Investment Banking Vs. Hedge Fund Management - Financial Edge (2022)

Investment Banking Vs. Hedge Funds

Financial professionals view Investment banks and hedge funds as the most desirable employers in the industry. Both offer excellent career prospects, high compensation, and attractive exit opportunities.

While investment banking is a highly competitive space where only stellar candidates are hired, the hedge fund space is even more competitive. There are a number of reasons. There are far fewer jobs available and very high hurdles even for entry-level positions. While both careers require strong academic credentials and an aptitude for numbers, candidates are also expected to demonstrate solid communication skills. However, not everyone who joins a hedge fund has a degree in finance. Expertise in other sectors, for example, commodities or technology, can help land a position that demands specialist sector knowledge. Degrees in mathematics or physics are also attractive, given the highly quantitative nature of many investment strategies. Whether investment bank or hedge fund, don’t expect a 40-hour work week. Double that figure is common, but in return, the earning potential is significant, especially with hedge funds. In addition, both offer excellent exit opportunities when professionals decide to move into other areas.

Key Learning Points

  • Both career paths have some of the highest standards of any industry and require an aptitude for numbers, financial literacy, and strong interpersonal and communications skills.
  • Investment banks serve their clients by offering support, advice, and execution across IPOs, M&A, debt financing and broker execution.
  • Hedge funds invest client assets, and must generate investment ideas in order to construct and manage portfolios.
  • Hedge funds can offer eye-watering salaries, but only the most talented investors achieve that level of compensation. However, even junior hedge fund positions are extremely well compensated. It comes at a price though, with 60+ hour weeks the norm.
(Video) Investment banking vs hedge funds

What is Investment Banking?

Investment banks raise capital for a diverse set of clients, ranging from public and private companies to institutions and governments. When an investment bank structures a stock offering for a client, they may underwrite the issue (buying the stock from the company and reselling it in the market) or sell the stock through best efforts. In this case, the client bears the risk. Banks may structure bond issues, give advice on mergers or acquisitions, value companies, restructure businesses, or raise capital through initial public offerings (IPO) or secondary offerings. Investment banks typically have a brokerage arm through which they trade for institutions and private investors.

The day-to-day activities in investment banking are diverse and depend on the function and seniority of the role. Some positions include in-depth security research that serves as a basis for stock recommendations while others connect buyers and sellers and provide liquidity. The hierarchical structure varies across institutions, but typically new graduates start at the analyst level, while MBA graduates start out as associates. It takes a lot of hard work and 80-hour weeks to progress to vice president, senior vice president, and finally managing director. The work is challenging, the deadlines are tight, and analysts and associates may be tasked with working on specific deals on top of their regular workload.

Investment banks are classified according to size based on several factors, including trading volume, number of employees, and number of offices around the world. Banks fall into four categories – regional boutiques, elite boutiques, middle-market, and bulge bracket investment banks (smallest to largest). The latter include familiar names such as JP Morgan, Goldman Sachs, Citigroup, Bank of America, and Morgan Stanley, as well as HSBC and Barclays in the UK, French BNP Paribas, and Societe Generale, Switzerland’s UBS and Credit Suisse, and Germany’s Deutsche Bank.

What are Hedge Funds?

Like asset managers, hedge funds manage money for their clients through pooled vehicles (funds). However, unlike mutual funds, hedge funds employ sophisticated strategies and invest in complex products. Their objective is absolute return, regardless of the market environment (market neutral), and they do not measure performance relative to any benchmark index. Hedge funds are part of the alternative asset class and are riskier than mutual funds. They are available only to institutional investors and high-net-worth individuals.

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Despite performance challenges in recent years, institutional money managers have significantly increased investment in hedge funds. Although hedge funds are considered high risk,, they can actually help reduce portfolio risk since they typically have a low correlation to the broader market and offer diversification benefits. They invest in a broad variety of asset classes and use varying strategies like long/short equity, fixed income arbitrage, global macro, and more. They may invest in traditional asset classes such as equity and fixed income, but also in commodities, derivatives, private and real assets, art, and more. Common hedge fund clients include sovereign wealth funds, pension funds, insurance companies, wealth managers, and charitable organizations.. They are also known for charging high fees, often following the ” two and twenty models,” or 2% of assets under management plus a 20% performance fee. A thriving hedge fund can prove to be lucrative.

The hedge fund hierarchy resembles that of asset management firms. The structure is relatively flat. Portfolio managers are responsible for the overall management of the strategy and are supported by a team of analysts who generate investment ideas. Team sizes are normally dependent on assets under management, so the larger the size, the more employees are needed. However, hedge funds that invest based on quantitative models tend to require fewer employees.

As with asset managers, hedge fund managers meet clients on a regular basis and discuss the investment process, portfolio construction, positioning, and performance. Hedge funds are not subject to the same regulation and disclosure standards as mutual funds so the risk and compliance function structures may vary across different organizations. Some of the largest hedge funds include Bridgewater Associates, Man Group, Renaissance Technologies, and Millennium Management.

Education and Skills

When it comes to education and skills, both investment banks and hedge funds look for talented individuals who are numerate, articulate, knowledgeable in finance, and offer strong soft skills as well. While a bachelor’s degree is considered a prerequisite for both, many analysts choose to pursue postgraduate degrees such as a Master’s in Finance or an MBA after a few years of experience in order to advance their careers.

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Notably, most hedge funds require previous experience in investment banking, asset management, private equity, or another adjacent area. Even junior positions at hedge funds demand candidates with some experience. Take our online investment banking course, and get the same training as new hires at the top 4 investment banks. The course covers accounting, financial modeling, and valuation. Enroll in our online private equity course to master core technical skills, from in-depth financial statement analysis to structuring complex add-on acquisitions in a leveraged buyout.

Another way to demonstrate a higher level of competence is by obtaining professional qualifications. This route is popular with hedge funds as they require robust investment knowledge. Typical qualifications include the Chartered Financial Analyst (CFA) and the Chartered Alternative Investment Analyst (CAIA) designations.

In terms of specific skills, both roles require financial modeling, financial statement analysis, risk and performance analysis, as well as strong market knowledge. Hands-on experience with financial software is also often required, depending on the role, as is familiarity with popular data providers such as FactSet, Bloomberg, Morningstar, and Thomson Reuters.

Last, but not least, strong communication, presentation, and writing skills are essential. Our online business toolkit course will help you develop your presentation and writing skills to communicate effectively and build your brand.

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Hours and Salary

Lifestyle and work-life balance are a challenge in both careers. Investment bankers may work anywhere from 60 to 80 hours per week or even more, and often work at least one day on the weekend. Work hours at hedge funds vary and depend on market conditions. A work week of 50-70 hours is typical, although hours can vary.

Compensation for both career paths can be high. Entry-level positions for analysts at bulge bracket banks typically start from $90,000 with bonuses ranging (based on performance) anywhere between 50% to 100%. However, hedge funds typically offer starting salaries in the range of $80,000 – $120,000, depending on experience. Bonuses are highly dependent on the fund’s performance and may range as high as 2-3 times the base salary. After a few years of experience, investment bankers earn approximately $150,000 in base salary, while compensation at hedge funds may be significantly higher.

Exit Opportunities

Since both careers are intellectually demanding and recruit only top professionals, it is not surprising that there are attractive exit opportunities available to them. The financial expertise acquired working in investment banking is applicable in areas such as asset management, private equity, venture capital, and hedge funds. Investment bankers looking for a better work/life balance might consider asset management, while those seeking higher compensation may look toward private equity and hedge funds.

Turnover in the hedge fund industry is relatively high and can be attributed to the fund’s success. Many hedge funds fail to meet their objectives and shut down. Exit opportunities for hedge fund managers and/or analysts, apart from finding a role at another fund, include joining a long-only asset manager or venture capital firm, becoming a sell-side equity research analyst, or undertaking entrepreneurial projects.

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To learn more about hedge fund attributes, access the free download.

FAQs

Is hedge fund better than investment banking? ›

A hedge fund offers the product that high-net-worth investors purchase. An investment bank offers the services for how they can invest. A hedge fund offers people the chance to invest in a portfolio, with returns based on how well the portfolio's underlying investments do.

Do investment banks or hedge funds pay more? ›

It is all about sticking to the career you choose. If you stick to investment banking, in the long run, you will earn millions. But the payoff in hedge funds is much more. Your earnings may reach a billion dollars.

Who makes more money investment bankers or hedge fund managers? ›

The top individual Portfolio Managers can earn hundreds of millions or billions each year. Hedge funds offer a much higher pay ceiling than investment banking, (sometimes) better hours and work/life balance, and the chance to do more interesting work.

Is investment banking better than asset management? ›

Those seeking better work/life balance will prefer asset management, while private equity and hedge funds could offer even greater compensation than investment banking. Typically, turnover in the asset management industry is much lower due to the more attractive hours combined with excellent compensation.

Can investment banks own hedge funds? ›

Banks cannot own, invest in or sponsor hedge funds, private equity funds or other trading operations (subject to certain exceptions).

Is Goldman Sachs a hedge fund? ›

Today Goldman Sachs Hedge Fund Strate-gies has investment offices in New York, Princeton, London and Tokyo, and the group is one if the largest and most deeply resourced, globally deployed fund of hedge fund investment houses, allocating over $15bn to over 140 external hedge fund managers.

Who makes more IB or PE? ›

Both investment banking and private equity are well-paid jobs but the compensation ceiling is far higher in private equity than it is for investment banking. This explains why most investment banking analysts choose private equity as their exit option.

How much do investment bankers make in a lifetime? ›

Expected Lifetime Earnings: $4,172,000.

Do investment bankers get CFAS? ›

If you're just starting out in investment banking, you're probably going for a job as an analyst. This position demands great expertise in number-crunching and financial modeling, skills that are best imparted by the CFA program rather than an MBA.

What is the most successful hedge fund? ›

Bridgewater Associates

Bridgewater is the world's largest hedge fund, with about $150 billion in capital. Since its founding in 1975, Bridgewater has returned $52.2 billion in gains to its investors – more than any other hedge fund on the planet.

What is the biggest hedge fund in the world? ›

1. BlackRock Advisors. BlackRock (BLK) is a New York-based investment manager that manages trillions in assets. The largest BlackRock entity, BlackRock Fund Advisors, has been in operation since 1984 and oversees $1.9 trillion in assets.

How much do first year hedge fund analysts make? ›

Base salaries start at $100K to $150K, and your bonus could be a multiple of that salary… or a fraction of it, depending on performance. The average pay is comparable to what you'd earn by going into private equity right after banking, but the standard deviation is much higher.

Is investment banking and investment management the same? ›

Investment management is all about investment decisions and asset allocation. This means coming up with investment strategies and directing funds to property, equities, or debt securities on behalf of clients. Investment bankers, by contrast, are deal-makers.

Why is investment banking prestigious? ›

That said, investment banking is a highly competitive field. Because the pay is so high and the job is so prestigious, particularly in cities such as New York, applicants far outnumber job openings every year. Having the right skills and being able to display them is paramount for getting a foot in the door.

Why do I want to work in investment management? ›

5 reasons why investment management could be for you
  1. It's really interesting.
  2. You can follow your own interests.
  3. It's not just for number-crunchers.
  4. You'll earn a good salary.
  5. You don't have to go to university.
  6. Image credits.

Is IB a sell-side? ›

Sell side refers primarily to the investment banking industry. It refers to a key function of the investment bank — namely to help companies raise debt and equity capital and then sell those securities to investors such as mutual funds, hedge funds, insurance companies, endowments and pension funds.

Is investment banking buy-side or sell-side? ›

Investment banks, market makers, and broker-dealers are typical sell-side firms. They provide investment services to the rest of the market. Buy-side firms consist of asset managers, hedge funds, and other firms that buy or sell securities on behalf of their clients.

Who owns hedge funds? ›

Hedge fund management firms are often owned by their portfolio managers, who are therefore entitled to any profits that the business makes. As management fees are intended to cover the firm's operating costs, performance fees (and any excess management fees) are generally distributed to the firm's owners as profits.

Who is the highest paid hedge fund manager? ›

Jim Simons is back on top. For the fifth time in seven years, the 83-year-old founder of quant specialist Renaissance Technologies leads Institutional Investor's Rich List, the definitive ranking of the highest-earning hedge fund managers.

What did Goldman Sachs do wrong? ›

Goldman Sachs was charged for repeatedly issuing research reports with extremely inflated financial projections for Exodus Communications and Goldman Sachs was accused of giving Exodus its highest stock rating even though Goldman knew Exodus did not deserve such a rating.

Are hedge funds high risk? ›

High-Risk. In general, hedge funds are considered to be high-risk investments because of the huge potential for money loss. Again, these funds are primarily controlled by hedge funds managers, and with pools of money going into investments, there is likely going to be some loss.

Where do investment bankers get paid the most? ›

Goldman Sachs

An investment banking analyst at Goldman Sachs makes an average of ₹ 21 Lakhs per year, and their salary ranges between ₹ 10 Lakhs to ₹ 35 Lakhs per year.

Do bankers make more than traders? ›

In the short run, bankers make more. abcasdf: In terms of compensation, a good trader makes a LOT more than a good banker for the simple reason that we are getting a % of our PnL and banker pay is pretty much a fixed bureaucratic ladder system.

Which PE firm pays the most? ›

Apollo Global Management: Apollo Global Management is frequently reputed to be the highest-paying firm on the street in terms of all-in compensation, paying their Associates upwards of $400k per year.

Why are investment bankers paid so much? ›

Why are bankers paid so much? The advocate would say they're paid so much because the banks work on very important transactions that generate big fees. In exchange for such important work, they need to be smart, hard-working, and highly skilled – and thus, well-compensated.

How many hours a week do investment bankers work? ›

Investment banking analysts generally work 80-110 hour workweeks – expect to have very little free time outside of the office, especially during the first year on the job.

Is working in investment banking worth it? ›

Being an investment banker is one of the best-paying jobs available today, excellently. Meaning, when it comes to salary, it surpasses other jobs by far. It's also one of the hardest jobs possible, in every way you can think of.

Who earns more CFA or MBA? ›

However, the average annual CFA salary in India is around INR 6.87 Lakhs. MBA: MBA in Finance from a reputed institution provides high salaries. The average MBA salary for freshers is around INR 2.76 Lakhs per annum, going up to INR 8.48 Lakhs per annum for people with work experience.

Is CFA or MBA better for investment banking? ›

Traditional MBAs are broader than the CFA program, covering topics such as management, marketing, and strategy. The CFA program, on the other hand, provides deeper coverage of investment management.

Can a FRM become investment banker? ›

However, FRM is a specialized exam for gaining expertise in risk management. Job opportunities – This course is especially useful for those who want to establish a career in portfolio management, investment banking, portfolio management, or financial research. In addition, FRM opens up careers in Risk Management.

What degree is needed to become a hedge fund manager? ›

Hedge fund managers typically have a minimum of a bachelor's degree, although many companies prefer a master's degree. Hedge fund managers may have a degree in accounting, finance, economics or business administration.

Are hedge fund managers rich? ›

Hedge fund managers become rich by making money on the profits of their assets. They charge a 2% performance fee and cut the generated gains, which amounts to about 20%. Due to the above, they only allow wealthy and affluent individuals to invest in hedge funds.

Who owns the largest hedge fund? ›

The largest hedge fund in the U.S. is BlackRock, with a revenue of $19.374 billion. As of 2022, the U.S. hedge funds have a market size of $111.3 billion. There are at least 3,841 Hedge Funds in the U.S. U.S. hedge funds have experienced a CAGR of 8% in 2022.

How much money do you need to start a hedge fund? ›

With respect to establishing a U.S. hedge fund, average hedge fund startup costs range from $50,000 to $100,000, and first- year operational costs usually total $75,000 to $150,000.

What is an example of a hedge fund? ›

Some examples of hedge funds include names like Munoth Hedge Fund, Forefront Alternative Investment Trust, Quant First Alternative Investment Trust and IIFL Opportunities Fund. There are others such as Singlar India Opportunities Trust, Motilal Oswal's offshore hedge fund and India Zen Fund.

Which countries have the most hedge funds? ›

The United States was the leading country in terms of hedge funds assets under management in 2019. Hedge fund managers based in the United States had assets under management worth around 2.7 trillion U.S. dollars.

How many hours do hedge funds work? ›

Hedge fund analysts typically work between 60 and 70 hours a week. Working on the weekend is not common but it certainly does happen from time to time. Though working at a hedge fund is not a typical 9 to 5 job, it is less strenuous than investment banking analyst or private equity jobs.

How many hours do hedge fund managers work? ›

At hedge funds, meanwhile, the 'reasonable' working week is around 70 hours. Around 80% of people working in hedge funds work between 50 and 70 hours a week, according to a recent report from consultants Benchmark Compensation.

Is it hard to get a job at a hedge fund? ›

When it comes to how to get a job at a hedge fund, real information is tough to find. Part of that is intentional: hedge fund recruiting, is less structured than investment banking interviews or private equity recruiting. Also, many hedge funds are not interested in broadly marketing themselves to candidates.

What are 4 types of investments? ›

There are four main investment types, or asset classes, that you can choose from, each with distinct characteristics, risks and benefits.
  • Growth investments. ...
  • Shares. ...
  • Property. ...
  • Defensive investments. ...
  • Cash. ...
  • Fixed interest.

How hard is investment management? ›

It is also one of the hardest. It is no surprise that the average day in an investment banker's life is long and stressful. Those who manage to survive the adjustment period often go on to have long and financially rewarding careers. Investment banking analysts may work up to 100 hours per week at some firms.

Are investment bankers financial analysts? ›

An investment banker can begin as a low-level financial analyst with just a Bachelor's degree, but investment banking associates should either have three to four years of experience or an MBA.

What are the big 4 investment banks? ›

Largest full-service investment banks

JPMorgan Chase. Goldman Sachs. BofA Securities. Morgan Stanley.

Why do investment bankers work long hours? ›

Investment banking hours are much longer than those in other jobs because of four main reasons: Huge Clients Pay Your Bank Huge Fees: When a company is paying your bank $50 million, $10 million, or even $1 million to advise on a deal, you have to do whatever it wants at any time of the day.

Is investment banking becoming less popular? ›

As young professionals re-examine their work-life balance, investment banking is becoming a less popular choice despite the money.

What qualifications do I need to be an investment manager? ›

What qualifications are needed to become an investment manager? For graduates, there is no specific requirement in terms of courses. However, the nature of the work means that degrees in business, management, statistics, finance, mathematics, accounting or economics can particularly well suited for these roles.

Is investment management a good career path? ›

Yes, Investment Management is a good career path.

This path is important for individual finances and for business finance. There are many different offshoots to this career, so you can find a path that best suits your interests and your end goals.

What are the most important skills you need to be successful in an investment management career? ›

Some of the skills most investment managers look for are obvious: a love of economics, business, and finance; vast knowledge of the preceding; high drive; confidence; persistence; and so forth. You probably recognize these skills as necessary as they permeate the mythology of the investment business.

Who makes more money private equity or hedge fund? ›

Hedge fund compensation is more variable than private equity salaries + bonuses, but at the junior levels, you'll most likely earn a bit more in private equity. At the top levels, a star hedge fund PM who has a great year could easily earn more than an MD in private equity – depending on the fund size and structure.

What is the most successful hedge fund? ›

Bridgewater Associates

Bridgewater is the world's largest hedge fund, with about $150 billion in capital. Since its founding in 1975, Bridgewater has returned $52.2 billion in gains to its investors – more than any other hedge fund on the planet.

How much do hedge funds pay? ›

Therefore, hedge fund salaries would be higher than $170,000 to start with. Hedge funds would pay slightly more than investment banking to motivate you to cross that bridge. A hedge fund analyst at a decent shop can expect to take home $90,000 to $100,000 in base salary with a similar amount in bonus.

What is the biggest hedge fund in the world? ›

1. BlackRock Advisors. BlackRock (BLK) is a New York-based investment manager that manages trillions in assets. The largest BlackRock entity, BlackRock Fund Advisors, has been in operation since 1984 and oversees $1.9 trillion in assets.

Who earns more private equity or investment banking? ›

Surprisingly, if you compare the compensation for both professions, you see that investment banking professionals earn less than private equity associates.

Who owns a hedge fund? ›

Hedge fund management firms are often owned by their portfolio managers, who are therefore entitled to any profits that the business makes. As management fees are intended to cover the firm's operating costs, performance fees (and any excess management fees) are generally distributed to the firm's owners as profits.

What makes more private equity or investment banking? ›

Private equity associates are usually older individuals who started out and were successful in investment banking in their earlier years. While there is sometimes quicker money to be made in investment banking, usually associates in private equity have higher salaries and make more in the long term.

Who is the most famous hedge fund manager? ›

Jim Simons is back on top. For the fifth time in seven years, the 83-year-old founder of quant specialist Renaissance Technologies leads Institutional Investor's Rich List, the definitive ranking of the highest-earning hedge fund managers.

What degree is needed to become a hedge fund manager? ›

Hedge fund managers typically have a minimum of a bachelor's degree, although many companies prefer a master's degree. Hedge fund managers may have a degree in accounting, finance, economics or business administration.

Are hedge fund managers rich? ›

Hedge fund managers become rich by making money on the profits of their assets. They charge a 2% performance fee and cut the generated gains, which amounts to about 20%. Due to the above, they only allow wealthy and affluent individuals to invest in hedge funds.

How many hours do hedge fund managers work? ›

At hedge funds, meanwhile, the 'reasonable' working week is around 70 hours. Around 80% of people working in hedge funds work between 50 and 70 hours a week, according to a recent report from consultants Benchmark Compensation.

How many hours do hedge fund analysts work? ›

Hedge fund analysts typically work between 60 and 70 hours a week. Working on the weekend is not common but it certainly does happen from time to time. Though working at a hedge fund is not a typical 9 to 5 job, it is less strenuous than investment banking analyst or private equity jobs.

What are hours like at a hedge fund? ›

At smaller, single-manager funds, the average might be 10-12 hours per day, for a total of 50-60 hours per week (weekend work is rare). As you move to larger, multi-manager funds, the hours and stress get worse, so the average may be more like 60-70 hours per week.

How much money do you need to start a hedge fund? ›

With respect to establishing a U.S. hedge fund, average hedge fund startup costs range from $50,000 to $100,000, and first- year operational costs usually total $75,000 to $150,000.

Who owns the largest hedge fund? ›

The largest hedge fund in the U.S. is BlackRock, with a revenue of $19.374 billion. As of 2022, the U.S. hedge funds have a market size of $111.3 billion. There are at least 3,841 Hedge Funds in the U.S. U.S. hedge funds have experienced a CAGR of 8% in 2022.

What is an example of a hedge fund? ›

Some examples of hedge funds include names like Munoth Hedge Fund, Forefront Alternative Investment Trust, Quant First Alternative Investment Trust and IIFL Opportunities Fund. There are others such as Singlar India Opportunities Trust, Motilal Oswal's offshore hedge fund and India Zen Fund.

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