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The Investment Banking Path to a Hedge Fund: Is it Necessary?

Career Path“My goal is to get into IB or HF.”

This is probably the most common career path desire of all the readers I see here and at M&I. I always smile when I read those sentences because the IB and HF career paths are really quite different.

Maybe they aren't all that different since they are both in the field of finance, but they are different enough that lumping them together is amusing.

Time to choose. Which one will you choose: Investment Banking or Hedge Fund?

Still don't have an answer? That's OK. I just wanted to get your attention and point out what you are really saying when you say, “My goal is to get into IB or HF.”

“My goal is to make a lot of money.”

That's what you are really saying. I get it, I really do. Investment bankers and hedge fund managers can make obscene amounts of money. Picking up the tab for bottle service for some of these guys is like the average person picking up a McDonald's value meal.

They are society's outliers and can do things in life that the average person only dreams about. The desire to make a lot of money is what brings some of the brightest minds in the world to finance.

Now that we've identified your true career goal (making money!), we need to spend some time discussing investment banking versus hedge funds so you can pick the career path that really is right for you. It's not a life-or-death decision, but you need the right information to make an informed decision.

The way I see it, there are three different career path choices to choose from when evaluating IB vs. HF:

  • IB for Life
  • IB with Exit Opportunity to HF
  • HF for Life

I'll discuss the pros and cons of each on their own and then offer some information so you can choose the path that's best for you and your career goals (ahem, making money!).

IB for Life

The IB lifers are a rare breed indeed. I liken these IB lifers to law firm partners. A freshly minted law school grad has to put in ridiculous hours for many years to make it to partner of any prestigious law firm. There are no shortcuts. But once you are in as a partner, the payoff is highly lucrative.

The same thing occurs in investment banking. You toil away for years and years to one day make Managing Director. Only in IB, the payoff is even greater than the law student turned partner.

As an MD at a big bank you'll be able to start comparing your comp package to those of sports stars and rock stars. The math works, but you must be willing and able to make a sacrifice to get there.

IB with Exit Opportunity to HF

A lot of hedge fund job listings cite a desire for investment banking experience. This is not to say that investment bankers generally make good hedge fund managers or that investment banking is a requirement to get into a hedge fund. Neither are necessarily true.

Hedge funds seek fresh graduates from the banking programs for several reasons:

  1. They understand financial modeling and how financial statements work.
  2. They usually have some deal experience so they have at least some understanding when/why it is good to buy or sell something.
  3. They've had to work very difficult, long hours.

All of these items are beneficial and reduce the learning curve to becoming a hedge fund analyst. The quicker you get up to speed, the quicker you can start making the fund money with your investment ideas.

Direct to HF

This path is just plain underused for those that want to manage money. Many students and job seekers seem to think the hedge fund world is off-limits to them until they have IB experience. This is not true.

While a lot of the very large hedge funds can sit back and pick off the best IB talent, most HFs are just looking for the best talent... wherever they are.

This creates an opportunity for you because many job seekers won't even seek HF jobs directly. With less competition, the door is open for you to jump to the buy side directly.

The Pros and Cons: Investment Banking vs. Hedge Funds

Now that we know a little about the different options, it's time to drill down and figure out what's best for you.

Compensation: Remember when we admitted our career goal was simply “to make a lot of money?” Rest assured, choosing either IB or HF is likely going to have a positive change on your bank account, but there are a few differences that you should be aware of.

Investment banking analysts typically make more money initially than hedge fund analysts. I can't really explain why investment bankers make so much money right out of college, it's always confounded me, but I can explain why you won't be making an IB salary right away at a hedge fund.

The hedge fund business is the ultimate meritocracy. Investment performance is the ultimate goal. In the end, all that really matters in managing money is that you can create alpha. Underperform and you are out. Outperform and you will be rewarded handsomely. It's a simple business.

This compensation system affects your starting salary because it is extremely unlikely that you will be contributing to investment performance on Day 1. There is a learning curve, which means a hedge fund is not going to pay you like a seasoned stockpicker when you don't have a track record.

You can speed this learning process along by being better prepared ahead of time with your activities, including: financial modeling training, CFA program, investment clubs or academic tracks where you manage real money, and so on. The quicker you can get to the point where you are adding value to investment performance, the faster you will see your compensation rise.

Investment bankers will see their compensation rise simply by surviving the rigors of the IB program.

Once you gain more experience, IB and HF comp plans begin to diverge. Experienced bankers can make a lot of money, millions and even tens of millions of dollars for the true BSDs.

That's a lot of money.

But that money pales in comparison to top hedge fund managers who can make Billions (that's Billions, with a big f*cking B) in a really good year.


Now, take a deep breath and sit back. You are many years, if not decades, of hard work and a lot of luck away from even contemplating a billion dollar year.

For now, you just need to know that investment bankers make more than hedge fund analysts at the start, but hedge fund analysts can see their comp rise faster with how good their investment performance is.

Hours: It's true that the average hedge fund analyst works less than the average investment banking analyst. Investment banking hours are brutal and they have the especially unique concept of “face time.” Face time is less prevalent these days, but you will still spend a lot of time in the office nonetheless.

Investment bankers work a LOT of hours. Eighty hour work weeks are not uncommon. That's a lot of hours. Did I mention bankers work a lot of hours?

Analysts at hedge funds typically work more reasonable hours. Your job revolves around the capital markets and the markets close. For most buy side jobs, the hours are typically in the 50-60 hour range. It's certainly not a 40-hour work week, but it's a lot more reasonable than 80 hours per week.

Of course, these are just averages. I once heard a story from an analyst that worked at a small startup hedge fund. They invested globally, but they ran everything out of the US because they didn't have enough money yet to hire dedicated global traders. I was amazed when he described a typical day at his hedge fund:

Get to work around 9AM on the East Coast, shortly before market opens. Spend the day analyzing companies, updating financial models, and all the other typical day-to-day buy side analyst work. Come early evening he would head down to a nearby hotel where he had a near permanent room to get a few hours of sleep. After a few hours of sleep he'd come back to the office for the open of the Asian markets, which was the middle of the night on the East Coast of the US. Then he'd trade the Asian markets based on orders given by the PMs during the day in the US. Finally, sometime early in the morning in the US, he'd go back to the hotel to shower and clean-up to be back in time for the US market open.

If he was a shift worker, he was working two shifts… EVERY DAY.

The hours are typically better on the buy side, but remember that sometimes average hours aren't always typical.

Exit Opportunities: Investment banking is the clear winner when it comes to exit opportunities. The skills gained by going through an investment banking program are transferable to nearly any job in finance.

You can go to private equity, hedge funds, venture capital, corporate finance, and the list goes on.

Hedge fund exit opportunities are more limited because you become much more specialized. Plus, as I've said before, the buy side is the end game. Hedge fund analysts grow up to become hedge fund managers.

Now I'm More Confused than Ever – Which Path is Right for Me?

Only you can decide which career path is right for you, but I can offer some guidance. We said at the onset that the real goal is really to just “make a lot of money.”

Here's when I'll call on an old cliché: Do what you enjoy the most and the money will follow. This really means that you can make a lot of money doing what you love because you are willing to work hard at it. Working hard is the key. There is no free lunch, except at Google.

If you are most interested in the public markets and you are the type of person who is extremely interested in pursuing the CFA, then starting on the buy side can be the right path for you. There's no need to punish yourself in banking for two years.

If you enjoy finance, but aren't 100% certain you want to be managing money, then investment banking is probably right for you.

Either way, if you love finance and want to make a lot of money, you can't go wrong with either investment banking or hedge funds.

{ 21 comments… add one }

    Hey Mike,

    Magic article as usual, I love this site!
    Seems like this is one of those little known best kept secret sites out there for us b-s wannabe guys.
    I do however have a few gripes:
    The articles are too bloody short.I can happily spend half the day reading this and the other half studying for the CFA (not a dirty word on this site,Brian lol).
    Please, stop divulging secrets,rather PM me if you HAVE to tell someone…

    Seriously though, if HF job postings call for IB experience,how would you get around that if you`re shooting for the buy side direct? And for a career changer,what is too old to break in? Is there a UK database (similar to the BIWS one) for HF and AM firms out there somewhere?

    Thanks again….

    • Thanks – glad you like the site. I’ll make sure the next post hits 2,000 words.

      Many HFs prefer IB experience, but rarely is it required. Using alumni networks can help. I remember someone who graduated b-school two years before me got a job right out of school (no IB experience) at a very well-known HF in NYC. Of course, the co-founder of the HF graduated from our same school. Nepotism? It happens, so use it.

      An MBA while doing the CFA is the best option for a career changer. Otherwise ER is always a good option. In just the past month I’ve seen two sell side analysts I follow jump to the buy side, one to AM and one to a HF. Age matters less than the experience you have. If you have 10 years experience in several different fields, that can be useful. If you have 10 years experience in one small niche, then it’ll be harder b/c you are now typecast.

  • Matthew

    Another great post. I think you’re right that most people say “IB or HF” because they want to make mountains of money. But part of the reason they pick IB is because of the exit opps. After two years as an IB analyst, you’ll likely be faced with a pretty broad range of finance jobs as possible next steps. For those straight out of college, it would seem sensible to spend a couple of years in IB, even if they think they want to head for the buy-side in the end, if only because they might change their mind along the way (how can a 21-year old college kid really know what they want or all the many different kinds of work out there?). Given the narrower range of exit opps from HF and the fact that it’s reasonably easy to break into HF from IB, what would you say to someone who thought it was therefore nearly always better to go for IB?

    • A good observation – I tried to address that exact question when I discussed the various paths. IB is definitely the way to go if you love finance but aren’t 100% certain you want to be in the public markets (because the broader skill set from IB = more exit opps). That said, there are people that really want to be in the investing arena, and for them the IB path is probably not necessary.

  • Hunjsuk

    Is there going to be a M and I spinoff dedicated to Private Equity like this site which seems to be dedicated to Hedge Fnds/Asset Management and Equity Research?

    This site is called “Life On The Buyside” but their is nothing about Private Equity, which is this as isn’t Private Equity “buyside”?

  • Hunjsuk

    Is there going to be a M and I spinoff website dedicated to Private Equity, like this site is dedicated to Hedge Fnds/Asset Management and Equity Research, maybe a dedicated site for private equity could be made perhaps?

    This site is called “Life On The Buyside” but their is nothing about Private Equity, why is this as isn’t Private Equity “buyside”?

    • PE is indeed part of the buy side, but it is a very small niche. A recent report showed worldwide AUM of PE firms at $3T. Now, that’s sounds like a lot, but compare that to ~$50T of worldwide equity market value.

      That said, I think M&I does a great job covering PE. Heck, Brian even did an entire web series on the subject!

  • John

    Hi Mike,
    Just wanted to say thanks for sharing all this info.

    I know I want to join a HF as soon as I can in my career but I am looking to establish a career in sales.Do you think HF’s would need a sales person and do you think starting a career in institutional (fixed income) sales is a good route to get to buyside sales?


  • Gee

    Thank you for the post!

    I am in college and I would like to ask if having and internship with a HF company will help land a job after my undergrad? And if you know about whether the Asian market is worth migrating to?

    Thank you!

  • Mark

    “Once you gain more experience, IB and HF comp plans begin to diverge.”

    So, how long does it take for THAT to happen?

  • Dr

    Wow! Great article, I stumbled across this from a student forum while I was locked under the pressure of applying to universities. I was intrigued by investment banking but their hours per week does not seem like a life to me… Anyhow my initial excitement towards I Banking has dramatically shifted towards Hedge funds. I am looking for guidance in exactly how to walk the “HF for Life” path, the steps and education needed to do so.

    In all honesty, I have not considered finance as my focus in my future commerce degree until tonight ( 4 hours in of none stop research). I was drawn towards subjects like marketing(light) subjects due to it being all I know. Just a couple months ago a friend introduced me to the Forex Market and I have been following up on that with immense research. That being said I think I found my true calling.. Hedge Funds and I will become a Hedge fund Manager one day.

    To conclude this comment, if anyone can refer to me to an article as easy to follow and straight to the point that outlines exactly what is needed to secure a career path in Hedge Funds, that would be appreciated.


  • xiexie

    Thanks a lot for a nice article.
    I have some questions about the working hour and pay in AM/HF in London (I will study in LBS this year).
    1) UK is known to be better than US in terms of working hour (UK even has the Casual Friday when people tend to leave early for pub). My question is whether AM/HF in London work less than their NY counterparts? And what is the common working hour for AM/HF in London (is 40h per week common there?).

    2) Second question is about the pay of AM/HF in London (both base salary and bonus) for junior staff out of MBA school in London.

    3) Third question is about the chance to land an offer at AM/HF in London for a LBS graduate with little experience in AM (1 year of AM/HF experience in a developing country), with passion in the market, and on his way to complete CFA level 2

    Many Thanks,

  • Hi Mike,
    Its an absolutely great article. My question was if someone has experience managing business projects within investment banking, private equity and wants to make a move to being in hardcore finance then does this person has to start all over again at an analyst level? What if this person has already worked managing the projects at vp/director level? is there a way to avoid the traditional analyst to MD path and gain entry into managing a BU?

  • Avocado


    You mentioned that exit opps from a HF are limited but limited how? Is it possible to jump from HF (equity analyst) to PE or IB?

    The job still involves fundamental valuation..

  • laziz

    Very interesting article! I think I think I will go ahead and start learning IB.

  • Talha

    hey mike .. im currently an undergraduate at cass buisness school london .. i am very passionate about becoming a hedge fund manager… i have come across many places where it says the hedge fund firms only employ graduates from a ivy league college or an oxbridge university .. is this true .. and i currently trade at the london stock exchange .. does that help in my chances to get a job

  • M

    Hi Mike, I’m a tier 1 global finance lawyer (junior associate) and graduated from Oxbridge. I’ve done distressed deals from funds, leveraged financing, high yield bonds and now regulatory side of funds. (From the legal side of course).

    I’ve been quite strong at math (several medals/ top 1% at international math olympiads) and economics (published an article in a US based journal) and am at least within the finance industry. Could have gone either to the commercial side or legal side, but I eventually chose law – I would like to switch to Macro/ special situations/ event-driven hedge funds/ PE fund (if the strategy is close enough). I’ve done investing in my own family portfolio on an ad hoc macro event driven basis for the past 8 years too. But I find it difficult to find entry opportunities into the industry given my legal background (i.e. non IB/ consultant). Any tips on how to overcome this?

  • Thanks for the tips! I’ve been wondering whether I should go into investment banking or hedge funds. It makes sense to go into investment banking since they make more money. I’m also curious as to why they make more money right out of college than people who go into hedge funds. Perhaps it would be best for me to get all of the schooling that I need to be an investment banker so that I can start making a lot of money as soon as I get a job out of college.

  • leo

    Are there some differences between a large city and a smaller one? Is workload and paycheck less?

  • What’s up, the whole thing is going well here and ofcourse every one is
    sharing data, that’s actually excellent, keep up writing.

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