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.