Virtually everyone thinks that if you work at a hedge fund, you make a ton of money. For some reason the media always loves to talk about how much big hedge fund managers are worth and the crazy things they like to buy (i.e. mansions, NFL teams, $50MM+ artwork, etc).

Of course, you can become extremely wealthy if you are able to convince others to let you manage $500MM+ of capital. The economies of scale are incredible if you are able to generate decent profits each year.

However, the reality is completely different. Hedge fund analysts on average do not make that much money relative to those working in private equity or investment banking.

Hedge fund bonus structure

To understand how a hedge fund analyst or portfolio manager gets paid, you need to understand how a hedge fund gets paid overall. The pay for a majority of hedge funds is determined based on two fee streams:

1. Management fee
2. Incentive fee

Back in the good old days, hedge funds used to charge “2 and 20,” meaning a 2% management fee and 20% incentive fee. However, given hedge fund performance over the last decade, fees have come down significantly to around 1-1.5% management fee and ~15% incentive fee. There are a select few funds out there that are able to charge significantly more give their long history of outperformance, but those funds are few and far between.  

The management fee is paid out regardless of the P&L and is based on how much capital the fund is managing at a given point in time. The incentive fee is usually charged at the end of the year and is based on the profits for the year. Once a fund gets paid out their incentive fee, a “high water mark” is set and they will need to make more than that level going forward to continue to make the incentive fee.

If the fund has more of a private equity type structure, the incentive fees are paid out later when the returns over the life of the fund have been realized. Some hedge funds, especially those that invest in illiquid / distressed credit, have these types of structures since they can’t afford to have redemptions while being invested in these markets. There usually is a certain return hurdle that needs to be met before they get paid their incentive fees (i.e. ~6-8%), then there is a catch up for the hedge fund, then the profits are split ~80/20 afterward (20% for the fund).

Example of how hedge funds get paid

Let’s say a fund starts the year with $1 billion of assets under management (“AUM”) and gets paid on a 2 and 20 basis. For the year, the fund gets $20MM off the bat due to the management fee, which is used to pay fund level expenses (i.e. salaries, office space, lunch / dinners, Bloomberg terminals, small bonuses, etc.).

Assuming the fund makes a 10% return for the year, then that is about $100MM of profits, of which the fund keeps $20MM (the 20% incentive fee) to split amongst their employees.

As you can see, this business has crazy good economics if you can consistently perform well over the long-run, which is why a lot of the top billionaires in the world are hedge fund managers.

Single manager versus multi-manager salary and bonuses

There can be a big difference between the pay at a single manager versus a multi manager. Decent size single manager funds can usually pay out small bonuses in any given year with just the amount that they collect on management fees. So even if a fund generates zero profits for the year, hedge fund analysts could still get paid a large bonus at a single manager fund.

Doesn’t sound fair does it? Why should hedge funds get paid when they aren’t making any money? This is one of the main reasons why fees for hedge funds on average have been coming down as returns aren’t living up to investors’ expectations.

Analysts who work at a multi-manager fund get paid slightly differently based on the performance of their individual team, not of the overall firm. Learn more about the basics of working at a multi-manager fund if you want to learn more.

Hedge fund hierarchy

Most single manager funds are structured in a similar manner. There is usually the head portfolio manager, who is the founder of the fund. He / she makes the final say on all investment decisions and gets paid the most out of anyone in the firm. Then you have sector heads, which are the senior analysts of the firm and they cover specific industries. Then at the bottom of the totem pole you have the analysts, who are one to three years out of college post investment banking.

Once a single manager starts managing $2 billion plus, then there usually will be multiple portfolio managers that are allocated a set amount of money to manage on their own and can make their own investment decisions without the approval of the founder.  

Multi-managers are similar, but everyone works in their own specific team and does not interact much with other teams. Each team is allocated a set amount of capital, somewhere between $200MM and $2 billion, and has one guy (the portfolio manager) running the show. The portfolio manager will hire around one to four analysts to help him make investment decisions. The hierarchy is pretty flat and most analysts get direct exposure to their portfolio managers. If the team is pretty big, then you will probably get less exposure to the portfolio manager and more exposure to the senior analyst or sector head of the group.

Hedge fund career trajectory

To get the best shot of landing a job at a hedge fund, you need to start your career as an investment banker. Yes, there are people who are able to break into the industry directly out of college, but that normally is not the case.

As a separate point, you should not try to break into a hedge fund straight out of college because you most likely have no idea if it is really what you want to do. Go the route that gives you the most optionality going forward, which is working in investment banking for a couple of years.

After your first year in banking, then you can start looking to transition to a hedge fund. For more about how landing a job at a hedge fund, read the step-by-step guide.

Hedge Fund Analyst

Most new analysts are one to three years out of banking. If you are at a decent sized fund ($500MM+), then you should get paid a $100-$150K base salary with a wide range for the bonus depending on the performance of the fund. All-in compensation for a hedge fund analyst with one to three years of banking experience is usually ~$200K to $300K for their first few years.

If you are able to work at one of the larger well-known hedge funds, then you could make $300K+ during your first year there.

Again, analysts at multi-managers get paid differently. Usually the base is the same as the above, but the bonus could be zero if the team doesn’t make any profits that year.

Senior Analyst / Sector Heads

After three to four years as a hedge fund analyst, you should develop a good expertise on a few related industries to the point where you can generate your own ideas. You become a lot more valuable then and can start directly contributing to the profits of the firm.

Senior analysts get paid a slightly higher base than hedge fund analysts with a much larger bonus depending on how much they contribute and how well the fund does. It is not unusual for a typical senior analyst to make somewhere between $300-$600K in a given year and potentially a lot more if the fund has a blowout year.

Portfolio Manager

After around five to 10 years, you should be given more responsibility and start managing a set amount of capital for the fund. Once you are given this direct level of responsibility, then your pay will be highly variable depending on your own performance.

I have seen portfolio managers make only $200K and I have also seen portfolio managers make $2MM+. It really depends on how much you contribute to the performance of the fund.

Portfolio managers at multi-manager hedge funds are paid entirely based on a set percentage of their profits. For more information on multi-managers specifically, read the basics.

The truth about working at a hedge fund

For some reason, people think that if you work at a hedge fund then automatically you make a ton of money. Yes, there are some who are extremely good at what they do and are able to consistency generate profits year after year, but on average, most hedge fund analysts get stuck making ~$200-$400K per year.

I know this sounds like a lot to the average person straight out of college, but it is less than what investment bankers and private equity folks make once they reach the title of vice president. During my first few years working at a hedge fund, my fellow analysts during my banking days who decided to stay in banking were making significantly more than me. Same was true of my friends who went the private equity route as well. You need to set your expectations straight and learn what it is really like working at a hedge fund.

To truly make more money working at a hedge fund, you really need to be able to generate money year after year, which is not that easy to do. You could go multiple years without making much money and then one year all of the sudden have a year where you make significantly more. It is highly variable. Private equity compensation is much more stable than at a hedge fund and bonuses don’t vary much year to year at the junior levels.

Hedge fund salaries versus private equity and investment banking

If you wish to learn more about the pay differences, then read the article on investment banking, private equity and hedge fund salaries and bonuses.

In the end, you should not choose your career path based on where you think you will make the most money. Try to find an industry that you really identify with and you could see yourself working over the long-run. The quicker you find out what you actually like the do, the quicker you will be able to specialize in that industry and become really good at it.

And don’t give up if you end up in a job that you don’t love. You could still love the industry that you work in, but were just unlucky to work with a bad team / manager or in an investment style that you did not identify with. I quit a $500K per year job because I absolutely did not like the investment style. I transitioned to a deep value, distressed fund and absolutely love what I do now.

So keep looking around and trying new things to figure out what you like to do. Don’t worry about the money off the bat because I promise it will come down the road.

Hedge Fund Case Study Examples

The examples below are real written case studies and a full Excel model that were used in actual interviews. If you have to complete a case study at some point during the interview process, reading these examples and the Excel model will make it much easier to ace interviews, especially for those who have never worked at a hedge fund before.

In addition to using these examples, make sure to also read through the Hedge Fund Case Study Guide.