≡ Menu

Should I Go Hedge Fund or Long-Only?

Hedge fund or long-only asset management?There are a lot of myths and misconceptions regarding hedge funds. I’d like to take a stab at boiling the discussion down to just a few key issues when comparing hedge funds to long-only asset management.

Key Hedge Fund Advantage – More Freedom & Opportunity

Because they are exposed to fewer regulations, hedge funds have a lot more freedom in how they invest. The investment opportunity set is much, much greater at a hedge fund. This can be an advantage early in your career as you will be exposed to more markets, more parts of the capital stack, and just more investing strategies in general. The learning experience can be tremendous.

Key Hedge Fund Disadvantage – Job Security/Implosion Risk

However, if job security is a concern, do not go to a hedge fund. During the latest financial crisis there were even websites created to simply catalog hedge fund implosions. These implosions happen because there is a much greater pressure to perform at hedge funds. You either perform or you are out, it’s as simple as that. This can lead to increased risk taking that often ends badly for everyone involved. You can limit this risk somewhat by targeting the larger hedge funds with longer track records. You will still need to perform, though.

Key Hedge Fund Myth – Compensation

The 2/20 fee structure is awesome. A small hedge fund can be as profitable as a long-only shop 4-5x as large because of this fee structure. However, these profits generally go to the guy whose name is on the door, not the employees. For analysts, compensation at top hedge funds is not materially different from top asset management firms. A common difference is that hedge funds will often have a better bonus plan, but it's all based on performance. Like I said before, perform or you are toast.

Bottom line on hedge fund compensation: Start a hedge fund if you want to make it big, don’t go work for one.

{ 4 comments… add one }
  • felix surya wardhana

    betapa sulit membangun bisnis hedge fund .

    • Thank you Google translate for telling me that says, “How difficult building a hedge fund business?” See this article:

  • Ankur

    Hi Mike,
    I’m an active visitor of LBS and M&I from past year. I must say, guys like you and Brain are doing great job to unveil highly secretive industry like hedge funds to us common folks. I’m a high school senior from India (yes, go on, roll your eyes). I wanted to work for a hedge fund since stories of the outliers like Paulson made headlines, that made me extremely curious about the industry and I did a lot of ground research. Just to realize that, the golden days are probably gone, It’s much more tougher/competitive to get into the industry, It’s more efficient now and hence it’d be more challenging to find alpha, plain- vanilla funds will loose to those nerdy quant funds notoriously generating awesome returns with 5& 44 fee structure! (How much I loved when Peter lynch said, Investing is art, not science!), The investors may cut the price down from 2 &20 and what not! But, Investing on my own from past year and getting decent returns made me realize it’s exiting and purely merit based (probably the only industry with no politics!). I heard a HF manager posting on Quora that he’d rather appoint a vegas gambler with two year of awesome experience than a Harvard 4.0 grad. Now I’ll be flying to US to join WashU at St. louis next fall. I read an article on business insider that a MIT econ + HBS MBA guy struggling to find a HF internship. It’s scary! My question is, if competition is this rigorous ( I even heard, managers who left in ’08 are coming back & accepting Sr. Analyst positions) , what else I can do while still in high school to show passion for the industry? Anything that can make me stand-out during the interview? I’m already actively investing. Thanks. 🙂

    • Don’t be too discouraged, just keep an open mind when you are looking for that first job/internship. Too many people think they need to work in a certain city at a certain HF and then they are discouraged when they don’t get it. Just be willing to get your foot in the door somewhere and go from there.

Leave a Comment