Next cohort (Fall'24) start date: September 28, 2024

Hedge Funds vs Investment Banking: What’s the Difference?

Among those who want to pursue a career in High Finance, a very common doubt is whether they should choose the Investment Banking path, or whether they should explore the buy-side instead (hedge funds, proprietary trading firms, family offices, private equity, etc). While the answer to that question will vary according to each individual’s profile, it’s important to clarify how investment banking differs from, in this case, hedge funds.

Investment Banking (IB)

If you choose to pursue a career in sell-side Investment Banking (IB) you’ll be assisting your bank in offering a range of services, namely equity capital raises, debt capital raises, issuing of new products, insuring bonds, facilitating M&As, helping with IPOs, etc. In short, you’ll be providing -and selling- a service to companies, buy-side firms, and other institutions.

What that means is that your main task will be to generate business for your bank and provide its clients with these products and services. Your day-to-day, especially during your first years, will be spent on tasks like modeling, working on pitchbooks, and other administrative tasks. You will often be dealing with several clients, and as a result, the working days in IB tend to be intense and long.

✅  IB – PROS

Pro #1

One of the big advantages of an IB route is that it is relatively easier to get into compared to hedge funds. This is mostly because investment banks tend to be bigger institutions that have the logistics to set up campus recruiting events, summer internship programs, and different outreach solutions. Their big size (think Goldman, JP Morgan, Morgan Stanley, HSBC; Deutsche, etc) means that they have many openings in their firm every year, and thus having the opportunity to interact with one of their recruiters, especially while still in university, is easier than in other fields. As it is the norm in High Finance though, the school you go to will matter, and students from non-target schools do not have it as easy, but the opportunity to try is usually there.

Pro #2

Starting salaries tend to be attractive, and higher than in other Finance fields. Career progression is usually relatively straightforward too, and it certainly allows for a financially comfortable, as well as relatively stable, career.

Pro #3

Due to the intensity of the work, having IB experience tends to signal to prospective employers that you’re a competent hard-worker, which makes it relatively easy to transition into other finance roles after a few years in IB. It’s also a good base from which to build a network.

❌  IB – CONS

 Con #1

The biggest disadvantage of working in IB is the grueling, long working days. 15 hour days are common, pulling all-nighters is often needed when deadlines approach, and working weekends is a more frequent occurrence than most would like.

 Con #2

The work is not necessarily the most stimulating. Especially early on, you’re tasked with endless modeling assignments and pitchbook preparation. These tasks can end up feeling quite mechanical and rarely are they intellectually stimulating. If you’re more of a creative or ideas person, IB can often feel limiting.

 Con #3

Despite the name ‘investing’, there is little actual investing and a lot of selling and capital raising. If you enjoy being engaged with market movements, coming up with investment ideas, strategizing trades, etc, you might be disappointed, as you’re more likely to spend your day working on modeling spreadsheets and client slide decks.


Hedge Funds (HF)

If you choose to follow the Hedge Fund (HF) path, you’ll be tasked with evaluating and researching investment opportunities. Your ultimate goal is to come up with ideas that can deliver ‘alpha’, i.e. superior risk-adjusted returns to your investors. Hedge funds come in all shapes and sizes, but your day-to-day will probably revolve around conducting investment research, pitching ideas to your Portfolio Manager (PM), sourcing and structuring potential deals, and, depending on the stage of the fund, preparing marketing materials for your prospective clients. Depending on the areas your fund operates you’ll need to be familiar with the ins and outs of them: equities, bonds, options, futures, debt, real estate, etc.

✅  HF – PROS

Pro #1

If you have a passion for markets and investing, working at a hedge fund will allow you to constantly be engaged. You’ll follow different markets, research opportunities, and use different tools to come up with strategies.

Pro #2

If you like coming up with ideas and you’re creative, hedge funds should be a decent fit, as you’ll have the opportunity to think about different actions that could generate a return for your clients. You’ll need to combine your creativity and out-of-the-box thinking with good risk/reward assessment and rational analysis. This can be a good way to test the power of your ideas, which is why it tends to be an intellectually rewarding job.

Pro #3

If you’re good, the compensation can be very, very, high. Unlike Investment Banking salaries, which tend to increase in a more moderate manner, compensation in HF can be virtually uncapped and can be in the millions (or billions for some managers) if your performance is good enough. In this regard, it is one of the most meritocratic, and financially rewarding, career paths available.

Pro #4

Work-life balance is significantly better in hedge funds than in investment banking. While there may also be some long days, working hours are generally shorter, all-nighters are much rarer and weekend work is infrequent (why bother if the market is closed anyway).

Pro #5

Given the wide array of different hedge and investment funds, it should be relatively easier to find one that matches your values, philosophy, and worldview. Investment banks, on the other hand, are much more homogeneous.

Pro #6

Many hedge funds tend to be less formal than investment banks and their workplaces are more casual. Unless you’re dealing directly with clients, many firms don’t require formal business attire, for example, so you can leave your suit and tie at home if you feel like it.

❌  HF – CONS

Con #1

Compared to Investment Banking, starting salaries are somewhat lower. This is because, generally, a big part of your compensation is linked to your performance so the pay is initially lower, until you’ve had a chance to prove yourself.

Con #2

The rise of passive investment through ETFs has hurt some funds in the past decade as, in this long-running bull market, returns have been similar or better in index-tracking ETFs than in some hedge funds (especially when taking commissions into account). That has reduced the number of funds and forced others to reduce their compensation). However, when volatility returns to the markets, the situation will likely revert back.

Con #3

A hedge fund is less stable than an investment bank because if the fund underperforms and clients lose confidence, the fund may close down and you may need to move to a new one.

Con #4

Perhaps the biggest disadvantage of hedge funds as a career choice is that access to them is very hard. Unlike Investment Banking, most firms in this space are small or mid-sized, with few employees, and thus do not have the recruitment capacity of the big IBs. Consequently, things like campus recruiting events, summer internships, etc, are a very rare occurrence in this field. Additionally, most hedge funds do not hire recent college graduates and prefer to hire someone with at least a couple of years of Finance experience. This is why a program like TrendUp Now’s L-Program can be extremely valuable, as we are able to offer hedge fund internships to the top participants of every cohort.

Breaking Into Finance

Regardless of which path you take to break into Finance (hedge funds, investment banking, private equity, proprietary trading firms, family offices, mutual funds, wealth management, etc), the knowledge, skills, and internship experience TrendUp can offer will clearly set you apart from 99% of all other candidates, dramatically increasing your chances to land your desired job.

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