© 2016 Shmoop University, Inc. All rights reserved.

The Real Poop

Need to brush up a bit before you dive into Wall Street? Take a peek at our Finance Learning Guides to make sure your knowledge is up to snuff.

See: Financial Analyst, Mutual Fund Manager.

Rich. Greedy. Gun-slinging. Narcissistic. Powerful. Tough. Smart. Hungry. What are eight words that describe my future spouse, Alex-from-Jeopardy? Possibly. Especially if your future spouse is a hedge fund manager.

If you bond with the above set of terms then maybe this is a gig for you. But you better want it from the time you get out of your pinstripe diapers because there are very few good hedge fund jobs out there and the best firms only hire out of the absolute best few schools—i.e., Harvard, Stanford, Wharton, and maybe a few others. But that's it. Hooterville Community College (no connection to the restaurant) may have a great basketball court, but it's not going to turn out any hedge fund managers. In fact, it'll be lucky if it turns out anyone who trims hedges for a living.

Looks nice, but it was supposed to be a herd of elephants.

Why the snobbery? Because the clients expect it. And they are willing to pay high fees for only having "the best of the best." And the fees are high.

For most hedge funds, the fund itself charges "2-20" which means that they take a 2% per year fee and then, after fees are paid, take an additional 20% of the profits of the fund in a given year as "incentive fee," which really just boils down to "...and more fees." So a fund managing $500M has a solid year and is up 20%. They go to $600M "assets under management" or AUM. They will have charged a bit over $10M in fees, which pay the salaries of the financial analysts and secretaries and lawyers and the rent and computer costs. Hedge fund managers don't get rich on the fees. But they do get rich on the "carry"—a fancy word for incentive fee. And you thought Bank of America was fee-hungry.

In the above example, the fund had $100M in profits, less the $10M in fees. So on $90M of attributable profits, they take 20% of $18M. And that money is usually split among just the very top guys. Not a bad gig if you can get it.

What do you do all day? You trade stocks. You can tell people that you "invest." But that's not really the case for most hedge funds because they have to be sensitive to monthly performance. That is, the industry forces them to be short-term greedy (as opposed to long-term greedy). So they trade a lot, invest just a little. Average hold time for a long-term investor might be 5 years. (That's even longer than the average hold time while waiting to speak to an operator at the DMV.) Average hold time for a hedge fund might be 5 months. Or weeks. Or days, depending on how nervous they are.

Careful, missy…you're not going to have any fingernails left.

Your job there as a financial analyst is similar to that of a financial analyst at a mutual fund—you analyze stocks and/or bonds. But in a hedge fund, you analyze hedges as well. And most hedge funds trade in options to hedge positions. If you want a really gnarly exposition therein, check out our Series 7 Options section (coming soon) for the X-rated explanation (images not included).