I think unless you’ve worked in institutional finance, or maybe if you’re an academic with deep knowledge of financial risk management, you probably know ‘zero’ about what hedge funds do, and why. Forget about how.
More than that, unless you fall into the groups above, virtually everything you think you know about it is probably wrong. And the more sure you are that you understand it, the more wrong you are.
Everyone who’s ever had their own account to trade seems to be certain they understand hedge funds. The big bucks, the wild parties, the spur of the moment decisions to buy millions of shares that results in fabulous windfall profits, the supermodels, the private jets, the caribbean islands…. it’s all great right? You slap a few keys on a keyboard in Greenwich Connecticut, and poof – a Lambo appears in the parking lot. What could be better?
It’s a really interesting phenomenon. If you dream of being a software engineer, when you finish your schooling and become a software engineer, it’s probably going to be quite a bit like how you imagined it. But if you dream of being a hedge fund manager, then the thing you’re dreaming about is as grounded in reality as being a wizard or space pirate. It imagines an entire world which doesn’t exist now, and never really existed before. The entire universe they imagine, is totally fictional.
That’s not the end of it either. The people who wouldn’t be caught dead managing a hedge fund imagine a completely different fictional universe filled with equally fictional villains and victims. In that world all hedge funds are run by people who if they had their way, would be doing it from a secret base under a volcano. These people are just as convinced they know everything about running a hedge fund, and believe that hedge fund managers should be tarred and feathered for it. A few think worse should be done to them. That’s every bit as unrealistic.
This is the point in this piece where I’d tell you what the truth is. But honestly, I’m now convinced there isn’t much point. It’s an unfortunate issue of our day that people are uninterested in the real, serious story, when a 13 year old’s fantasy (dark or otherwise) is available in its place. If you really want to know what it’s like, go ahead and read the other 50 or so questions I’ve answered about it.
It’s a relatively dry, extremely demanding, relatively high paying but unbelievably competitive field where only the best of the best of the best of the best, ever become really successful. Just to hold your own in the industry, you need to be an outlier in intelligence, work ethic, tolerance for risk, objectivity, and a dozen other criteria. It makes such huge demands on your character, that even if you get all that right your chance of ‘real’ success is still less than 50–50. It takes you a lifetime to get there, and when you do, you discover that it will take luck for you to really win.
And yet… in universities all over the world smart STEM kids are still imagining that Lambo magically materializing and checking out the Sotheby’s real estate site to decide if they’ll buy an island in the Caribbean or the Aegean. It’s all just fantasy. Every bit of it. And all without a single iota of understanding of the job, it’s demands, and it’s compromises.
I don’t mean to be cavalier about it or to be too dismissive of the kids asking these questions. In truth, I don’t mind the questions so much. What’s that old line? The only infinite things out there are the universe and human ignorance (and I’m not sure about the universe)? The people asking these questions are kids. Their ignorance is the reason they’re asking, and who could blame them for that?
What really annoys me is the totally uninformed answers. The art majors who dream of every friend I’ve made in the last 25 years being chased through the streets with pitchforks and torches. The ‘personal traders’ who argue that it’s all about using the system that hasn’t lost them money yet. Or the mercenary promoters telling them to think about option strategies, currency trading, or whatever system they’re using today because it’s ‘What all the big guys use’. Shameful.
The hedge fund world isn’t going to ‘crash’. It isn’t going to ‘explode’. It isn’t going to back to the (again…. totally fictional) days of wild parties and supermodels. It’s going to continue in the way it has, with moderately fewer opportunities to get to the top. And when you accomplish that nearly impossible goal of reaching the top, you’ll still be looking up at ‘what it used to be’ in terms of economic success. That’s the reality of the hedge fund world.
You cannot get there from your dorm room. You cannot be hired right out of college in a PM role. It’s happened before, but it won’t happen to you. Can you still do it? Yes, absolutely. But you’ll have to do it that hard way like the vast majority of us who have done it before.
It’s an MBA, a big bank training program, and at least 5 years on the sell side. That’s how you ‘start a hedge fund’. All the rest is just legal and accounting, and you can pay people for that.
But the truth is, you don’t really want to because it isn’t the thing you’re imagining it is.
Here’s a description of the thing, it actually is:
