We will continue with our second guest post ever by our of our clients. This client named Dylan is a 16-year-old high school sophomore who managed his own account as well as both his parents’ retirement accounts. Dylan wants to be a hedge fund manager one day and wrote an awesome post about how to become a hedge fund manager. He is well on his way as in 2016 he returned 23% for his account, 14% for his dad’s IRA, and 17% for his mother’s IRA. Go, Dylan!
How to Become a Hedge Fund Manager
If you follow the financial news at all, you are probably no stranger to the term hedge funds. In fact, these days, these offshore investment funds seem to be the buzzword, especially when it comes to lucrative jobs. So what is it that makes hedge funds or a career in this field so attractive? Well, it is no secret that the owners and managers of hedge funds earn in the hundreds of thousands, if not in millions. Not surprisingly, plenty of people are interested in getting a foot in, whether it is through investing in these funds, or through running and managing these funds.
If you’re one of the latter and are interested in learning how to become a hedge fund manager, this article is what you’re looking for. I’m sure you’ve heard all those dazzling tales about hedge fund managers earning upwards of $2 million annually, depending upon the year, of course. I’m also sure that you can’t wait to get started. That’s great! However, apart from your enthusiasm, you’re going to need a lot more if you want to become successful in this field.
The first thing you need to know about this field is that there are a lot of hedge funds actively running these days – around eight thousand or so, in fact. However, out of these, only 5% achieve the kind of success everyone dreams of.
The next question is obvious – what does a hedge fund manager do? Well, a hedge fund manager is basically someone who manages assets and is specialized in reducing the risk to your investments, without letting this reduction affect your returns. There are a wide range of investment opportunities and assets in hedge funds that such managers create – bonds, stocks, securities, and futures. A hedge fund manager may work with an individual who has a huge amount of assets or with large companies. Their goal is always the same – to bring in profit, regardless of whether the market falls or rises.
Therefore, without further ado, here is how to become a hedge fund manager – a successful one, obviously.
Step 1 – Be Very Certain
Being a hedge fund manager is no walk in the park. The first thing you need to do is to be absolutely certain that this is the career path for you. Stop, consider, and then consider some more. It is not easy to learn the tricks of this trade and you will go through a lot as you try to make your way in the financial world. You will need to work hard and be disciplined and determined if you want to be able to handle all that you’ll face. You also need to be absolutely sure that you want to work for a hedge fund and not for an ETF, a mutual fund, or a private equity fund. In addition, to all these points you must be very honest with yourself about whether you have the skills and qualities a hedge fund manager should have – passion for the stock market, dedication, financial acumen, conviction, confidence, credibility, and reliability. All this is the absolute first step in how to become a hedge fund manager.
Step 2 – Get the Necessary Qualifications
There is a lot of learning involved in becoming a hedge fund manager. First and foremost is the matter of educational qualifications. You’ll get different advice from different people – some telling you that specific qualifications aren’t necessary and others that you do need some degree or the other. The best thing to do is play it safe and get a good degree in a numerical discipline, preferably from a prestigious university. A Master’s Degree in Finance, a Chartered Financial Analyst credential or a Chartered Alternative Investment Analyst credential should be good to be going on with. You basically cannot get a foothold in the finance industry much less hedge fund management without the necessary educational qualifications. This becomes the second practical step in how to become a hedge fund manager.
Step 3 – Prepare Yourself
Hedge fund management is a field in which educational qualifications can only take you so far. You need to be prepared in a practical sense. You can do this by subscribing to hedge fund reports and news and studying them. Joining a local hedge fund club or association is even better. Know your basics and study the greats – their strategies and their methods. Figure out how you can emulate them and be prepared – as many of their stories will tell you, you will need to be patient. Fortunately, a lot of the literature you need such as newsletters and reports are free of charge so you don’t have to spend a lot to learn about this field.
Step 4 – Strategize
Prior planning never hurt anyone and if you want to break into the field of hedge fund management, it is certainly going to be one of your best friends. One of the strategies that some of the most successful hedge fund managers have used is the Three-Circles Strategy, first propounded by Jim Collins in his 1995 book ‘Good to Great’. The strategy is fairly simple – draw three circles that intersect. In the first circle, write down all the ideas you are passionate about. In the second circle, write down the ideas that take advantage of your education and experience and in the third circle, write down all the ideas that are highly profitable. Then look at which of these ideas fall inside the intersection. This is one of the most efficacious strategies to ensure that your career in hedge funds is successful.
Step 5 – Identify a Career Mentor
If you truly want to know how to become a hedge fund manager, a career mentor is someone you absolutely must have on your side. When you start exploring the world of hedge funds through your studies, research, and strategies, you will also need to identify one or more people in the field that you can build a mentor-mentee relationship with. Again, patience is a virtue here. It is not easy to build a relationship with a mentor – like any other relationship it requires time and commitment. However, you are lucky in the fact that plenty of successful people are willing to help out novices in this field. Your mentor will be impressed if you show patience, commitment, humility and a willingness to learn.
Step 6 – Get Some Experience
As I mentioned earlier, you will need to learn to be patient. The fact remains that you need some experience before you can become a hedge fund manager. In fact, everyone, even the ones who tell you that you need educational qualifications, will be quick to point out that you need to have hands-on experience to supplement those qualifications. You can’t jump to being a hedge fund manager straight away. You need to start smaller. Begin by taking up internships, preferably in the same organizations that your mentors are in. If you are already working full-time at another job, you will need to commit an additional six to ten hours a week to doing an internship at a hedge fund. From there you can build up to a full-time job with the hedge fund. The rewards will more than compensate for the time and energy you put in. Even those six to ten hours can show you how a hedge fund operates or how it creates trading ideas. If you aren’t already working, you can take up a job as a trader or analyst in a hedge fund to get some hands-on experience. This is a step you cannot and should not avoid in your journey of how to become a hedge fund manager.
Step 7 – Draw up a Business Plan
So, let’s look back. You’ve got the necessary qualifications, you’ve done your own research and studies in the field, you’ve built up relationships with potential peers and you’ve gotten yourself some experience. Now you need to take the plunge. Draw up a proper business plan. Doing this is going to help you in many ways. First and foremost, you will know how much money you will need to start. The next thing you will learn is how many employees you will need to hire – if you’re planning to hire any at all. The third thing you will be able to identify is the niche that you can occupy. If, for example, you want to hone in on retail stocks, then do some additional research and publish a few white papers on the subject. A business plan helps you clarify your goals and the paths you will need to take to achieve those goals.
Step 8 – Set Up the Marketing, Legal and Brokerage Aspects
Just like any other business, a hedge fund needs a good marketing plan too. After all, you do need to generate sales. If you set up a good marketing plan right in the beginning, you are one step closer to making your business a success. Decide upon a name and a logo for your company. Next, create a presentation that tells potential investors why investing in you and your company will be profitable for them. Also, attend to the small details such business cards. While you’re doing all this, don’t forget the legal aspect. The best thing to do is to hire a reputed hedge fund lawyer who can help you settle legal matters that you have no expertise in and also help you build your network. In addition, ensure that you have hired a prime brokerage, which can help you get the seed money you need and work the business. Don’t be hasty and choose the first one that comes along. Make sure that you meet with quite a few and select one that can understand your needs and handle them. This is important if you want to know how to become a hedge fund manager.
Step 9 – If You’re Looking For a Job…
This point is for those who don’t want to start up their own hedge fund but are looking for jobs in other companies. While each hedge fund specializes in different fields such as coffee, gold, health care, oil, oranges and foreign currency, there are a few common skills or qualifications that all hedge fund employers are looking for. They will want to know information such as how much money you made for your previous firm, what your education is, any extra qualifications you might have such as asset-gathering ability or an expertise in PR, any CAIA, CFA or CHA (Chartered Hedge Fund Associate) credentials, names of high quality from the last few hedge fund jobs that you did and whether you are going to be alright with a bonus compensation/high commission pay structure.
Step 10 – Go for the Hedge Fund Job that wasn’t Advertised
Instead of only circling the advertisements in the newspaper or relying upon job portals and other such resources, turn to online Chamber of Commerce listings and start making cold calls to firms and companies that are engaged in the hedge fund business. You can also network through the Hedge Fund Association or HFA, the Hedge Fund Group or HFG, the local CFA society or the HedgeWorld Service Provider Directory. Actually, a job hunt in this field isn’t very different from job hunts in other fields. It is a good idea to attempt to set up informational meetings with two administrators, four or five prime brokerage firms and around fifteen to twenty portfolio managers and hedge fund analysts. Tell them who you are and of your interest in the field and ask them if you can pick their brains about this field over a cup of coffee (or lunch, if your budget allows for it). At the end of the meetings ask for more names who can answer some more questions and voila – your network grows.
Remember that most hedge fund firms and companies are looking for someone who is dedicated, eager to learn and sharp when it comes to the stock market. Cultivate these qualities and follow the steps I have given above and you should be able to forge a successful career as a hedge fund manager.
Great job Dylan! You, my friend, are well on your way. Not only have you beaten the market in 2016 but you have also taken the time to learn a few of the steps of what it takes to start and manage your own hedge fund. Myself, and all of our clients and readers will be on the lookout for you in years to come!