Step 1: Assess the Type of Hedge Fund You Want to Join
While a hedge fund typically means an investment vehicle open to a limited range of investors who pay a performance fee (typically based on returns of the fund and typically ~20% of returns) and an asset management fee (typically based on assets under management contributed and typically ~2% of assets), hedge funds employ a number of different strategies and each strategy type would require a different preparation method.
Typical strategies include:
- Global Macro - Top-down approach to investing and invests based on predictions of future events affecting the global economy
- High-Frequency Trading - Computerized trading approach. Typically makes money through speed of execution of trades. Industry is becoming more regulated and has been popularized in Michael Lewis' "Flash Boys"
- Long / Short Equity - Long positions deemed as favorable and short positions deemed as unfavorable. Hedge funds can have a net long, net short or an equity market neutral positions. Long / Short Equity can employ a number of different focuses:
- Can focus on either specific markets (established / emerging) or sector (healthcare, financials, telecom, technology, etc.)
- Growth (focused on earnings growth potential rather than current value) vs. value (focused on undervalued investments)
- Multi-Strategy can employ combination of different strategies
- Event Driven - Trade based on inefficiencies in anticipated corporate events
- Merger Arbitrage - Trade based on discrepancies in share pricings around M&A transactions
- Activist - Acquire large positions in inefficient companies and urge management to take radical change in order to generate shareholder value
- Distressed Debt - long / short debt of companies at or near bankruptcy and make money based on price discrepancies
Step 2: Research the Hedge Fund
Whether you are cold emailing or being referred to a hedge fund by a friend / head-hunter, one of the most important things to do is to understand the hedge fund to the greatest extent possible. Ask yourself the following questions and see if you can answer them based on publicly available information
- What strategy does the hedge fund employ?
- Focus your interview preparation on the right strategy.
- Who is the portfolio manager or senior analyst at a single manager fund I will be working for?
- Understand your bosses history, background, and reputation.
- Can help prepare some talk points to cater to his interests.
- What are the assets under management of the team you will be working for? At the hedge fund?
- How many investment professionals are there working for the portfolio manager? Investment professionals in total at the hedge fund?
- The above two questions can help gauge the size of team / hedge fund and potentially level fo compensation expected.
- How has the performance of the hedge fund been since inception on an annual basis?
- While historical returns will not dictate future performance, a reputable hedge fund that has been a strong performer historically over a number of years carries a more compelling reason to join the fund vs. a new fund or a fund with a volatile return pattern.
The single greatest component of a hedge fund interview is being able to pitch at least one long and one short investment idea. Typically, you would want to focus on targets that either have an internal (company specific) or external (macro / market) catalyst which will drive volatility in the share price of a particular stock in one way or another. Sources that you can use to identify targets to do further research on include:
- Seeking Alpha - Best website for investor information. You can find free write-ups regarding companies when you search by stock ticker.
- Motley Fool - Alternative website with investment idea recommendations and write-ups to explain why a particular catalyst is driving stock in one direction or another
- Street Insider and Wall Street Journal - Up-to-date macro and company-specific news to start building your thesis
- Value Investors Club - Hand selected membership to idea posting bulletin board
- Sum Zero - Another idea posting board that is less exclusive than value investors club