College graduates at hedge fund billionaire Steve Cohen's investment school Point72 Academy.

There are some in this world who look upon bankers' pay as small change. And who are these masters of the universe? They are called hedge fund managers — hedgies for short. They are investors who buy and sell all manner of financial instruments with the express aim of making money for their clients, and for themselves.

So just how much do these masters of the universe earn each year? Well, hedge fund manager James Simons, a quantitative trading genius made an estimated $1.5 billion last year for himself. He is the chairman of the hedge fund firm he founded, Renaissance Technologies, which manages $36 billion. Similarly, Michael Platt of London-based BlueCrest Capital Management also personally made an estimated $1.5 billion last year. 

With such outsized pay days, you can easily tell why working for a hedge fund is one of the most appealing career paths for budding finance people. Hedge funds are much less regulated than other investment vehicles (like mutual funds), and their inner workings are shrouded in secrecy.

"The hedge fund manager is the person responsible for physically managing the monies, and it isn't the type of role that you can pick up straight from university," Peter Elliott, director of Emerson Chase City, a recruitment firm specialising in hedge funds told The Independent. "A fund management position is on the pinnacle of the industry."

In other words, you can't be fresh out of college and set up a hedge fund as investors typically park their money with someone who has a proven track record. Therefore, a lot of hedgies start off as traders in investment banks working on proprietary trading desks trading stocks, bonds, currencies, commodities, derivatives, or other financial instruments. Another good entry into the hedge fund industry is through becoming a market analyst.

"If you've worked on proprietary trading desks and have a solid track record then that's a good way of getting into the industry," Ajay Malhotra, hedge fund founder and president of ACE Capital, whose Manhattan office reflects a 15-year obsession with artwork from India, told Braingainmag.com.
 

What degrees do you need?

It's a job that lays money on being one step ahead of the market, so you need to be nothing short of brilliant. You need impeccable academic credentials to inspire confidence since you are handling vast sums of money belonging to powerful investors. A First from one of the top universities, usually in something relevant such as business, economics, accounting and maths will get you over the first hurdle. An MSc could also help as could a CFA (chartered financial analyst) qualification.

"You need to be a straight-A student. It helps to have an Ivy league education, MBA, or a quant-focused Ph.D," said Malhotra, a Wharton MBA graduate. He studied in Delhi Public School, Mathura Road and came to the US to major in maths from the California Institute of Technology, an elite destination for science, engineering and maths study just outside Los Angeles.  

The hedge fund industry is also known to attract science and engineering talent. 

“At a more junior level, the ability to code in Python and Java has increasingly been an attractive credential for quant hedge funds,” Ben Hodzic, managing consultant of quantitative analytics, research and trading, Americas, at Selby Jennings, told eFinancialCareers.com.

Quant hedge funds typically look for college students with very strong maths, computer science or engineering skills, as well as programming skills, for example, C++, Python and Java. Some schools have even developed majors, such as financial engineering majors, specifically for quantitative analysis.

“Quant funds in particular are looking for the smart, analytical people right out of undergrad — such as maths or econ majors from MIT or Wharton, for example — rather than pulling from investment banking or sales and trading floors,” Crosby Baker, a managing consultant in the financial services and real estate practice at Korn Ferry Futurestep, told eFinancialCareers.com.

The bulk of hedge fund employees attended top business schools, including Harvard, Wharton, the University of Chicago and Northwestern, showed a CNBC survey. "In addition to receiving a quality education, attending a top school can help you make valuable connections with individuals who have, or will have, significant capital," noted Investopedia, which publishes market related news.
 

Competitive Career

"I have never met a hedgie who wasn't a Type A personality. They all bear the standard hallmarks of being competitive, outgoing, ambitious, impatient and aggressive," said Malhotra.

Students eyeing a career in the hedge fund industry also need to possess a temperament suited to dealing with the stress on the job.    

"If it were just pure maths we'd get a computer to do the work. At the end of the day, you need people who have a natural feel for the markets," said Malhotra. "As a hedgie you must be furiously competitive, and have nerves of steel."

Also bear in mind that highly successful hedge fund managers like James Simons of Renaissance Technology ushered in the quantitative trading wave that is now dominating the hedge fund world. Firms that rely primarily on human decision-making are anachronisms of the past. The majority of the 10 top-earning hedge fund managers and traders of 2016 to a greater or lesser extent used computers and systems-based approaches to trading financial markets, reported Forbes. Algorithmic-driven trading and the quants who use sophisticated statistical models to find attractive trades are taking over the investment world.

It's a career that has high rewards as it allows a greater level of individuality than other areas of finance. As hedge funds are generally smaller than investment banks, hedgies enjoy far greater levels of investment freedom, intimacy and control.  

"This investment freedom is what attracts so many investment managers to hedge funds. That and the quite extraordinary sums of cash that the very best can earn," quipped Malhotra.

Hedgies have to settle for a high commission and bonus compensation structure. In fact, the salary is a tiny fraction of their overall pay. There's an implicit difference between investment bankers and hedge fund managers as hedgies only get paid bonuses when they make money. In other words, there's no reward for standing still or failure in this highly competitive business. Salaries in the industry are not dissimilar to those paid in investment banking, so to make serious money, hedge fund managers need to earn their performance-related fees. These typically amount to 20% of any returns made on a portfolio above a set benchmark, and this is how hedge fund pay also has the potential to rocket.
 

High Risk, High Reward

The hedge fund industry rakes in vast sums, but is not immune to spectacular failures, most notably Long Term Capital Management, which blew up in 1998 and almost took Wall Street with it. Amaranth Advisors, also famously lost billions of dollars in a few weeks on bad natural gas trades in 2006. Many have also tried to blame hedgies for some of the excessive risk-taking they say triggered the 2008 global financial crisis.
 

Investment Freedom

What sets hedge funds apart from most investment funds is the range of instruments they can use and the strategies they can employ. Traditional fund managers buy shares and bonds in the hope that they will rise in value, or occasionally dabble in financial derivatives, but their hedge fund counterparts can do so much more. For example, they can take advantage of movements in interest rates and currencies, company restructuring and bankruptcies, and pricing anomalies across different markets.

"This investment freedom is what attracts so many young investment managers to hedge funds. That and the quite extraordinary sums of cash that the very best can earn, of course," said Malhotra.

 
Uttara Choudhury is a writer for Forbes India and The Wire. In 1997, she went on the British Chevening Scholarship to study Journalism in the University of Westminster, in London.