Most people believe that hedge fund managers make a lot of money. Well, this is not just a myth. In the financial industry, bankers, those in the financial markets, and related job titles are generally well-off than those in other industries. However, hedge fund managers are right at the top of the pyramid. This is not unrelated to how tasking their jobs are.
The typical hedge fund investor has to not only find investors but will need to put investor funds into viable investment opportunities. Some hedge fund managers oversee billions of dollars’ worth of investments. Thus, it makes sense that their cut is on the high side. Also, a typical hedge fund manager takes risks. Jim Simons, for example, founder of Renaissance Technologies, is well-regarded for his earning streak for clients. But this does not come without its risks. Thus, hedge fund managers who stay focused and manage not to lose money for clients rake in some astounding profit at the end of the day.
That said, becoming a hedge fund manager is an exciting way to make a high income. Hedge fund managers earn more than the average worker in the United States. This discussion focuses on hedge fund managers, what they do and how they earn money. If you are a person who would not mind being paid to take risks for clients, then you are in the right place. So, how much do hedge fund managers make? Let’s find out!
What Do Hedge Fund Managers Do?
To understand who a hedge fund manager is, you have first to learn what a hedge fund is. A hedge fund is a fund that pools money from different investors to put into any investment.
A hedge fund manager, hence, is a person responsible for managing the hedge fund. They design a strategy and typically invest in stock and other securities. In addition, most hedge fund companies invest in mutual funds. This is because it is an investment pathway that utilizes funds from different investors.
Hedge fund firms are not allowed to source funds from the public. Hence, they typically have to find investors through non-public means. What this implies is that a hedge fund cannot advertise or offer its shares to the public.
A hedge fund is not subject to as much regulation as other investment pathways. Thus, it is riskier. However, this also means that individuals who manage hedge fund assets make more money than regular analysts.
To be a hedge fund manager, you need to get a bachelor’s degree. Starting your education in an area such as accounting, finance, or economics gives you a head start. Most companies will not require you to have a master’s degree, especially at the entry level. However, if you can, you should. An internship with a finance or accounting firm will also come in useful. All of these “extras” will make sure you make more than the average salary when you eventually start working in a hedge fund company.
Another factor that could get you a hedge fund manager job quicker than the average is certifications. Again, most firms do not stipulate this requirement when hiring recruits. However, most hedge fund managers always have certifications. Hence, you may want to bag a couple, just as a matter of regular practice. Some of the credentials to consider include the Chartered Financial Analyst (CFA), Registered Investment Advisor (RIA), and Certified Treasury Professional (CTP).
Finally, before you start managing hedge funds, you may want to cut your teeth in some other area of finance at the start. For example, jobs in accounting, asset management, and investment banking could better prepare you to become an analyst. You could even decide to become an investment advisor, working with select clients. All of these will ensure that when you eventually get your dream job as a hedge fund manager, you will have the experience required to perform on the job.
How Much Do Hedge Fund Managers Make?
Hedge fund manager salaries are pretty impressive. In 2020, for example, 25 of the highest-paid hedge fund managers made a combined salary of $32 billion. This is outside the bonuses they also earned within the period. Also, the estimate means that they earned more than 50% of what they did the previous year. The report puts Israel Izzy Englander at the top of the list with his $3.8 billion earnings within the period.
According to available labor statistics, the average salary of a hedge fund manager in the United States is $124 868. The average compensation moves up as the manager climbs the ladder. Also, from available data, San Francisco, Rhode Island, and Massachusetts pay hedge fund managers the best. Thus, the base salary a person could get in those locations will be typically higher than the average compensation a hedge fund manager gets in others.
How Does a Hedge Fund Manager Make Money?
A hedge fund manager earns money in two ways: from a performance fee or a management fee.
The management fee is the money the hedge fund manager gets for being responsible for clients’ accounts. It is calculated as a percentage of the money in the client’s fund. The usual practice is for the hedge fund manager to charge 2 percent. However, some top earners charge as much as 4 percent of the fund as a management fee. This can be charged either monthly or quarterly. It is from this that hedge fund managers run the day-to-day activities of their firms.
On the other hand, performance fee depends on how well the hedge fund does in the stock market. This is an incentive fee. Hedge funds use it to motivate managers to put their best into managing their accounts. A performance fee can run into billions and might even be higher than the average hedge fund manager’s salary.
Generally, a hedge fund compensation system operates a 2/20 pattern. Hence, the hedge fund manager earns 2% of the funds in the hedge funds as the management fee and 20% of the profit as a performance fee.
In most cases, how much the hedge fund manager gets paid depends on how well their clients’ funds flourish. Thus, a manager whose hedge funds did not make a profit during a particular year can expect not to earn as much as they would normally. Moreover, the amount of compensation the hedge fund manager gets also depends on the number of people paid. Apart from the managers, every other person who works for the hedge fund firm, an analyst, will get paid from the performance fee and management fee the hedge fund manager earns.
How To Become a Hedge Fund Manager
People are often on the search for the perfect hedge fund manager. Unfortunately, while there are many hedge fund managers available, many are average. We show you how to be a focused manager to stand out from the crowd in the steps below.
Get the Prerequisite Education
As mentioned earlier, you should have at least a bachelor’s degree before you start on your journey to being a hedge fund manager. Getting a degree in a finance-related specialty will also get companies to take you seriously. Additionally, you may want to get other relevant certifications. You must understand that certifications will not necessarily mean that you wouldn’t lose money if you aren’t a fantastic analyst. In most cases, the certifications help instill confidence in the investor. They give the idea that the manager in question knows their stuff as it relates to securities and other similar transactions. If you can spare the money to pay for certifications, please do.
Decide on Your Investment Strategy
Investment strategies for managing hedge funds differ from one manager to the other. However, in most cases, the strategy will be what attracts the investors. As a hedge fund manager, you should be familiar with various complex investing techniques used in the industry. Thus, your business is to learn all the hedging transaction techniques, including short, medium, and long-term investment strategies.
Hedge fund managers typically have access to huge sums of money. The amount in the funds sometimes runs into billions of dollars. That is one of the primary differences between hedge funds and mutual funds. The manager also has a lot of leeways to invest the funds the way they see fit. Popular options hedge fund managers explore include futures trading and derivatives. In light of all that, it is essential for the hedge fund manager to pay attention to their investment style. If not, you could find yourself at a loss regarding what paths to follow to minimize losses to your client.
Get some Industry Experience
As explained above, it is generally more advisable to work for some time before going for a hedge fund manager job. A hedge fund manager is one of the jobs that you grow into. It is a precarious endeavor. Thus, successful managers are typically those with some experience in the field. This is because they can better estimate and gauge risks and then search out the best solution at any point. Theoretical knowledge can only go so far. It would be insufficient to effectively tackle the challenges that could face you as a hedge fund manager. To ensure you will be worth what you are paid as a hedge fund manager, gather some work experience before starting.
Polish Your Marketing Skills
Hedge fund managers that are paid the most are excellent salesmen. As mentioned, hedge funds are funded primarily through private means. They cannot sell shares directly to the public. Hence, a hedge fund manager has to pitch themselves to accredited hedge fund investors in most cases. Managing assets effectively is one thing; being able to convince another person of this ability is another. You will have a lot of convincing to do, especially if you are new to the financial markets. Thankfully, pitching your abilities to potential investors is the easy part. With some help, you should pick up the skills you will need on the job. If it comes down to it, you could even pay for a professional coach in that respect. The important thing is getting the knowledge and experience to manage hedge funds excellently. You can work out any other things later.
Conclusion: Hedge Fund Managers
Generally, hedge fund managers make good money. However, it will be helpful to know that a couple of things affect how well a hedge fund manager gets paid. First, the total compensation package could be influenced by the manager’s expertise, length in the industry, and ability to make quick returns. In other words, it is not every manager that will get as wildly successful as Chase Coleman or Jim Simons. However, with commitment, grit, and perseverance, you could be successful yourself.