able to source good deals.
- Strong relationships with investment banks to get bank financing.
- Recruit good management for your portfolio companies and motivating them.
What’s the similarity among the 3 key factors? They all require having a strong personal network. To be successful, it helps to know the right bankers and industry professionals.
As a junior person at a private equity fund, you are responsible for the analysis and not so much the relationship building. But as you move up in the ranks, you will be expected to use your network to source deals.
So to get to a partner level in private equity, having a strong network is essential.
Relationships matter in all industries, but it matters more in private equity than in hedge funds.
On the hedge fund side, the end-all be-all is generating good annual returns on the portfolio. The deeper you know about your industries and companies, the more likely you’ll put up good performances.
Hedge Fund portfolio managers are expected to market the fund as well, so having good relationships definitely matter. But strong research is the foundation to market the fund effectively.
The path to partnership in private equity is also more structured than in hedge fund. You can expect similar titles and promotion timeframes in private equity as in investment banking.
At hedge funds, it’s hard to say when promotions happen, particularly from senior analyst to portfolio manager. Depending on your level of return and contributing to the portfolio, you can be promoted at much faster or much slower pace than your private equity counterpart.
Hedge Fund vs. Private Equity: Compensation
Private equity and hedge fund pay are fairly close if you are just coming out of investment banking. Both industries are competing for the same talent and need to offer competitive compensation to attract analysts.
The average base salary in private equity and hedge fund would be similar to 3rd-year analyst pay in investment banking.
A 3rd-year investment banking analyst typically makes about $90-100k in base salary.
However, your bonus in private equity and hedge fund would be slightly more than in investment banking.
A 3rd-year investment banking analyst would bring home $90-100k in cash bonus. As a private equity or hedge fund analyst, you can expect to get $100k+ in bonus.
Those are the starting figures. After a few years, the difference in compensation between hedge fund and private equity would begin to widen.
Private equity offers more consistent base and bonus increases. The time horizon of a private equity investment holding (typically 3 – 5 years) is a lot longer than a hedge fund portfolio position (typically as short as 3 months to 3 years).
Private equity’s longer investment horizon creates stability in pay for the investment team, and you can expect stable increases in your base and bonus compensation.
On the flip side, hedge fund bonuses can vary drastically year to year depending on your performance.
Your hedge fund base pay would see a stable increase, but the bonus trajectory will not be linear year over year.
You could rake in half a million dollars in cash bonus one year and then get nothing the next. It all depends on your performance and the fund’s annual performance.
This is a risk that’s tough to stomach. But for some people, it also creates opportunity. As a hedge fund analyst, if you excel at what you do, then you could take home million dollar plus bonuses before you hit 30. This is especially true for analysts at smaller hedge funds with higher AUM growth.
I chose asset management over private equity primarily because of the nature of the work.
As an investment banking analyst, “doing deals” had never been a huge appeal to me. I loved building industry expertise, learning about company dynamics, and making investment decisions. That’s why I chose to be a research analyst.
This is not a diatribe to convince you of a clear winner in the hedge fund vs. private equity debate. I hope it doesn’t come across that way.
Rather, I want to objectively compare the pros of cons of working in private equity vs. hedge fund for everyone to make an educated career choice.
Go with where your strengths lie. If you excel at deal management and relationship building in addition to company research and modeling, go with private equity.
And if you are like me, a nerd who’s super into tinkering with company trends and valuation, then join the dark side of hedge funds.