A hedge fund manager is someone who, as the title would suggest, manages a hedge fund. A hedge fund is a fund that pools money from a group of investors to purchase certain investments. Since a hedge fund is subject to less regulation that many other investments, and is only available to sophisticated investors, it is riskier than many investments. Managers are subject to that risk s well. Here’s what you need to know.
What Is a Hedge Fund?
A hedge fund takes investments from so-called accredited investors, who are required to have a certain minimum income or net worth or investment education. Using these funds, a hedge fund manager purchases investments based on the fund’s strategy.
A hedge fund strategy may be designed to outperform the market by focusing on specific types of investments, or it may be designed to protect, or “hedge,” against a market downturn.
Hedge funds can invest in stocks and bonds, just like mutual funds do, but they can also invest in alternative investments like foreign currency, real estate and even fine art. They are restricted to raising money only by non-public means, which means they cannot offer the investment to the general public.
What Does a Hedge Fund Manager Do?
A hedge fund manager oversees the investments in the hedge fund’s portfolio, and must buy and sell investments in order to achieve the goals of the fund. Some of hedge fund manager’s duties include:
- Making investment decisions for the portfolio
- Performing trend analysis and market research
- Analyzing investment options
- Understanding the investors’ needs
- Offering investment advisory services to investors
- Communicating new investment products to investors
- Managing a pool of analysts, traders and accountants
- Reconciling investment values on a regular basis.
What Are the Qualifications to Be a Hedge Fund Manager?
To become a hedge fund manager, you need at least a bachelor’s degree – some companies will require a master’s degree – in a discipline like finance, accounting, economics or business administration. Internships with financial firms are helpful if you want to be a hedge fund manager.
Most hedge fund managers will start their career in finance, often with a brokerage firm or investment bank. Some will become financial advisors, offing advice to individual investors.
There is no requirement to be certified to be a hedge fund manager, but many managers have other certifications. Many will hold certifications like Registered Investment Advisor — RIA, Chartered Financial Analyst — CFA, Certificate in Hedge Fund Regulation — CHFR, or Certified Treasury Professional — CTP.
How Do Hedge Fund Managers Get Paid?
Hedge fund managers get paid in two ways. They earn a management fee, for managing the investments in the hedge fund portfolio. And they earn a performance fee, which is a percentage of the profit the hedge fund earns. The better the fund performs, the more money the manager makes.
A typical hedge fund compensation is what’s known as a 2/20 fee structure. Under this scenario, the hedge fund manager earns 2% of the assets in the portfolio as a management fee, plus 20% of the fund’s profits as a performance fee.
For example, if a hedge fund has $100 million in assets and had earned 10% in a given year, the hedge fund manager would earn $4 million. Of that $2 million is the management fee — 2% of the $100m in assets) and $2 million in the performance fee — 20% of the $10 million the fund earned.
How Performance Affects the Hedge Fund Manager’s Pay
Because the hedge fund manager’s compensation is at least partly tied to the performance of the fund they manage, running a hedge fund can be as risky as investing in one. A hedge fund manager whose fund has a bad year may find themselves taking a significant pay cut from the previous year.
The management fee and the performance fee pay the salaries of all hedge fund managers and their staff, so analysts and others who work for the hedge fund manager would also be paid out of this pool of money.
How Much Does a Hedge Fund Manager Make?
The highest-paid hedge fund managers are very well paid indeed. In 2020, the 25 highest-paid hedge fund managers made a total of $32 billion – an all-time record. Of those, 15 earned over $1 billion each, according to Institutional Investor’s Rich List.
- The highest-paid hedge fund manager was Israel (Izzy) Englander of Millennium Management, who earned $3.8 billion in 2020. His flagship fund returned 26% in 2020.
- Close behind was James Simons of Renaissance Technologies, who earned $2.6 billion. His flagship fund returned 76% in 2020.
Good To Know
Of course, not all hedge fund managers earn north of $1 billion per year. In fact, according to Indeed.com, the average hedge fund manager makes a paltry $62,614 per year.
Just as hedge funds are not the best investment for every investor, being a hedge fund manager may not be the best career choice for everyone. But for those who have an affinity for picking successful investments, and who can weather the inevitable ups and downs of the market, it can be an exciting and lucrative career.
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- Corporate Finance Institute. "Hedge Fund Strategies."
- U.S. News Money. 2021. "How To Invest in Hedge Funds."
- Corporate Finance Institute. "Hedge Fund Manager - Overview, Functions, Compensation."
- Indeed.com. "Learn About Being a Hedge Fund Manager."
- Street Of Walls. "How Do Hedge Funds Make Money?"
- Institutional Investor. 2021. "The 20th Annual Rich List, the Definitive Ranking of What Hedge Fund Managers Earned in 2020."
- Indeed.com. "16 Wall Street Jobs (With Salaries and Duties)."