ROLES WITHIN HEDGE FUNDS
TYPES OF HEDGE FUND INVESTORS
Fund Manager / Portfolio Manager
The fund manager (FM) is in charge of the fund. They usually make the main investment decisions on where and when to invest the money. Fund managers will usually have a team of analysts reporting to them and advising them of any potential opportunities and risks in the market.
A lot of responsibility lies with the FM and it is up to them to improve the performance of the fund. The FM’s compensation package will consist of a basic salary and a large bonus element. The size of the bonus will be dependent on how well the fund does over the year.
As mentioned above analysts report to the FM. Analysts usually specialise in a specific sector and study the various companies that exist within that sector. They then make recommendations to the FM on any opportunities. If a hedge fund has an existing investment in an equity/bond of a company it is the responsibility of the analyst to monitor the company to keep an eye on any new events. Analysts often arrange and conduct meetings with company management.
Analysts can specialise on a variety of factors such as a certain country or industry. These industries can include Telecoms/Media/Technology, Industrials, Autos, Natural Resources, Energy, Financials, Consumer Goods.
Traders are responsible for buying and selling financial products such as shares, bonds and derivatives. If the trader is carrying out the orders of a fund manager they are known as an execution trader. A proprietary trader can buy or sell based on their own investment decisions as well as carrying out orders. Traders focus on short term price movements and try to get the best price that day. Analysts concentrate on mid to long term and try to predict what will happen in the market over the coming weeks and months. Traders work closely with the fund manager and analysts to be aware of any developments in the market. Traders usually have a strong quantitative or mathematical background.
A junior trader has a limited amount of experience and reports to a senior trader. They liaise with operations staff to ensure trades are entered into the software system correctly and resolve any queries they might have. They are monitored quite closely when carrying out trades by the senior members of the team. Senior traders usually have at least 4-5 years of experience. They work with the fund manager and analysts to carry out the strategy for each day.
Chief Operating Officer (COO) / Chief Financial Officer (CFO)
The distinction between a COO and CFO in the hedge fund world is quite blurred and the terms are often used to mean the same thing. The COO is responsible for managing the day to day activities of the fund. The COO is generally in charge of all the operations, fund accounting and compliance staff. The COO liaises with many different groups such as Prime Brokers, Fund Administrators & Solicitors to ensure that everything runs smoothly for the purposes of the investment management team. COO candidates have quite a lot of experience and usually have a professional accountancy qualification. The COO in a hedge fund is often the main point of contact for recruitment.
There can be a difference between a CFO and a COO. In some of the larger hedge funds, they may have 2 people to carry out these functions. The CFO manages the financial risks of the fund. This includes negotiating fees and rates with prime brokers and using forward contracts to protect against foreign exchange risk. Hedge funds can have investors contributing in more than one currency and the CFO needs to protect against any loss that a change in FX rates might have.
Operations / Middle Office (MO)
Operations and Middle Office is a support function for the investment management team (FM, Traders, Analysts) in the fund. They report to the COO. They are in close contact with the prime broker to ensure that the trades booked on the internal software system are the same as what the prime broker is showing. Any queries from the fund administrators would usually go straight to the operations team.
Head of Operations or senior middle office roles are typically filled by candidates with 4-5 years experience in the industry who have strong product knowledge. This could have been with fund administrators, prime brokers or another hedge fund. They are directly below the COO. A junior middle office candidate reports to a senior and has approximately 1-2 years of experience. Hedge funds will specifically mention when they want graduates and will usually prefer people with 1-2 years of experience when looking for junior candidates.
When sourcing an operations candidate, there is usually a strong preference for individuals who have experience within the predominant asset class of the fund. For example, credit hedge funds will look for people with experience in CDS, CDO’s, Loans, RMBS. Equity Funds will look for derivatives and knowledge of corporate actions etc.
Another part of the middle office function is Treasury / Collateral Management / Cash Summary. This involves dealing with margin calls that the PB’s will hold on behalf of the fund.
Fund Accountant (FA)
Fund accountants liaise with the fund administrators to produce the weekly and monthly NAVs. They are responsible for validating the monthly management fee and performance fee which are based on the NAV. The fund is audited at the end of every year and the FA must work with the auditor to produce the year-end audited financial statements. The FA reports internally to the fund manager and the COO.
There are senior and junior jobs within fund accounting like the other roles and the divide is based on similar principles. Senior FAs have more experience and often have a professional accountancy qualification although it is not a mandatory requirement.
Risk Manager / Risk Analyst
Risk managers analyse the makeup of a fund’s portfolio in great detail. They report to the fund manager and traders if there is too much invested in a certain area or product. They provide commentary on changes in the market and the potential effects of these.
Risk managers will have to have strong IT and modelling skills. Expert knowledge of Excel, Access and VBA is almost always required.
Business Development / Sales
This is the person who deals with all client interaction, and who goes out and actively markets the fund to investors. This person would be paid on assets bought into the fund, as well as the assets they can keep in the fund when performance is down.
Investor Relations / Client Services / Sales Support
This person usually acts as the support for a senior business development person or team. Their role usually involves dealing with client queries, completing marketing materials (RFP’s, DDQ’s) and updating the CRM database. Often, the Sales and IR functions fall under the same bracket, particularly in smaller hedge funds.
Essentially a very technical IR person. This role sits in between the investment and the sales team, often taking the place of the PM in a business meeting. Usually, come from ex-analysts.
Accountancy – ACA, ACCA, CIMA
ACA - Chartered Accountant
ACCA - Association of Chartered Certified Accountants
CIMA - Chartered Institute of Management Accountants
CA - Chartered Accountant (SA and the US mainly)
These 4 qualifications are professional accountancy qualifications. The ACA and ACCA qualifications are very similar. Both of them focus on financial accounting and take approximately 3 years to complete. The CIMA qualification relates to management accountancy.
Clients that are looking for COO/CFO, Head of Ops or fund accountants would often desire one of these qualifications. All 3 are very highly regarded in the industry.
The FSA is the independent regulator of the financial services industry in the UK. They have a number of exams which must be passed if you are to be approved to work in certain areas. You need to pass the Regulations exam to speak to clients, and the Securities and Derivatives exams to deal in securities and derivatives respectively.
The roles that would require this qualification include traders and fund managers.
Investment Management / Operations Qualifications
CFA - Chartered Financial Analyst
CAIA - Chartered Alternative Investment Analyst
IOQ - Investment Administration Qualification
IMC - Investment Management Certificate
The CFA and the IMC cover a wide range of financial and investment management topics. They take a number of years to complete and are more popular than the CAIA or IAQ qualification. The most likely candidates to have these qualifications are analysts.
The CAIA qualification focuses specifically on the alternative investment industry. Hedge funds are a part of the alternative investment sector.
The Investment Administration Qualification is aimed at operations and administration staff. It gives candidates an overview of the financial industry and its regulation. This would be for candidates in middle office, operations and compliance roles.