Most Frequently Asked Hedge Fund Interview Questions and Answers

Breaking into the hedge fund industry can be extremely challenging,especially if you are not able to show that you have a true passion for investing.Interviews can be completely different than private equity and investmentbanking interviews, so you need to make sure you are well prepared before beginningthe interview process.

People seem to believe that landing a hedge fund job is oneof the hardest transitions to make in a career. This is absolutely true if youhave no passion or experience investing. Nobody wants to hire someone who can’texplain why they want to work at a hedge fund. Just saying you want to make aton of money is not a good enough reason.

You need to prepare years in advance to be able to land a hedge fund job. The earlier you start the better.

Hedge Fund Case Study Examples Used in Real Interviews

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What qualities do hedge fund managers really want when hiring?

Hiring is less complicated than it seems. Interviewquestions primary revolve around figuring out if you are talented, fit the cultureand are motivated to work hard. It is really that simple.

Hedge funds wantto know that:

You are able to pick good investments (talent)
You are easy to get along with (fit)
You are willing to work hard (motivation)
You have the curiosity to dig deep to find answers (inquisitiveness)
You can overcome being wrong (handling failure)
You are a straight shooter (honesty)
You hate losing money (risk adverse)
You are able to work with little direction (independence)

Make sure you portray the qualities above during yourinterviews. It is okay if you do not have prior hedge fund experience or don’t necessarilyhave investing talent. Funds that hire straight out of banking actually preferthat you do not have prior experience investing so that they can teach you the investmentstyle of the firm.

That said, you need to have the background that will bestposition you for a career at a hedge fund.

What are the best backgrounds to prepare you for a careerat a hedge fund?

Nobody at a hedge fund wants to hire someone that needs handholding on a day to day basis. A hedge fund analyst position is in no way anentry level job. Yes, there are people from Ivy League schools who land hedgefund gigs straight out of college – but those positions are few and far betweenand usually you need to have the connections.

Given that most of these shops are lean, there will not beanyone to give you much direction or check your work. You need to have certainfundamental skills before a hedge fund manager is willing to hire you.

The basic skills needed to work at a hedge fund include:

Mastery of Excel
Understand what makes a good investment
Know how to read financial statements
Intermediate accounting knowledge
Ability to talk to management teams

These skills can be developed in the traditional finance fields.The majority of hedge fund managers hire people straight out of banking orafter two years at a private equity firm. Those who are from good middlemarket or mega fund private equity firms are in the best position to transitionto a good hedge fund. They have the technical skillset from banking as well as agood investing foundation from private equity.

What about working at a distressed hedge fund?

If you want to work in distressed, the best possible path isto either go the legal route and work in bankruptcy law after law school orwork at in a restructuring group at an investment bank.

You can also transition from private equity or general investment banking, but you need to show that you have a passion for distressed investing (either through reading, following investments, etc.).

Read more about distressed debt investing here.

General interviewing advice

There are certain things that you shouldn’t do and shouldn’twear when interviewing anywhere.

You have to be modest – don’t wear a crazyflashy expensive suit or a $5K+ watch and don’t act like you are better thaneveryone else because you went to some fancy Ivy League school
Always show up in a suit and tie – yes, hedge fundsmay have relaxed cultures where you can wear whatever you want, but wheninterviewing you want to be seen as a professional; of course, if you areinterviewing for a tech role, this advice is not relevant
Show up 10 minutes early every time tointerviews – you need to be seen as reliable and you do not want to be stressedif you are running late
Get a good night’s rest before – you want tohave energy in your interviews and be able to come up with good responses toquestions
Do not complain or brag about your hours – if somebodyasks you how many hours your work, you respond by saying it depends on what isgoing on; some weeks it could be 80+ hours if there is a deal going on, other weeksit could be just 60 hours

You want to be able to tie together your prior experiencewhen answering interview questions. For the majority of people, you should haveat least a year of real-world experience under your belt before applying tohedge funds.

The more prior experience you have, the easier it is toanswer the majority of interview questions. I remember out of college I had tocome up with BS responses when interviewing. Questions like what are your strengths,weaknesses, why do you want to work here, etc. are hard to answer when you havenot been able to work with others, have other people give you feedback andunderstand what you are actually interested in.

Misperception about hedge fund interviews

Everyone thinks that hedge fund interviews are some of thehardest interviews out there. The common misperception is that because hedgefund managers are rich and manage hundreds of millions or billions of dollars,then they must be geniuses. And as a result, interviews must be extremely hard.

In reality this is not the case. Yes, there are definitelysome very smart people who work in this industry. But on average, the majorityof people who make it in this industry did so because they have been doing itfor a very long time.

This is true for any other field as well. You become a so called“expert” in something after doing it for a decade or more.

Hedge fund interviews are actually very simple. As long asyou can clearly explain that you have the qualities above, then you should haveno problem with the interviews.

Yes, they are less structured than banking and privateequity interviews, but in reality, they are pretty simple as long as you actuallyhave an interest in investing and prepare for the common questions beforehand.

Most common hedge fund interview questions and answers

Below is a list of the most common interview questions that I’vebeen asked when breaking into the industry. It took me 20+ interviews to breakin, so don’t be upset if you keep getting rejected over and over again. Writedown what you think went wrong after each interview and figure out how you can improveyour story / interview responses going forward.

Why do you want to work at a hedge fund?

If you have no prior experience working at a hedge fund, thereis a 100% chance you will be asked this question. You need to answer both:

1. Why you do not want to do what you are currently doing

2. Why are you interested in working at a hedge fund

Think of the real reason why your current job is not whatyou want to do. For me, I was an analyst in investment banking. I knew that themore senior I became, the more my responsibility would shift to trying to bringin M&A deals. I would essentially turn into a salesman and have to build relationshipswith people in order to convince them to pay me to give them M&A advice.

I knew I did not want my success to be dependent on convincingothers to make decisions, so it was not a good long-term path for me. I wantedto be the decision maker. Working on the buyside allows you overtime to makedecisions directly.

To answer the second part of the questions, I was a bitbehind during my time in banking because I did not know I was interested inworking at a hedge fund until I was a year into banking. Unfortunately, I wasnever exposed to investing early on in high school or college, so I had to comeup with a good story to convince people I was truly interested in working at ahedge fund.

I spent a ton of time reading the top investing books out there. Also, I was lucky enough to work on an M&A deal that was the result of pressure from activist hedge funds. I saw how much value these funds created by forcing change just by being minority shareholders.

Why hedge funds over private equity?

As a rule of thumb, whenever money flows into a space returnscome down overtime. In private equity you are competing against all these otherfunds bidding on the same companies, driving the purchase price higher. In myopinion, private equity has become such a crowded space over the last 10 yearsfueled by low interest rates. There is so much competition in the space now causingacquisition multiples to be at peak levels.

The main issue with private equity is that even if you finda good company to invest in, it does not mean that you will be able to acquireit at an attractive enough price (ie. you could be outbid in an auction process).The benefit hedge funds have is that the price is already known and nobody isin your way when making investment decisions.

Learn more about the differences between hedge funds and private equity firms so you can figure out how you would answer this question.

Tell me about how you became interested in the market/ stocks

The earlier you start learning about the markets and how toinvest, the better your story sounds. Those that started reading aboutinvesting and trading stocks in college have a much easier time landing hedge fundjobs and answering this question than those who started after college.

Talk about any investing clubs you joined in college, personalinvestments, experiences in banking, etc. For me, I was deeply involved in anM&A transaction that was the result of hedge fund activism and I readdozens of investment books that got me interested.

What investment books have you read?

Pretty straightforward question to answer. Spend time reading the top 10-20 investment books out there and figure out which ones are your favorite.

Who is your favorite investor?

Hedge fund managers ask this question to make sure youreally have a passion for investing and also to see if your investing stylematches theirs. If you are interviewing at a fundamental focused value fund andyou mention that your favorite investor is Jim Simons, Ray Dalio, or other quant/macroinvestors, then you probably won’t get the job.

Every firm has their own investment style, so think aboutfamous investors that have a similar style to the firm you are interviewing at.Try to pick someone other than Warren Buffet and make sure you can explain whythey are your favorite investor.

What is your favorite investment idea (AKA the stockpitch)?

Before interviewing, you need to have one to two wellthought out investment ideas in your back pocket. These ideas must be interestingenough to have a back and forth discussion about or else the interviewer isgoing to think you don’t know anything about investing.

Read investor letters or go to valueinvestorsclub.com and find a good idea if you don’t have one off the bat. Then do all the research you can so that you know as much as you can about that company and the industry because you will get questioned on it.

What experience do you have investing? Were you in aclub, do you have a PA (ie. personal account) or mock portfolio where you keeptrack of investments?

This is why it is extremely important to start as early asyou can if possible. By following a few names or sectors, you begin to realizewhat moves stocks and what makes a good investment thesis.

If you are in college, join an investment club that manages realmoney (hopefully your school has one) or start making small investments inindividual stocks. Read all the books that you can as well on investing.

What makes a good investment?

The response you say here really depends on the type of firmyou are interviewing at because every firm has its own investment style.

In general, good investments always start with a differentiatedview. You will not make money making consensus bets over and over again. Contrarianideas are where most of the money is made.

If you are interviewing at a multimanager, then agood investment is one where a company will beat expected earnings over thenext six months to a year. Valuation does not really matter because the overallportfolio is hedged and expensive stocks can become more expensive if theycontinue to beat expectations.

If you are interviewing at a long-term value-oriented fund,then good investments are usually good businesses that have strong competitiveadvantages, industry tailwinds and trade at an attractive price.

If you are interviewing at a growth / tech-oriented fund,then you are trying to find companies that have large addressable markets and arepositioned to capture a ton of share in that market. You are trying to figureout the earnings power of that company 2-5 years down the road given that growthcompanies are most likely investing heavily today and have little to negativeprofits.

If you are interviewing at a distressed fund, then agood investment is one that trades below asset value, has low capital expenditureneeds, is not hemorrhaging cash and has a double digit yield to maturity.

What is the difference between a good business and a goodinvestment?

Good businesses are ones that have strong competitiveadvantages (either through tangible or intangible assets), are dominate playersin their respective industries, have economies of scale, high operatingleverage, stable cash flows and little need for capital expenditures.

A good investment is completely different. Price, having multipleways to win to create value (through consolidation, customer penetration,market share gains, etc.), and market expectations can all be major drivers indetermining whether a company is a good investment.

What are the most important things to consider whenforming an investment thesis?

Price – market versus intrinsic value, margin ofsafety
Macro trends – where is the industry heading
Moat – high barriers to entry / economies ofscale, impenetrable brands (think or Porter’s Five Forces)
Potential near-term catalysts – paints thepicture of how, when and why; forms your view on sizing of investments
Management – high insider ownership, goodallocators of capital, clean accounting

If I gave you a company and you came back to me in aweek with five summary bullets, what would they be?

First bullet would have key investment factors
Second bullet would have macro factors andindustry trends affecting the company
Third bullet would have current market share,competitive advantages, barriers to entry, total addressable market
Fourth bullet would have information on how thecompany makes money, how it compounds cash flow, and its ROIC
Fifth bullet would have information on FCFyield, P/E, EBITDA multiple or whatever multiple the street uses to value theCompany

What are the qualities that characterize a goodinvestor?

Curious – gives you the drive to find out moreabout a potential idea
Open-minded – have the ability to consider andevaluate an opposing argument
Emotionally stable – being able to continue tothink logically during stressful situations
Humble – being able to acknowledge and learnfrom your mistakes
Contrarian – ability to think differently thanthe crowd

What is the best business you have seen?

One of the best businesses I have come across is Bloomberg.The company is indefinitely scalable at practically no cost. Adding anotherBloomberg terminal costs practically nothing to the company. The business has astrong and proven competitive advantage, which is evident in the prices theycharge for each terminal (~$25K / year).

Bloomberg is all about network effects. There are currently~325K+ terminal subscribers out there today and each has a messaging platformthat is vital to connecting with others in the financial industry acrossdifferent firms. Given this dynamic, the company has very high barriers to entrywhich allows it to essentially have a monopoly on the market

What have you done at your current firm to prepare youfor a hedge fund role?

You need to think about what skills you’ve developed at yourfirm that are transferring to a hedge fund role. Hedge fund analysts need to betechnically savvy (ie. understand accounting, financial statements, valuation)and be very good at using excel. Analysts also talk to investor relations andmanagement teams all the time so talk about any situations where you have interreactedwith clients / CEOs / CFOs.

What was said on your reviews (AKA what are yourstrengths and weaknesses)?

Hopefully you are a strong performer in your current roleand are able to talk about what you are really good at.

For me, I have a strong ability to figure out thingsindependently, have a really good work ethic and have strong attention todetail. A key weakness of mine early on was that I struggled to speak up givenI was intimidated by the senior guys during my first few years in finance.

You must talk about how you have improved on your weaknesseswhen answering this question. Talk about things you have changed, situationsyou have put yourself in, etc.

What motivates you?

Please DO NOT say money motivates you. Once you make enough money to pay off your loans and have a good chuck of savings, money will no longer be the best motivator. There is a reason why I quit a $500K / year job after just one year.

Talk about being given responsibility or being able to havean impact on key decisions. Feeling important and having others trust yourjudgement are really good motivators.

Make sure to also read the Step by Step Guide to Landing a Hedge Job if you want to learn the best way to prepare yourself for interviews.

Hedge Fund Case Study Examples

The examples below are real written case studies and a full Excel model that were used in actual interviews. If you have to complete a case study at some point during the interview process, reading these examples and the Excel model will make it much easier to ace interviews, especially for those who have never worked at a hedge fund before.