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If you are curious about becoming a hedge fund manager, this article is for you. By the end, you will have a better understanding of the responsibilities of a fund manager, how their salary is determined, and better yet, how big bonuses can be earned.
Who are we, and why should you listen to what we have to say?
At Fund launch©, we are experts who can quickly get you up and running a successful hedge fund! We have years of real-world experience and have developed a templated process that will save you buckets of money and shortcut you to reach that exciting day when you roll out your fund.
Over 900 fund managers have chosen Fund Launch© to hone their skills and get themselves to market fast. To learn more, please visit us at www.fundlaunch.com and book a private consulting call today!
What Does a Hedge Fund Manager Do?
Is it your dream to launch a hedge fund? That's a great goal, but is it worth your time and effort? Let's assume you already have the niche and investment model expertise (or can hire someone who does). How is a fund manager compensated, and can managing a fund make you a lot of money?
Hedge Fund Manager Responsibilities
A hedge fund manager is a dedicated professional who oversees a hedge fund's investments and operations and is the primary person behind its success. With a high confidence level from Limited Partners (shareholders), the fund manager is earnest about protecting their investment capital.
Here are a few of the fund managers' responsibilities.
Investment Strategy Development
The manager actively analyzes the markets and adjusts strategies as markets change. The fund manager also purchases and sells securities and additional financial assets as needed. The manager makes these decisions without requiring input from the limited partners.
Risk Management
Hedge fund managers control the fund's risk exposure to align with Limited Partner (LP) expectations. The goal is to achieve a healthy tradeoff between risk and reward while maintaining above-average (Alpha) returns for the fund's investors. The fund manager also benefits from generating Aplha as carried interest compensation kicks in once the hurdle rate has been achieved.
Portfolio Management
Traditional markets can be volatile, reacting immediately to news events. The hedge fund manager must continuously monitor market changes and adjust strategies accordingly, but doing so within the fund's investment mandate.
Investor Relations
Regular Communication
It's imperative that a hedge fund manager provides regular performance reports to clients, explaining changes in investment approaches and responding to client issues. The report is a high-level overview, not an in-depth explanation. Being proactive with communications assures the Limited Partners (LPs) that the manager is firmly in control and working for their best interest. A spin-off benefit is that some LPs will invest more money in the fund.
Factors Influencing Hedge Fund Manager Salaries
The term partners is not just a title but defines the relationships within the fund. The general partner (GP), who can also be the fund manager, obtains capital from the limited partners (LPs). Although the fund manager receives a salary, there is also an additional performance fee for generating returns over and above the LPs hurdle rate.
Hurdle rate - is that a new term to you? The hurdle rate assures the LPs that the first profits produced by the fund flow to them up to a set ROI. Thus ensuring the LPs receive the first profit distribution up to a stated return on investment (ROI).
Conversely, the LPs would not make money without the fund manager's expertise. Therefore, the manager receives a base salary derived from the management fee.
Example:
$12,000,000 Total capital from LPs.
$240,000 2% management fee
$120,000 Fund operational expenses
$120,000 Fund managers salary
$10,000 bucks a month is nice, but you don't want to start a fund to give yourself a job, right? You launch a fund to make a lot of money. The additional performance fee is the key to becoming wealthy. It is an incentive to do well on behalf of the LPs, and the cool thing is that after meeting the hurdle rate, your portion of the performance fee grows as the fund performance increases.
Hypothetical example:
Gross investor funding: $12,000,000
Hedge fund profit: $4,000,000
LPs Hurdle rate 8.0%: $320,000
Profit balance: $3,680,000
Performance fee 20%: $ 736,000
Total Comp:
$120,000 Salary
$736,000 Performance fee
$856,000
Assets Under Management (AUM) + Alpha Returns = Success
- It's all about assets under management (AUM), which decides how much money will be derived from management fees. As a fund manager, you will share the management fees as salaries with the rest of your team. If you have specific financial goals to hit personally, this will determine the amount of AUM you need to pool. If you can bring in tens of millions in AUM, that's fantastic. However, this truism applies to most new fund managers: "You have to crawl before you walk and walk before you run." It's all about the track record, so in the beginning, you may find it necessary to make some concessions to secure investment capital and then double down hard to build a track record of real-world returns.
- Alpha returns unlock the performance fee, your key to creating wealth. Eventually, having a track record with an attractive ROI makes securing additional capital easier, spilling off more management and performance fees.
Do you like where this is going?
Manager's Experience and Track Record
Investors choose to work with people they know, like, and trust. Do you have a knack for building personal connections at a rapid pace? If so, that's awesome because it covers steps one and two; they know and like you. But trust is more challenging to earn. After all, it's a big ask from a new relationship to give you a chunk of their money.
So, how do you overcome the problem of trust? You borrow credibility. This is why you'll need to select your team members carefully. How many people do you know who are very good at what they do but are not front-of-the-house types? They like to stay behind the scenes and let people like yourself be front and center.
Let's say you're launching a distressed property fund. You know Darla, who has 15 years of experience tracking down failed property developments and negotiating bottom-dollar buyouts. If you hire Darla on your management team, you leverage her expertise and borrow her credibility.
Your investment model also calls for multi-family and small apartment properties held for a 5-7-year cash flow plan. Ben has been managing over 700 tenant-leased properties for 8 years. Bringing Ben onto your team for cash flow properties lets you borrow his credibility.
Why would Darla and Ben join as team members? Although we are all different, we are all the same. We all want to make some serious money based on our skills. If you make a genuine offer to Darla and Ben, say, 15% above their current salary and a percentage of the performance fee, you might be surprised at how fast they say yes; if they don't, thousands of Darlas and Bens are out there.
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George, the co-founder of The American Dream Fund, and a $100M Private Equity fund, joined Fund Launch to help learn how to raise capital domestically for the next fund he will be launching.
He commented:
The best part about Fund Launch has been the live coaching calls, the access to other fund managers who can help through issues with my fund, and the coaching I've received to help navigate the early process of structuring and launching a fund.
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How Do You Become a Fund Manager?
Here are some of the traditional stages of experience associated with becoming a hedge fund manager.
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If you have accomplished some of these milestones, congratulations. On the other hand, don't be discouraged if this hasn't been your career path. It doesn't take a wall of degrees or slaving for years in the trenches of corporate America to earn the right to launch a fund. More on this in a moment.
Traditional Path
Junior Analyst or Research Associate:
This entry-level position is often earned after college (usually in a quantitative discipline).
Hedge Fund Analyst:
Analysts research investment opportunities closely, track risk, and recommend strategies to portfolio managers.
Senior Analyst or Sector Head:
Senior analysts are industry experts or strategists, provide investment suggestions to portfolio managers, and lead junior analysts.
Portfolio Manager (PM):
PMs make the final trading decisions, manage the entire portfolio, and deal with clients.
As I mentioned earlier, it's not necessary to walk the traditional path to launch a successful hedge fund. In fact, just the opposite is true. In our post-pandemic world, credibility is becoming less and less about how many degrees you have; instead, investors want to know what you can do for them and how you will do it.
Want proof? The link below will take you to a video in which Bridger Pennington founded Black Bridge Holdings with no fancy degrees and no time spent working on Wall Street. Yet, he has deployed millions of dollars from his fund in the last few years.
Launch a fund without fancy degrees.
The traditional path doesn't always mean it's the best path.
We are Fund Launch©
In the last three years, we've proudly helped our students launch over 300 funds, around two every week! As a member of our (Free) ALT STREET community, you will benefit from fantastic video interviews with other successful fund managers and eye-opening courses designed to save time and money.
CLICK HERE to learn more!
