Hedge fund trading is one of the careers expected to grow by 4% and offer more than 18,000 job opportunities across the U.S. between 2018-2028. While hedge fund trading may be one of the best paying jobs in the market, there are no exact estimates on how much they earn.
Hedge fund traders on average make $82,731 annually, but the salary range falls between $26,000 and $163,500. Additionally, most hedge fund traders also enjoy a generous commission and bonus package. Factors like fund’s profitability, location, and size also impact a trader’s income considerably.
In this article, we will give you details on what a hedge fund trader does, trader salaries, and how to get into hedge fund trading. Keep on reading if any of these topics are of interest to you, and I promise you will find this article helpful.
IMPORTANT SIDENOTE: I surveyed 1500+ traders to understand how social trading impacted their trading outcomes. The results shocked my belief system! Read my latest article: ‘Exploring Social Trading: Community, Profit, and Collaboration’ for my in-depth findings through the data collected from this survey!
Table of Contents
What Are Hedge Funds?
A hedge fund is when different investors pool funds and use various strategies to earn returns. Unlike bonds or mutual funds, hedge funds are considered a long-term proposition as the money invested can be locked for years. Hedge funds do not need to register with the Securities and Exchange Commission. However, these funds are subject to prohibitions against fraud, and the hedge fund managers have a fiduciary duty to the funds they handle.
Hedge funds focus on making a profit by borrowing to increase risk and investment exposure. These funds also use speculative investment practices like short selling that you will not find in mutual funds. Hedge funds use biased performance data, and the managers do not have to report the performance numbers to anyone who is not a fund investor.
What Does a Hedge Fund Trader Do?
When various investors create a pool of capital and set it aside, it is known as a hedge fund. Portfolio managers or hedge fund traders use this amount to generate profits in financial markets. Their work is to trade different instruments like derivatives, debt, or equity to gain a profit.
A hedge fund trader executes the laid out strategies while considering the investment professional’s advice and following the investment plan. Entry-level hedge fund traders execute trades for senior analysts. Once they gain experience, traders can suggest a modification to the strategy.
Unlike proprietary traders that use an investment bank’s money, hedge fund traders use the investor’s money to trade. These traders get a percentage of the profits they generate, but they also charge a management fee covering the business cost. The profit is paid in bonuses to the traders, and in some cases, the profits are reinvested into the fund.
Although hedge funds are similar to mutual funds, the former has few restrictions on what they can invest in, and only accredited investors are allowed to do the investing.
How Does One Become a Hedge Fund Trader?
Getting into a hedge fund is no walk in the park as you will have to meet some requirements. If you like to study investments, market scenarios and have ideas on implementing investment ideas, you will have an easier time getting into hedge funds.
Becoming a trader is one of the ways to get into a hedge fund. Two types of execution traders exist– traders who execute others’ opinions and traders who generate new ideas and execute them. To get started as a hedge fund trader, you will need to have at least a bachelor’s degree. Although more senior traders also have a master’s degree in finance. You will also need technical skills in asset management, investment banking, and equity research.
Having previous experience in other jobs can also help you become a hedge fund trader. Many hedge fund traders have previous experience as operations specialists or equity traders, which gives the trader an edge.
After becoming a hedge fund trader, you can go ahead and become an investment analyst. Portfolio managers are at the highest rank and are the ones who instruct the traders to buy or sell.
The Average Pay of a Hedge Fund Trader
Hedge fund traders average $82,731, but the salary range falls between $26,000 and $163,500. For example, a hedge fund trader in New York earns an average of $87,761 a year, while a trader in California makes an average salary of $88,816 a year. The average pay may vary based on location, skill level, and years of experience.
You will need to spend at least five years as a hedge fund trader to become an analyst. The standard career path involves spending 2-3 years at an investment bank and 3-5 years working as an analyst at a hedge fund. During this period, one earns up to $300,000. The other route to becoming a hedge fund analyst is to continue in investment banking until you are ranked as the best analyst in the sector. You can then switch to a hedge fund analyst.
Once you progress and become renowned in the industry, you will start to manage money as a portfolio manager or junior trader. Typically, most traders begin their journey with $40-$200 million of assets under management. That means if you earn 10% returns, your salary range will be $0.5-$3.4 million per year. Failure to meet your target means you only get the base salary. In some cases, you may end up losing your job.
If you happen to lose money for over a year, you can be fired. The time you have will depend on the fund. Some firms will keep you in an operational role despite lousy performance at a fund.
Another thing to note is that you can get work at a smaller fund if you get fired from a prestigious fund. However, if you are fired from a less prestigious fund, you may have to go into a non-trading role or leave the industry. Although the fund’s total turnover differs, most trading roles will range between 10-20%.
The amount of money you manage can grow if you perform well as a hedge fund trader. Sometimes it may take a couple of months, while it may take a few years for others.
Hedge Fund Promotion Path
After working as a hedge fund trader for a while, you will be promoted to a hedge fund analyst. Note that the bigger the hedge fund, the more time it takes before you progress to the next position. It can take an analyst three to five years to become a senior analyst and another five to ten years to become a portfolio manager.
You may need to get a CFA if you aim for the portfolio manager position in a large hedge fund. The timeframe of your career can differ if you are working at a mid to small-sized fund.
In some cases, you could end up becoming a portfolio manager within five years if you are the first analyst joining a small hedge fund. However, this is dependent on whether the hedge fund is successful and manages to raise another fund. The high risk of joining a small fund can lead to a higher reward in a few years.
Author’s Recommendations: Top Trading and Investment Resources To Consider
Before concluding this article, I wanted to share few trading and investment resources that I have vetted, with the help of 50+ consistently profitable traders, for you. I am confident that you will greatly benefit in your trading journey by considering one or more of these resources.
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Conclusion
Working as a hedge fund trader comes with some perks in the form of high salaries and associated bonuses. A hedge fund career presents better hours than investment banking, high salaries, and various firm cultures and strategies.
However, to qualify for a job in this industry, you need to have multiple skills, the right temperament, knowledge, and the desire to keep learning and improving. Understanding this will help you determine if a hedge fund career path is right for you.
BEFORE YOU GO: Don’t forget to check out my latest article – ‘Exploring Social Trading: Community, Profit, and Collaboration’. I surveyed 1500+ traders to identify the impact social trading can have on your trading performance, and shared all my findings in this article. No matter where you are in your trading journey today, I am confident that you will find this article helpful!
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