The Hedge Fund Portfolio Manager Job: A Day in the Life, Salaries, and Trade-Offs
Yes, everyone hates bankers now, and politicians threaten to destroy private equity…
…but plenty of people still fantasize about becoming Portfolio Managers and earning hundreds of millions of dollars.
At that level, who cares if everyone hates you?
The only problem is that the reality is much different from the headlines about hedge funds or what you see on shows like Billions:
What Does a Portfolio Manager Do?
The Portfolio Manager sits at or near the top of the hedge-fund hierarchy.
At single-manager funds (SM funds), the PM started or took over the fund and has responsibility for everything that happens.
At multi-manager funds (MM funds), there are potentially dozens of PMs who are each assigned a certain amount of assets under management (AUM) to invest.
Regardless of the fund type, the PM makes final trading decisions, manages risk and the entire portfolio, and oversees back/middle office operations such as compliance, IT, and accounting.
The PM also reviews ideas generated by junior team members and is responsible for marketing the fund, raising capital, and maintaining relations with the Limited Partners.
The Portfolio Manager earns money based on his/her performance (Profit & Loss Statement – P&L or “PnL”) in the year, which means that it’s possible to earn a bonus of $0, or a bonus in the millions of dollars… or anything in between.
On average, PMs tend to earn far more than Hedge Fund Analysts because making the correct trading decisions, executing them, and managing risk are more valuable skills than generating investment ideas.
Many smart people who know accounting and finance (or coding/statistics/math on the quant side) could come up with ideas and hedge fund strategies that have the potential to make money.
Without the hedge fund portfolio manager, however, those ideas and strategies would remain in the “potential” column – not the “actual dollars realized” column.
Research Analyst vs. Portfolio Manager
There are some similarities between the different roles in the hedge fund career path; for example, everyone generates and evaluates trading ideas, monitors current positions, and conducts due diligence.
But the key difference is that PMs are responsible for far more than those tasks:
- Investment Logistics – For example, what percentage of AUM should you allocate to Idea X vs. Idea Y? What’s the best way to hedge, and how much should you allocate to that? How well can the traders execute the orders required to build the position?
- Risk Management – PMs focus on risks related to both the individual positions and macro factors that might affect the entire portfolio – and how to prevent disaster if there’s a market meltdown.
- Entire Portfolio – PMs spend more time thinking about portfolio-wide diversification and points like the net exposure (% long positions – % short positions). Even if Company X has 50-70% upside, it might not make sense as a Long if it doesn’t fit with the rest of the portfolio, or if it would skew risk too much in one direction.
- Non-Investment Responsibilities – PMs must spend time marketing the fund, raising capital from LPs, and answering their questions and concerns. They also oversee the infrastructure required to support the fund, which means they may be further removed from the nitty-gritty details of investing.
Some of these points change a bit for hedge fund portfolio managers at multi-manager (MM) funds; for example, such funds will probably have separate teams for IT and other middle/back-office functions.
Also, since most MM funds run tight net exposure, there’s less flexibility with the structure of the entire portfolio and risk management.
A Day in the Life
This one will vary based on factors such as the fund type, strategy, and AUM, but if we use the same type of fund as in the Analyst article:
- Fund Type: Single Manager
- AUM: $1 – $5 billion range
- Strategy: Long/short equity or other long-term, value-oriented strategy
Then your typical day as a PM might look like this:
6 AM – 7 AM: Wake up, check your phone before rolling out of bed, and see what happened in Europe and Asia overnight and how it will affect your positions.
You get ready and head into the office while listening to a few finance/market podcasts.
7 AM – 9 AM: Arrive at the office, read news related to your current holdings as the rest of the team arrives, and take notes on issues to follow up on throughout the day.
An existing LP also “wants to chat” sometime today.
Your team takes turns pitching ideas, and you hear a few interesting ones about over-levered REITs with high retail exposure that could be good Shorts.
9 AM – 10 AM: Just before the market opens, one of your companies (a building door manufacturer) announces a plan to spin off its EMEA division.
You immediately call the Analyst who worked on that idea and ask him to run the numbers, and the company’s stock price opens down 5% in the first 30 minutes of trading.
To hedge against the risk of an even bigger drop, you think about asking the traders to increase your stake in an industrial conglomerate that is a potential buyer of this division.
10 AM – 11 AM: The Analyst runs into your office with the quick numbers.
The expected selling price for this division is a ~20% discount to fair value, which is why the market hates the deal.
But it doesn’t contribute enough to the company’s financials to justify a 5% drop, so you ask the traders to up your stake – easy to do when everyone else is selling.
11 AM – 12 PM: The LP from earlier in the day finally gets through to you (you were dodging his calls up until now).
He’s skeptical of your current portfolio because he thinks you’re mostly holding small-cap stocks, even though you have a mid-cap focus. You agree to send him more information later.
12 PM – 1 PM: You meet with a Sector Head and another Analyst and find out that you’re in trouble with another position, a 4-5% stake in a software company.
The CEO has just announced an aggressive, high-growth-at-all-costs strategy. You and the Sector Head want to sell your stake immediately, but the Analyst pushes for a longer-term hold.
1 PM – 3 PM: You review the best ideas from your team over the past week and think about how to structure potential new positions.
You want to maintain a net exposure of 40% (e.g., 70% long and 30% short) while limiting each sector to 15% of your total AUM.
One new Long idea is in Healthcare, where you already have 10% of AUM, so you decide to allocate 5% to it and then sell off a 3% stake in another Healthcare company to stay under 15% total.
3 PM – 4 PM: You conduct a quick job interview with a Senior Analyst candidate from a larger fund. You like her ideas, so you ask the other Senior Analysts to speak with her as well.
Then, you get interrupted by a new potential investor calling to request performance stats.
4 PM – 6 PM: The markets close, and neither the software company nor the door manufacturer has turned into a disaster… yet.
You finally get time to do uninterrupted research on an idea one of your Analysts brought you last week.
6 PM – 7 PM: But then news breaks that executives at that software company are “staging a coup” to remove the CEO. The Analyst and Sector Head come into your office, and you all agree to sell your stake ASAP to cut your losses.
7 PM – 9 PM: Go to dinner with a few brokers and other hedge fund portfolio managers. The brokers keep pitching ideas that you’re not interested in, but you stick around to get a sense of everyone else’s mood.
They all seem downbeat, so you avoid mentioning that your fund is up 15% YTD.
9 PM – 10 PM: Head home, respond to a few personal emails, and go to sleep.
Hours and Lifestyle
You could argue that professionals at hedge funds “work less” than ones in investment banking, but this day-in-the-life account shows the flaw with that argument: the stress levels and intensity can be much higher.
Many PMs work around 60 hours per week (or more), but they’re “on call” all the time because the markets are always moving, and potential crises are always waiting.
At multi-manager funds, the PM may not be quite as responsible for non-investing tasks, but stress comes from lower risk tolerance – if you have a bad year, that might be the end for you.
Hedge Fund Portfolio Manager Salary (and Bonus) Levels: Where the Fun Begins
So, the PM job is quite stressful, and you need a wide variety of skills to succeed… but the huge compensation makes up for it, right?
Compensation spans a huge range at this level because it’s linked almost 100% to performance.
We gave a range of $500K to $3 million USD in the hedge fund career path article for the “average” PM, with median pay in the high-six-figure-to-low-seven-figure range.
But there are several important footnotes and caveats.
First, there are thousands of small/startup funds (< $50 million AUM) that are not necessarily included in these compensation surveys.
Pay tends to be far lower at these funds because the average AUM is much lower.
These compensation figures are most applicable for funds with $250+ million under management.
Second, base salaries are often capped at less than $200K because no hedge fund wants to pay much more until
Third, total team compensation is between 10% and 20% of their P&L, depending on the fund size, structure, and the team’s split of the total AUM.
Here’s an example to illustrate the math:
Let’s say that you’re managing a $500 million portfolio at a multi-manager platform fund with $20 billion total in AUM.
The fund had mediocre results for the year, but your team had a positive performance, so you’ll get paid.
Your team earns a 3% return on its $500 million for the year, for a P&L of $15 million.
Yes, a 3% return may seem low, but most MM funds are highly levered because of their neutral net exposure… so 3% could add up to far more at the platform level.
For example, many of the large MM funds, such as Citadel, run 0% net exposure but 400-500% gross exposure (gross exposure = long % + short %).
In addition to your annual profits of $15 million, your team also had expenses in the form of administrative staff, data providers, Bloomberg terminals and other IT, travel and meals, and so on.
Altogether, those add up to $1 million per year.
So, the “Net P&L” before bonuses is $14 million.
Your team earns 15% of that, which is $2.1 million.
You have one Analyst and one Senior Analyst, and you allocate bonuses and base salaries such that the Analyst earns $300K and the Senior Analyst earns $600K.
That leaves $1.2 million for you in total compensation.
Of this $1.2 million, you’ll receive $150K – $200K during the year in base salary, and the remaining $1 million or $1.05 million as a bonus at the end of the year.
How to Become a Hedge Fund Portfolio Manager
No one ever “becomes” a Portfolio Manager from outside the finance industry; you need a track record and years of experience managing money first.
The four most common paths to PM include:
- Perform well over 5-10+ years and get promoted internally (possible at MM funds; less likely at many SM funds).
- Switch jobs and move to a smaller/startup fund or one that is expanding and willing to take a chance on promoting you.
- Join a MM fund that has clear promotion opportunities and is willing to bring you on as a Junior PM.
- Start your own hedge fund.
Paths #1 and #2 are probably the most realistic ones if you develop a solid track record.
And we’ve covered all the reasons why it’s probably a bad idea to start a hedge fund before, but knock yourself out if you enjoy the pain.
The key to everything above is performance.
If you cannot point to a consistent track record of generating a P&L within teams and funds that have done well, you will not become a PM.
Is a Hedge Fund PM Role in Your Future?
For most people, a PM role is probably not appropriate.
This point is part of a broader one about the hedge fund vs. private equity vs. investment banking debate.
In IB and PE, you can succeed by following a process and advancing up a clearly defined hierarchy.
You don’t necessarily need to be “passionate” about deals as long as you can execute them, stay on top of process details, and avoid mistakes.
But with hedge funds, you must be passionate about the markets and investing to get into the industry, and you can’t “fake it.”
And you can’t just “follow a process” to reach the PM level – you also need performance results every single year, and there isn’t one universal method for achieving that.
Plus, you must also be able to make time for all the other tasks besides generating and evaluating ideas.
Managing a personal or family portfolio is no guarantee that you’ll be able to do the job because trade execution and risk management are totally different at the institutional level.
If you understand all that, then the job might be up your alley.
And if not, you can always fantasize about it by watching Billions.
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Does a $500k AUM make you a portfolio manager? Is no, what’s the average range AUM for a PM?
$500K AUM makes you a retail investor. Most people would say you need $100 million AUM to call it a “hedge fund,” but some smaller ones might still qualify. The key is whether or not you’ve raised outside capital with the traditional 2/20 structure.
If a portfolio manager of a multi-manager hedge fund takes 15% of the p & l of his AUM annual return for himself and his team, how does the hedge fund firms executive or founder make money from the fund annual returns?
??? Not sure I understand what you’re asking. The HF starts with a certain amount of assets and then earns a return on it during the year and takes a percentage of that return. If they want to invest more money, they can choose to take less or raise more outside capital.
I mean, how does a hedge fund manager of a multi-manager hedge fund make money from the annual return that comes from the capital allocated to each PM and his team? If the portfolio manager takes 15% p&l from the annual return of capital allocated to him and the team.
The higher-ups at a multi-manager hedge fund all earn small percentages of each individual team’s P&L if that’s what you’re asking.
I am currently a Client Portfolio Manager managing $1bio for UHNW individuals as part of a private wealth management team in UBS.
Is it realistically possible for me to make a switch to a PM / associate PM position at one of the largest mutual funds ? If yes, what steps should I take ?
We don’t focus on these types of transitions, so the best answer I can give is “Maybe, but it’s not as easy as you might think” because mutual funds view themselves as quite different from wealth management and because there is not much turnover at the PM level (unlike at hedge funds). All you can really do is start reaching out and networking with these funds and see what they say.
What about management fees of 20%? Won’t that get added on to the salary in the hypothetical example.
Management fees are not 20%, they are 1-2% of AUM, and they cover fund-wide administrative expenses, teams that lose money, etc.
Hi, thank you for this great post and for clarifying things up. I appreciate it very much.
I want to become a PM. I love research, investing and math. I like to understand the competitive dynamics, understand the needs of advertisers, understand user behavior. I get my inspiration from philosophy, sport methodologies, various scientific studies and the arts. To me macro is very interesting and complex. The ability to understand how the world economies are intertwined, thinking through what instruments will be impacted, and the complexity of keeping it all together is a great. I like hinking about catalysts / what move the stock in the ST. I think active managers are more alive than ever. All these retard quant shops keep pushing prices around based on a simple formula, and it creates opportunities for those who know better. Is a career in HF right for me?
A question arises though what is the next big thing for investment management? What I’m trying to ask is, for an ambitious future investor who wants to manage other people’s money, what investment strategy has the most potential in the next decade, what are the trends? There’s been a lot of discussion about typical L/S being crowded out as more investors move towards passive investing. So, this brings the question – what strategies in the hedge fund world do you see succeeding in the future?
Well, with the current crisis, anything related to distressed debt or distressed investing in general should do well for at least the next few years. HFs that use strategies that require longer lock-up periods should also do well. I think global macro will be tough because many of the “rules” about different asset classes will stop applying due to massive government intervention. Sure, if you like to think about markets in-depth, then a hedge fund career might be for you.
Hi, thank you for the reply.
What about typical L/S? Do you think the ST stuff will be automated away but the LT horizon stuff (distressed debt, deep value) will stay around for a long time?
Separately, I have found that I think differently than many students or guys in the industry do because I have had very different life experiences than are common for people with that educational and professional pedigree. That difference in thought pattern makes me look at the same opportunities through a different lens; it also lets me identify different opportunities than the herd.
On which side are these skills more beneficial? Public or private? I was discussing this with a PE Manager and he said in private markets. His answer: “I don’t think it’s the same in the public markets. You’re pretty rigidly buying or selling a security. You’re along for the ride. In private markets, if you see something that other people don’t because you have a different lens, you can put yourself in the driver’s seat.” What do you think about that?
I don’t think it’s possible to automate strategies like distressed debt with current technology because they require too much “common sense” (reading long documents to find small loopholes and problems with the terms of debt), which is far beyond what computers can currently do. So, yes, these should stay around for a long time.
Private markets tend to be less efficient (look at WeWork’s valuation before and after the implosion), so if you’re good at spotting cases where “the Emperor has no clothes,” yes, private markets are probably better. But you can do this in the public markets as well, just at a smaller scale – look at Muddy Waters’ research on Luckin Coffee and other Chinese companies for good examples.
What professional backgrounds are today’s and tomorrow’s top HF minds coming from?
So today we see strong demand for BB analysts and PhD math/ CS. But if we rewound the clock, we’d see that different backgrounds used to be more coveted. And looking forward – prop trading and quant funds are dying and, surely, the cult of central banking will wane. So there will be new and different factors driving shifting demands for the next generation of investors. What are these trends today? And what will they be in the future?
In other words, where are today and tomorrow’s HF greats going to come from? Where do you see the next Dalio, Icahn, Simons, Buffett… coming from?
The most common backgrounds are still asset management/other public markets investing roles, investment banking, and then the quant route with math/CS/stats people. It has definitely shifted more toward math/CS/stats over time, but a lot of that is at the Analyst level, not really the Portfolio Manager level. I don’t necessarily think quant funds are “dying,” but they’ve under-performed expectations.
I don’t really think we will see massive new hedge funds start today. The window of opportunity closed when the industry was still new, decades ago. For that to change, something fundamental about the financial markets would have to shift – maybe if crypto becomes a huge asset class, we’ll see some new mega-hedge funds born out of that.
But otherwise, I don’t really see how a hedge fund started today could grow to the $50-$100+ billion range. It’s just too difficult to accumulate that much capital when the public markets are now much more efficient.
For that to happen, I think some major regulatory or geopolitical shift or new asset class would have to develop.
Hey Brian, seeking your advice on my education pathway. Pardon me for the lack of relevance to this blog post.
Let me begin by first giving some context.
I’m currently an 18 y/o student from Singapore. Ideally, I want to pursue a tech-related career in an analytical role, such as Data Scientist, Business Analyst, or even something more technical like a Software Engineer.
However, I am currently a year into my three-year vocational school education (sort of like community college in the US?), studying business. Now being the end of the first year, I am to choose which diploma to pursue, having been given a year to decide on one.
Right now, I am leaning towards Marketing, as well as Banking and Finance, due to my passion in analytics and modelling to provide insights and ultimately value to businesses. (my other options are Accounting, Entrepreneurship, Human Resource Management, International Trade, and Resort Management, if that helps) I am also exploring a career in Finance, or as a Marketing Manager, although a career in tech would be preferred.
Now my big question is: which diploma should I go for, given my long term goal is to gain competencies that would complement my skillset as a prospective Data Scientist/Business Analyst?
Or is it smarter to transfer to a course in IT instead? (meaning my past year of education will have gone to waste, which I do not mind, but is of course not preferred)
Now, I understand it is difficult to advise me given the incomplete information, but I would appreciate it if at all you address my questions about my career. If you require the list of modules taught for each diploma feel free to let me know!
We don’t really advise on tech careers here, so I am not the person to ask. If your question is “What degree is the best complement to Data Scientist/Business Analyst?” then I would say Accounting because the rest sound like fluff (not substantial). Accounting gives you well-defined skills that are useful everywhere, similar to coding. Once you go outside of those fields (and engineering, etc.), everything gets more nebulous and you don’t necessarily gain specific skills.
That sounds like an *extremely* difficult job.
That is all
Yes, it is. Don’t tell the high-school students who trade stocks via Robinhood and are also “aspiring” portfolio managers, though…
Very informative post! What would be the maximum age for attempting a transition from S&T to PM ? Would HFs say what maximum age they’re willing to tolerate? In my surroundings people are out by 55 in general.
I don’t know, but you don’t really see many “old” traders, so… I think if you wait past the mid-level (VP or so) in S&T, it gets difficult. They want to see that you can manage your own book and generate good P&L results, but they also don’t want you to stay at a bank for 10+ years.