Hedge fund: definition and how to break in it?

Hedge funds first appeared in the United States at the end of the Second World War and were made popular by films such as The Big Short. Even today, hedge funds fascinate as much as they question... Quintessence of capitalism and speculation, and the main culprits of the subprime crisis for some, true experts in alternative finance and value creation methods for others. Let's take a look at these structures that are gradually opening up to the public and attracting more and more young graduates who want to make a career there.

What is a hedge fund ?

A hedge fund is a system in which private investors (limited partners), most of whom are very wealthy, contribute funds that are managed by professional managers with the sole objective of maximizing profits while minimizing the risks incurred.

To do so, the mandated managers implement different investment and trading strategies, mainly on the public markets (unlike private equity, for example). Although the different funds develop independent strategies by investing, for example, in long or short term, vanilla or structured products, they all have in common the objective of extracting themselves from market fluctuations. In other words, these funds aim to achieve performance on their assets whether the market is rising or falling. Hedge funds take their name from this specificity, as they originally invested in a wide variety of products, sometimes in contradiction with each other, in order to "hedge" against sudden movements in the financial markets.

How does a hedge fund work in practice ?

Based on their research and analysis, the various fund managers propose a well-defined investment strategy to the limited partners that must be respected. Unlike more specific areas such as private equity, which will (practically) only invest in the capital of unlisted companies, hedge funds have the freedom to invest in almost any type of product, whether financial or not. However, there are many strategies specific to hedge funds. These include

•  Global macro: this strategy simply consists of following market trends and taking positions based on macroeconomic analyses and projections such as inflation, growth or interest rates.é

•  Long-Short Equity: the objective of this method, which is very common among hedge funds, is to take advantage of assets that are considered undervalued or overvalued, by buying the former or selling the latter. The managers' objective here is to "arbitrage" market anomalies.

•  Emerging countries: this type of fund, among the riskiest due to the volatility of these types of markets, consists of investing in markets considered promising and little influenced by the global economy.

Read more: Venture Capital : definition, remunerations and recruitement

Who are the main players in the field of hedge fund? 

Among the most renowned players in the sector, there is an overwhelming Anglo-Saxon domination with Citadel, Two Sigma, Bridgewater, Millenium, Point72, The D.E. Shaw group, and even (to some extent) Blackrock.

In Europe, although the United Kingdom and Germany clearly stand out for the number of hedge funds, France has a few major players (who are recruiting!). We can mention Capital Fund Management (CFM) and its 6 billion AUM, One Eleven Capital, or BDL Capital Management.

How to break into hedge fund industry? 

Unsurprisingly, the world of hedge funds is difficult to enter, perhaps even the most difficult of all financial activities. The astronomical remunerations that are charged contribute to this, but are far from being the only valid argument. In fact, fund managers' jobs are still market finance activities, so the working day is roughly based on the opening and closing hours of the markets, and it is not uncommon for a fund manager to finish his day at around 6pm.

While hedge funds were still relatively closed a few years ago and recruited the best profiles from the world's largest investment banks on a piecemeal basis, they are gradually opening up by offering summer internships and associate programs.

However, there are some essential criteria that must be met in order to join one of the funds mentioned above.

•  Academic background: a degree from a top engineering school with a specialization in quantitative finance, data science or machine learning is still the most important requirement. A business school with a specialization in market finance and (ideally) a double degree with an engineering school may also be relevant. The famous "El Karoui" and "M2MO" masters at the University of Paris-Diderot are also the royal road for all those who are destined for the hedge fund quant profession.

•  Work experience: as mentioned above, joining a hedge fund right out of the gate is technically possible, but very (very) difficult in practice. The best option is to work in investment banking for 5-10 years and thus acquire the market experience that funds are looking for.

To sum up

Hedge-related jobs are particularly interesting and stimulating, and require such a technical and theoretical background that it is often difficult to get into them straight from school. By choosing the right career path, the right experiences and by showing a real interest in the business, you will be able to make your way in this very closed but no less exciting world!