What is a Hedge Fund Manager?

A hedge fund manager is firm or an individual who manages, makes investment decisions, and oversees the operations of a hedge fund. Managing a hedge fund can be an attractive career option because of its potential to be extremely lucrative. To be successful, a hedge fund manager must consider how to have a competitive advantage, a clearly defined investment strategy, adequate capitalization, a marketing and sales plan, and a risk management strategy.

Key Takeaways

  • A hedge fund manager is a financial company or individual that employs professional portfolio managers and analysts in order to establish hedge funds.
  • Hedge fund managers typically earn above average compensation, often from a two-and-twenty fee structure from investors.
  • Hedge fund managers typically specialize in a particular investment strategy that they then use as their fund portfolio's mandate.
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Understanding a Hedge Fund Manager's Worth

Understanding a Hedge Fund Manager

Hedge fund management firms are often owned by the managers in charge of the portfolio, meaning that they are entitled to a large amount of the profits that the hedge fund makes. When entering into a hedge fund, investors fund the management fees that cover the operating expenses, as well as performance fees that are usually distributed to the owners as profit. What sets hedge fund managers apart from other types of fund management is the fact that the personal worth and funds of hedge fund managers are usually tied directly to the fund itself.

Individuals wishing to invest in hedge funds must meet income and net worth requirements. Hedge funds can be considered high risk because they pursue aggressive investment strategies and are less regulated than many other types of investments. 

Top hedge fund managers hold some of the most well-paid positions in any industry, far outpacing CEOs of major companies. Some of the highest-grossing managers make close to $4 billion a year. Hedge fund managers have the potential to be some of the highest-paid executives in the financial industry if they stay competitive and always come out as winners, however, some hedge fund managers do not make nearly as much as the top paid managers because if they fail at all in their financial endeavors, they will not be paid.

Hedge Fund Strategies

Hedge fund managers can use multiple strategies to maximize returns for their firms and clients. One popular strategy is using something called global macro investing. The idea is to invest in tandem with a large share or sizable position in markets that are dealing with predicting global macroeconomic trends. This type of strategy used by hedge fund managers gives them the necessary flexibility they need, but the strategy is heavily dependent on excellent timing.

Another popular tactic that has made multiple hedge fund managers billionaires is an event-driven strategy. This means that the managers are looking for large opportunities to capitalize in a corporate environment. Examples of this include mergers and acquisitions, bankruptcies and shareholder buyback initiatives. Managers working on this strategy are capitalizing on any market inconsistencies, similar to using a value investing approach. Hedge fund managers usually go this route because of the vast resources they have behind them.

Hedge Fund Manager Compensation

Two and twenty (or "2 and 20") is a typical fee arrangement that is standard in the hedge fund industry and is also common in venture capital and private equity. Hedge fund management companies typically charge clients both a management and a performance fee. "Two" means 2% of assets under management (AUM), and refers to the annual management fee charged by the hedge fund for managing assets. "Twenty" refers to the standard performance or incentive fee of 20% of profits made by the fund above a certain predefined benchmark. While this lucrative fee arrangement has resulted in many hedge fund managers becoming extremely wealthy, in recent years the fee structure has come under fire from investors and politicians for varying reasons.

Some hedge funds also have to contend with a high watermark that is applicable to their performance fee. A high watermark policy specifies that the fund manager will only be paid a percentage of the profits if the fund's net value exceeds its previous highest value. This precludes the fund manager from being paid large sums for poor performance and ensures that any losses must be made up before performance fees are paid out.