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Home Page > Finance > Investing > How To Become A Hedge Fund Manager How To Become A Hedge Fund Manager Posted: Aug 17, 2008 | Views: 39,408 |
Becoming a hedge fund manager certainly has its perks... if you are successful. The King of the Hedgies is currently John Paulson who raked in £1bn for a years work shorting the sub prime markets and others certainly are not poor.
Can you do it?
The answer to that question is a yes and no. Just like it is possible for everyone to be a sports star. If you have the right physical capacity, the mental toughness and the commitment you can get to the top of your game, and of course, there is an element of luck in everything.
The first thing to know about hedge funds is what they are. There are many resources on the web that will go into chapter and verse but the simple explanation is that, typically, a hedge fund is a set up as a company, lets call it XYZ Ltd, which is set up in a tax efficient jurisdiction such as the Caymans or BVI, for example.
The company generally has two classes of shares (it can have more) one are mangement shares (so you own the company) and the other shares are investors shares (which carry no voting rights).
This company will have various service providers such as:
Prime brokerage: Prime brokers provide a range of customised services to hedge funds. Current services include handling trade execution, clearing and settlement, providing financing and technology services, risk management and operational support facilities, securities lending, and making introductions to sources of capital.
Fund Administration: Some hedge hedge funds conduct administration internally while others choose to outsource certain functions such as their accounting, investor services, risk analysis or performance measurement functions to third party administrators. Some outsourcers offer independent pricing of a fund's portfolio of securities.
Custody: Hedge fund assets are generally held with a custodian, including cash in the fund as well as the actual securities. Custodians may also control flow of capital to meet margin calls.
Of course there will also be a manager of the fund. Assuming you are the one looking to set the fund up, that would be you.
This all sounds a little complicated but there are plenty of administrative services that could put this set-up together for you for around $70,000.
The set up, however, is not the problem. Getting money into the fund is.
Lets say you have a fund set up, you have even managed to get yourself a fund management company properly licensed, you are ready to go as a newly fledged hedge fund manager. Problem now is that you have to get money into the fund and this is where your problems start.
The continuing fees from your administrators above are payable on an annual basis so your overhead is there. Covering these overheads will be the fees you get from your fund. Fees are the now notorious '2 & 20' meaning that there is a 2% annual fee and 20% of the profits.
Lets say your overheads are £100,000 per annum, you will need at least £5mn into your fund for the annual fee to cover your overhead. In anyone's language, that is a large chunk of change. To get this you will need to prove to potential investors that you know what you are doing.
Sarah Butcher, editor of eFinancialCareers.com agrees. "You can't just be someone off the street and set up a hedge fund," she says. "Investors want to put their money with someone who has a track record."
When speaking with investors you need to be able to show them your performance and the strategies you use. Gaining this experience is the key.
Going the traditional route you will either train with an investment bank or directly with a hedge fund company. Investment banks are looking for someone with a good degree, maybe in maths or physics, they want someone who is tough minded, a quick learner and someone who has the capacity to make trading decisions based around sometimes complex structures.
Finding your way directly into hedge funds can be hard, they are notoriously secretive. By far the more tradional route is through working as a trader with an investment bank.
So if you have missed the boat as far as becoming a new boy at an investment house are your dreams of becoming a hegde fund trader over?
Not quite. The thing about managing money is that people are looking for performance. If you can show a track record of performance then people will want to invest money with you. You clearly have to have the capacity for enjoying the stock market, so you probably have been buying and selling stocks but you will need to learn more about other market instrument such as futures etc.
You can do this by opening an account at a reputable trading house and downloading their trading system. They will provide you trade ideas and the explanations behind them and they will help you develop your portfolio operating on trades similar to what the hedge funds do. If you immerse yourself in this type of trading, making profits on your own portfolio, then you are creating a track record. If you are successful enough then you may get to the point where you believe you have the capacity to start a fund.
We are not saying it is easy, it most certainly is not, but not being a 20 year old with a first from Oxford does not necessarily limit your potential career as a fund manager. It is a long hard slog to get anyone to believe that you are credible but the rewards are there if you get to that stage.
The billionaire boys have spent years perfecting their art in most cases and now have the ear of huge amounts of money, but don't give up becuase you can't work in an investment bank.. remember 'money follows performance'.
If you would like to see if you have what it takes there are several platforms you can download for free and test out your skills. This online trading system is something you may want to consider if you are trading.
David Brown - About the Author:The author has spent 20 years in the financial services industry trading everything from physical commodities to futures. Currently writes for a variety of sites including online trading sites and general market information sites.
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Source: http://www.articlesbase.com/investing-articles/how-to-become-a-hedge-fund-manager-524909.html Article Tags: hedge fund manager, hedge funds, becoming a fund manager, investment, financial, money Related Articles Latest Investing Articles More from David Brown Emerging Hedge Fund Manager Sentiment Survey Declares Technology As Best Investment When asked where to invest in the U.S. stock market, hedge fund managers said that Technology (41.0%), Financial Services (31.2%), Consumer Goods (26.2%), Food & Beverage (21.3%) and Defense (21.3%) will be the best performing sectors in 2007. These results were released after VanthedgePoint Group Inc's second annual Emerging Hedge Fund Manager Sentiment Survey.
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