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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.

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