Yes, there are lots of issues at this time with your funds because of the COVID pandemic. But the world will right it self in the coming day, and you can prepare by being informed of the direction you may pursue in finance.
Both destinations, private equity, and hedge fund jobs are highly coveted by professionals.
Both careers are considered exemplary exit opportunities for investment bankers. Both jobs appeal to high-net-worth investors to deal in millions (sometimes billions). Both are classified as alternative investments.
Amid these high-level similarities, how do you differentiate between the two industries; and decide? What is best for the future? Will you choose a lifetime career in private equity or hedge funds?
Here is the information you need to help you navigate through the differences. You’ll understand the nuts and bolts of hedge funds and private equity careers – workplace environment, career growth, salary structure, and education and background to get you started.
Careers in private equity and hedge funds are toe to toe.
The BIG Difference
The biggest differences between private equity and hedge fund industries.
- Private Equity (PE) firms usually acquire entire organizations (especially those failing and underperforming).
- Hedge Funds (HF) acquire smaller stakes in companies or liquid financial assets such as for example stocks, bonds, derivatives, amongst others.
- Hedge Funds (HF) investments are short-term and high-risk in nature than PE. The holding period in hedge funds ranges from three months to three years.
- Private Equity (PE) investments are often made for three to five years.
Structure — Private Equity vs Hedge Funds
Private Equity funds are often set up as limited partnerships. There are two kinds of partners.
- Limited Partners (LPs): Investors in the fund (typically institutional investors like pension funds, endowments, wealthy individuals, among others). Limited Partner liability is bound to the funds invested by them.
- General Partner (GP): In-charge of creating decisions for partnerships. Their liability is unlimited. They are required to meet obligations set by the firm even if they will have to invest their personal assets.
Hedge Funds will also be generally setup as limited partnerships. However, they are much smaller compared to PE firms in several employees. Even the largest hedge funds have just over a few hundred employees, and the tiniest company could have only a couple of employees.
Due to the number of employees, the work culture in hedge funds is non-bureaucratic and less rigid — with a free flow of some ideas. There are fewer work politics in a hedge fund office.
Types of Job Roles in Private Equity and Hedge Funds — Who’s who?
Different funds might use different titles for hedge funds and private equity jobs. The overall composition of the organization is individualized.
Private Equity Professionals will on average find these roles and sequence of career progression in Private Equity (much like investment banks).
- Analyst – An analyst is a junior-most professional. They work on basic deal support — financial modeling, and valuation of companies.
- Associates – Associates oversee analysts and keep a note of seniors’ requirements. Firms, where analysts aren’t hired, may have associates perform their work.
- Senior Associates – Senior Associates would be the number two person on some deal teams. The senior associate is more associated with deal negotiations and portfolio management compared to their juniors.
- Vice President – Vice Presidents, by default, would be the number two person on all deal teams. They could also lead initial negotiations on a few deals.
- Principal – Principals run day-to-day deal processes, and manage the whole investment teams. A principal almost always leads deal negotiations.
- Partner – The partner usually goes on the title of GP, Managing Director or Managing Partner. Partners are the senior-most private equity professionals at the firm.
Hedge Fund Departments are often composed of.
- Research Analysts – The research analyst’s main task is to value stocks, organizations, undertake sector analysis, and forecasting events.
- Research Associates – Research associates are senior to analysts and oversee the investigation analyst’s work. They work along with quantitative analysts and portfolio managers.
- Traders –All departments at the hedge funds support traders – to make trading decisions and conducting operations. Traders are the ones who sooner or later put investor’s capital on the market.
- Risk Managers – The risk manager will continue to work closely with portfolio managers and frequently come with over 10 years of work experience. Risk managers will also be responsible for assuaging any loss concerns of potential investors.
- Portfolio Manager (also, Partner) – Portfolio managers are also frequently the General Partners (GPs) in HF who hold significant equity interests. The portfolio manager also manages traders and research analysts. Portfolio managers generally look after individual sectors. A Portfolio manager in healthcare equities may oversee healthcare, and so forth.
- Chief Investment Officer (also, Partner) – The Chief Investment Officer is responsible for managing all the investment portfolios of the firm.
The rate of career progression from junior private equity professionals to a partnership is more streamlined and structured in private equity than in hedge funds.
Duties and Responsibilities – What may be the job?
Researching, valuing companies, and financial modeling forms a core section of both Private equity jobs as well as hedge funds. However, quarterbacking deals and maintaining networks occupy a majority of the full time of private equity professionals.
Private Equity professionals can work on several types of PE funds. The distinguishing factor is the stage of a company’s life at which the fund is invested. The PE mainly focusses on mid-to-late-stage funds — including Leveraged Buyouts (LBOs) and Growth Equity funds. You can alternately specialize in early-stage VC (Venture Capital) funds and private equity funds of funds.
Major responsibilities in private equity jobs.
- Sourcing deals via public auctions or personal relationships.
- Building relationships by meeting lenders.
- Interviewing management of the company to be acquired (a component not as prominently present in hedge funds).
- Conducting company research.
- Forecasting valuation (making financial projections, developing upside/downside scenarios and calculating the rate of return).
- Drafting presentations.
- Close and coordinate deals.
- Preparing an acquired company to go public or get sold.
Research Analysts and Associates.
Typically, the research and analysts and associates would be the starting positions in Hedge Funds. They perform highly research-focused functions. These professionals consider the sales, costs, expenses, tax rates, and depreciation of the organization and sector. The research analyst is trained to gauge the present value and project future earnings.
Research Analysts and Associate main responsibilities.
- Building industry expertise (The deeper can be your understanding in the market — the closer you’ll get to the top).
- Sectorial Analysis.
- Valuing companies, stocks, and securities.
- Forecasting effect of events on the market and economy.
- Financial modeling.
- Making investment decisions.
Pay and Benefits — Let’s talk about money.
Hedge Fund and Private Equity professionals are compensated in two ways. The compensations are garnered in a management fee and a performance fee. Both fees are covered by the investors (or LPs) from their assets in the funds.
- Management Fee: The management fees on average range from one to two percent of assets under management of the firm. The fee supports the firm’s operational expenses (office space, electricity, salaries, technology, electricity, etc.).
- Performance Fee: Also called a carried interest or carry, the performance fee is basically a share in the gains accrued from the investments. Usually, this fee ranges from 20 to 25 percent of returns (performance). A very select group of top funds could also take home a performance fee in the number of 30-40 percent.
Historically the divide between management and performance fee is a two % management fee, and a 20% performance fee. These fees are called a “2:20 model,” popularly used to describe the fee structure.
Earnings in a Hedge Fund or Private Equity job.
What will you earn in those two sectors? Don’t get ahead of your self here. Upon initial joining in the junior role, you may not get yourself a significant part of the performance fee or carry. However, some funds may be filtered down to you by the managers as an incentive to select the right investments.
In both the industries, the pay, in the beginning, is close, equivalent to that of a third-year Analyst at investment banks. After a few years, however, the huge difference in compensation becomes to widen.
While the bottom pay increases in both industries at a steady pace — the difference in bonuses vary drastically. In hedge funds, you can rake millions in bonuses inside a single year, much higher than in Private Equity, with respect to the growth of assets under your management.
Education and Background
Private equity careers mostly attract former investment bankers as it’s considered to be a highly sought-after exit opportunity. Hedge funds however, along with investment Bankers attract diverse talent from equity research, sales and trading, and other financial domains.
Just out of Undergrad? In both industries, hiring fresh out of undergrad candidates is significantly rare. Large funds, however, are now providing opportunities to enter the business enterprise at the analyst level.
Landing a hedge fund job right after college won’t be easy.
Most hedge funds don’t advertise and work through either executive recruiting agencies or recommendations. Only a few of the large hedge funds are which makes it a practice to touch base to business schools looking for new talents. Most employees come with experience ranging from four to a decade.
Hedge Funds jobs require higher level degrees like MBA, JD or Ph.D.
Topped with some years of experience can make it easier to get your foot in the entranceway on the positions of research analyst or credit analyst. Upon recruitment, most hedge funds will on average sponsor a member of staff for professional certifications (see credforce.com).
In private equity jobs, the most frequent entry path followed by professionals is called the 2-2-2 route.
- Spending 2 yrs in an Analyst training program at an investment bank or in consulting firms.
- Followed by two years at a Private Equity firm.
- Finally, two years of business school (MBA) to secure a career-track at a Private Equity firm.
If you didn’t land in investment banking or consulting in college, you are able to still secure a post-MBA position at a Private Equity firm. To get yourself a pre-MBA position at a PE fund, though realizable, would be challenging.
Bottom Line — Which career path is right for you personally?
There is not an individual right answer.
If you can answer affirmative to those three questions — then a private equity career can prove a thriving choice for the future.
Ask your self if you are:
- Highly analytical?
- Are you a self-starter?
- Are you charged to maintain industry trends?
- Do you love researching?
- Have you begun to build industry expertise?
- Do you value companies and making predictions? you can choose hedge funds as a lifetime career.
If you are able to answer affirmative to those three questions — then the hedge fund career could prove a flourishing choice for you.
Some professionals take up investment banking or consulting at the start of their careers, followed by a stint at private equity, and in due course join hedge funds.
Choose what strikes a chord with your own individual disposition and is the right-fit with your strengths.