Hedge Funds: The Basics Explained

You have probably heard the term ‘Hedge Funds’ in passing but may not have understood what it actually means. So, what are hedge funds and how do they work?

Want to know what makes this type of investment different? keep reading and to learn more about the skills and knowledge that’s needed to start a career in this area. 

Hedge Funds are a portfolio of alternative investments of funds that are not dependent on the market going up or down. They are market neutral and can be stocks, bonds, unregistered securities, or futures, but the aim of hedge funds is to get a high return on investments. 

Put simply, hedge funds are a fund of funds (pools of money from differing investors) used by hedge fund managers, sophisticated investors, and groups of accredited investors who want to reduce the risk of losing money. The team of individuals who form and decide on investment strategies are known as the general partners.

Hedge funds and mutual funds are both used by institutional investors through a pool of funds by accredited investors. However, whilst mutual funds are offered to the public for trading, hedge funds are private investments only available to accredited investors. 

Hedge funds are also unique due to their 2/20 fee structure, with 2% management fees covering investment vehicle operating costs and performance fees (also known as incentive fees) which is a 20% bonus for higher returns.

Hedge Fund managers focus on reducing the risk of your investments and bringing about positive returns regardless of the current market status. 

They do this by finding and creating a portfolio of alternative investment opportunities (hedge funds). They are often attached to specific organisations; however, they also work with high net worth individuals and real estate. 

Liquidity has also been a high concern for hedge fund managers since the 2008 financial crisis, and good liquidity management can lead to successful hedge fund management. 

Tasks of a hedge fund manager include:

Hedge Fund Managers will need to have an undergraduate degree, usually in a financial, business, or numerical subject. Many companies also prefer candidates with a master’s degree in a relevant discipline. If you’re a recent graduate or student, you can look into courses that give an overview of hedge funds, such as the Hedge Fund Intro Series.

Following the academic requirements, some graduates undertake internships or short positions at local financial firms allowing them to gain hands-on experience in the industry and apply their theoretical knowledge to the real financial world.

After an internship, those who want to become managers will need to work their way up through work-based training. When the internship is over, many companies will take interns on for entry-level positions such as traders or analysts, and as they gain more experience, knowledge, and skills, they can work their way up through further training.

Don’t worry if you are interested in getting into the hedge fund industry but don’t have any financial qualifications. There are other routes into the industry, so do not give up just yet.

If you have completed a Bachelor’s in an unrelated discipline, you could do a master’s in a financial or business field. When applying, ensure that you emphasise your passion, interest, and knowledge in the subject. You can also take online courses such as the Henley Executive Hedge Fund Programme to give you a leg up.