Thought Leadership

Been trading for a while, ever thought of doing it professionally?

We are often approached by people who ask us if it’s possible to transition from being an independent trader/investor to working at a hedge fund or a proprietary trading firm.

The reality is that technology has allowed retail traders access to information, financial data, and trade execution that were once only available to a select few professional firms. This has contributed to the creation of an ever-growing number of people who have developed valuable trading and investing skills independently, and who could also put them to use professionally in a buy-side firm.

So…what should you do if you’ve been trading for a while and are now thinking of doing this professionally?

The benefits are well-known: Buy-side finance has some of the highest compensation levels of any profession in the world, and the jobs tend to be challenging and intellectually stimulating. However, cracking into the industry is no easy feat. (To learn more about buy-side vs sell-side, check out these articles by Mergers & Acquisitions and Investopedia.)

Everybody is unique and has different backgrounds and education/career trajectories, so, rather than an overall analysis of who hedge funds are looking for, we would like to focus on how you can use your trading experience to stand out.

Know your Style

Being a jack of all trades is not something that is generally viewed favorably in the industry. Hedge funds tend to be highly specialized. They may have a specific strategic approach (long/short, global macro, etc), a theme (tech, value, etc), a preferred analytical approach (fundamental, algorithmic, etc)… As a result, it will be much easier for you if you specialize in a specific trading or investing style before interviewing for a job. This refers not only to the products you generally trade (equities, options, futures, etc), but also the approaches you take. You should be able to discuss your strategic approach with the person interviewing you, and be able to give some concrete examples of how this was applied in real life.

Hedge funds work hard to avoid what’s called “style drift”, that is when they keep on changing strategies. Consequently, you should probably also avoid personal style drift and stick to one or two approaches that work for you. I’d rather hire someone who has, for example, been trading grain futures with a very specific approach for three years, than someone who has bought and shorted all the futures contracts available, hundreds of different options, and half the stocks on the S&P, without any rhyme or reason. That is not to say that having knowledge about different markets, products and strategies is a negative thing (on the contrary!), but if you’re talking about your personal trading strategies it’s best not to be all over the board.

Have a Track Record

In the age of Robinhood anyone can call themselves an investor or a trader. Buying a few stocks and currencies and a couple of call options do not make you one. You need to be consistent to stand out and your past performance can help you do this. You should be able to show a good track record (of at least around 18 months).

It doesn’t have to be perfect, nor should it have necessarily beaten the market. But you need to be able to explain why you did what you did, what worked, and what didn’t.

Good traders will try to keep track of what they do, so having something like a trading journal can be a great complement to the performance statistics that you can download from your brokerage platform. Hedge funds understand that daily profits of, say, 20%, are exciting but impossible to maintain, so they’ll be looking at the overall returns of your trading, for example over one year period. Returns of around 10% annually can be fine, especially if you can show how, while you were producing these returns, you had hedged your positions against possible market crashes, which would have allowed you to profit from a down market as well. Now, obviously, if your track record shows a loss of 76% then you’re better off not showing anything, and it may be better to take some time to gain some more knowledge before returning to the markets.

Lastly, your track record should have evidence of independent thought: If all your profitable trades have been purely due to successful trend-following momentum stocks (chasing up a stock like Tesla), it is unlikely they will see much of value other than a lucky streak.

Get Professional Mentorship

While the first two steps are important, the reality is that hedge funds and other buy-side firms receive thousands of applications and it is highly unlikely that they will want to hire a self-directed trader just on a good strategy and a track record. As we discussed in our previous article on hedge funds, they’ll be looking at your educational background, professional experience, and skills. If you have access to someone who works at a hedge fund, you should try to get under his wing and learn as much as possible.

But, if you’re like most people, that is not something that is easily attainable. Programs like TrendUp Now not only help you develop the necessary skills for these positions, but also connect you with professionals in the field that will provide you with personalized advice and possibly connect you with relevant opportunities.

Have Past Relevant Experience

If you do a quick job search for reputable hedge funds and other buy-side firms, you’ll see that most jobs require some previous relevant experience.

This is the classic catch-22 where if you can’t get a job you can’t get experience which makes it hard to get a job.

For some opportunities, you can overcome this by showing professional experience in any finance-related field, even if you were not in a trading or analyst role.

But the reality is that nothing beats a good internship at a fund.

TrendUp Now provides internship opportunities to its qualified students so by the time you apply for jobs in the field you have the relevant experience you need to quickly stand out from the rest.

Thought Leadership

Hedge Funds Part I: What Are They And Who Are They Looking For?

Ambitious people with an interest in pursuing a career in Finance often have different options available to them. After some research, one of the first questions they tend to ask themselves is,

“Should I work in the buy-side or the sell-side?”

In short, the sell-side is about developing and selling products (stocks, bonds, entire companies if you’re in M&A) to investors, making money from fees and sale commissions; whereas the buy-side involves making investment decisions to generate returns from your or your clients’ money. The sell-side tends to be dominated by investment banking, while the buy-side is dominated by hedge funds and private equity.

We’ve observed that, in recent years, going into investment banking has become the goal of many.

This comes a bit as a surprise as, in general, individuals with an entrepreneurial mindset are probably best suited for a career in hedge funds. In general, if you’re successful, the compensation in hedge funds is clearly superior to that of investment banking, and the hours tend to be more predictable. The work also tends to be more intellectually stimulating as there is less of a mechanical, hierarchical approach to tasks compared to those in investment banking. This is not to say some people can’t also thrive in the sell-side, but we’re just surprised that nowadays university students tend to gravitate towards the -generally less appealing- investment banking path as the ‘default’ Finance path. However, this is a relatively new phenomenon which actually creates big opportunities for those who want to explore the hedge fund path.

This phenomenon is due to the fact that the big investment banks have taken university recruitment seriously and it is not rare for them to come to college campuses and offer well-structured internships and summer programs. Interestingly enough, before Dodd-Frank’s Volcker Rule was passed as a result of the 2008 Financial Crisis, large banks also had proprietary discretionary trading departments, but, due to that regulation, this space has moved to buy-side firms because of the lighter regulation.  Essentially that means that it is now harder for students or recent graduates to access trading roles without having some sort of connection. At TrendUp, we bridge this gap and train and help interested candidates break into the harder to access, but exciting, high-paying careers of the hedge fund industry.

The history of hedge-funds is one of the investors seeking independence from institutional rules and government regulations: Hedge funds allowed investors a carte blanche to go after the best opportunities.

Today, it is a +$3T industry with more than 10,000 firms, of varying sizes.

Graph of ‘Value of assets managed by hedge funds worldwide’ by Statista

One of the most exciting aspects of the hedge fund industry is its huge diversity. For example, the funds will have different investment horizons: Some may put trades with a 10yr horizon, others, especially in the algorithmic space, maybe just for the next 10 seconds. Hedge funds also have a wide array of strategies: Long/short equity, market neutral, merger arbitrage, convertible arbitrage, event-driven, credit, distressed credit, fixed-income arbitrage, systematic, global macro, short only, etc. This means that it is not hard to find a hedge fund that matches a candidate’s specific personality or skill. However, if a candidate is unaware of what their skills and personality are and how that fits in the industry, they will have a hard time finding the right match. This is why at TrendUp Finance we have data analysts and fund psychologists working with us to assess our candidates’ skills and personalities so we can then match them with the most compatible positions in the sector.

The space is extremely competitive, so it’s important to be prepared when entering a hedge fund. The reason is that hedge fund operators look to deliver absolute -not relative- performance, in any type of market.

Hedge funds want to ‘beat the market’, not just ‘match it’, like other players in the financial industry.

As a result, it tends to attract ambitious people who want to advance fast. The result is a faster environment (major decisions can be made in hours) more creativity, more risk, and therefore huge money potential. It’s not like an asset management firm where keeping up with the market average is enough. In those firms, a new trader may have time to hone and develop his skills, but in the hedge fund industry it is quite more cutthroat and entrepreneurial, so having beforehand knowledge is a big advantage in order to avoid making costly mistakes and losing your seat. This is why TrendUp Finance trains its participants in hedge fund strategy and equity and derivative analysis so, by the time they apply for a position, the employer has the certainty that the candidate already has the necessary knowledge and skills to successfully contribute to their firm. Hiring the wrong person for a hedge fund position is extremely costly for the company and traumatic for the employee, so having TrendUp train, filter, and match their candidates with compatible positions is a win for all.

In general, successful candidates tend to have some of the following:

Personality Skills: Candidates in this industry tend to show reliability (you need to be able to show you can be trusted), strong work ethic (during intense times you need to be able to produce results efficiently), stress management (you need to be able to maintain a cold head if the market turns against you), effective communication (you need to be able to communicate your trading ideas to senior management or the market situation to the fund’s clients), and creativity (you need to come up with money-making ideas with attractive risk/reward scenarios, sometimes thinking outside the box).

Education: Long gone are the days where people without a college degree were able to enter the industry. Having a college degree is now seen as an essential requirement for most buy-side positions. In particular, hedge funds tend to look for

• Evidence of having successfully overcome the competition (for example, your class rank -top 20% for example-, even if it’s from a second-tier school).

• Evidence of strong ability/work ethic (your GPA, your school)

• Coursework in Finance, Economics, Math, Statistics, or Computer Programming

Mentors: Finding someone in the industry to mentor you is an extraordinary asset. Building those connections will allow you to not only learn directly from that person but also tap into their network. Getting a mentor is easier said than done, especially in such a competitive industry. Showing commitment, patience, humility, and hunger for learning can go a long way. By participating in the TrendUp programs you will be exposed to top professionals in the field, often in 1-on-1 settings, which can be a great way to start exploring a mentoring relationship.

Stand Out: There are many candidates applying to a limited number of internships and jobs in this industry. Standing out is therefore critical. Extra elements that make you different from your peers (published research, trading experience, background, etc) can go a long way. At TrendUp we work with our candidates to help them publish investment research and manage a portfolio.

All in all, if you feel you have some of these skills, and a career in Finance appeals to you, the buy-side in general and hedge funds specifically, offer you an exciting, challenging and highly rewarding opportunity, both personally and financially.