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How To Become A Hedge Fund Manager
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
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.
sounds a little complicated but there are plenty of administrative services that could put this set-up together for you for
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
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 2annual fee and 20of 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\'.
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.
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.