Hedge funds are a class of investment vehicles that use pooled funds and employ a number of strategies to earn an active return, commonly known as alpha, for their investors. Unlike an active portfolio manager of a mutual fund, hedge funds often cater to higher net-worth individuals and organizations and may invest in several different asset classes including alternative investments, and engage in strategies other than holding long positions. Hedge funds may also partake in derivatives markets.

A hedge fund analyst is somebody that does quantitative research in order to identify the assets to trade with the fund's money that adheres to its trading strategy and mandate. Analysts may research individual securities, market sectors, macroeconomic trends, or all of the above. The analyst will then pass this research over to the trading team or portfolio manager who will execute the trades as they see fit. Below, we go over some typical job roles and duties as well as what a hedge fund analyst could expect to earn on the job.

Key Takeaways

  • A hedge fund analyst is tasked with providing guidance to a portfolio manager on how to best structure the hedge fund's investment portfolio.
  • A hedge fund analyst works for a hedge fund, as opposed to another type of buy-side institution. With hedge funds, alternative asset classes, derivatives, and short or delta-neutral strategies may be used.
  • Hedge fund analysts are tasked with finding investment opportunities based on research and due diligence, recommend them to portfolio managers, and then monitor risk and performance.

Identify Potentially Attractive Investments

A hedge fund analyst continually stays up to date on a wide variety of financial news, macroeconomic trends, and market forecasts. To accomplish this, a hedge fund analyst is required to spend time reading about these items and hold meetings or calls with experts, both internal and external, who provide insight into these types of market forces.

The analyst utilizes this information to form an investment thesis that can be used to identify a specific company's stock/bonds that might serve as a potentially attractive investment opportunity.

Provide Detailed Research on an Attractive Company

Once a specific stock/bond is identified, the hedge fund analyst begins their research, which will help lead to an investment recommendation for the portfolio manager. This research entails examining the current and future financial well-being of the company that issued the stock/bond, gaining an understanding of the company's current and future standing within the industry in which it competes; exploring potential market and economic factors that could affect the company in the future; conducting a wide variety of financial analysis of the company to uncover the company's actual valuation; finding reasons why the actual valuation differs from the market's perceived valuation; assessing risks to the actual valuation; and identifying potential company-specific risks of which the market is currently unaware.

The hedge fund analyst uses the information provided by this detailed research to craft an investment recommendation on the company's stock/bond.

Deliver a Recommendation to the Portfolio Manager

Once the hedge fund analyst completes his or her detailed research analysis, an opinion is formed on the best course of action regarding the company's stock/bond. A brief yet thorough recommendation is crafted and then presented to the portfolio manager that outlines the best course of action and any major findings from the research used to come to this conclusion.

Monitor Companies that the Fund Invests In

Once an investment in a specific company's stock/bonds is made by the portfolio manager, the hedge fund analyst continually monitors the respective company for any indications that the information used to craft the initial investment recommendation might no longer be relevant. When such an indication occurs, the hedge fund analyst once again conducts research to provide an updated course of action to the portfolio manager.

Hours and Salary

A hedge fund analyst can expect to work hard and be rewarded for doing so. People with this job title will tend to work 12+ hour days - or 60-70 hours a week, and weekends may be necessary in certain instances. Compensation will also be high, surpassing $140,000 base plus bonuses that can double that level of income. Hedge funds are also known to provide generous perks and employee benefits to its team.

The Bottom Line

The type of detail necessary for a hedge fund's success requires a hedge fund analyst to perform a number of jobs on a regular basis, such as initial identification of a potentially attractive investment in a company's stock or bond, detailed research on the company's securities and a thorough recommendation of action the portfolio manager should take in regard to the company's stock and bonds.

Additionally, once an investment in a company's stock/bond is made by the portfolio manager, it is the job of the hedge fund analyst to continually monitor the company's stock/bond to see if any changes in investment strategy are needed.