by Brian DeChesare Comments (14)

Hedge Fund vs. Mutual Fund: Where Should You Start (and End) Your Career?

Hedge Fund vs. Mutual Fund
You can find plenty of articles that explain hedge fund vs. mutual fund differences, but most of them focus only on the business model.

Good luck finding much about the recruiting process, compensation, daily life, and long-term career prospects.

Companies that offer mutual funds are referred to as asset management firms, so you’ll also see articles that frame this as “hedge funds vs. asset management.”

Technically, “asset management” is much broader and could also include private equity, hedge funds, infrastructure, real estate, and more – any firm that manages financial assets.

For our purposes, though, asset management firms are ones that collect money from the public and invest it into specific pooled investments called mutual funds.

Here’s how they work, and how recruiting and careers are quite different from what hedge funds offer:

Hedge Fund vs. Mutual Fund: The Business Model

Hedge funds and mutual funds seem similar at first glance: both raise capital from investors and then invest it in financial assets, such as publicly traded stocks and bonds.

But past that basic similarity, everything else is quite different:

  • Availability: Hedge funds are lightly regulated and limited to accredited investors, which means very high minimum investments that are only available to wealthy individuals and institutions like pension funds. By contrast, anyone can invest in mutual funds, and the minimum amounts are much lower or do not even exist.
  • Returns Benchmarking: Mutual fund returns are usually measured against a specific index, such as the S&P 500, while hedge funds focus on absolute returns. If the S&P falls 20% in one year, but your portfolio is down only 10%, that’s great if you’re at a mutual fund, but terrible if you’re at a hedge fund.
  • Investment Strategies: Mutual funds stick to traditional asset classes (stocks and bonds), and most, but not all, are long-only. Hedge funds use a wider variety of strategies, including short-selling, derivatives, alternative assets, and betting on events like mergers and spin-offs.
  • Liquidity: Mutual funds offer much higher liquidity because investors can sell their shares whenever they want (maybe with limitations on frequent selling). But hedge funds often have lock-up periods and limited redemption periods each year.
  • Active vs. Passive: A mutual fund may be “active,” meaning that a human Portfolio Manager makes buy and sell decisions, or “passive,” in which case it’s effectively a low-fee index fund that tracks a certain market segment. But hedge funds are always active, or no one would pay their fees.
  • Fees: Mutual funds charge fees based on a percentage of assets under management (AUM). So, a firm managing $100 billion earns higher fees than one managing only $10 billion. For actively managed funds, the fees could be anywhere from 0.5% to 1.0%. Hedge funds, on the other hand, charge both management fees and performance fees. The management fees could be 1-2% of AUM, with performance fees of 10-20%. Some of the top funds even charge 30-40% fees on their profits!
  • Skin in the Game: Finally, most hedge fund Portfolio Managers put a significant portion of their own money into their funds, which incentivizes them to perform and avoid catastrophic risk (in theory). Some PMs at mutual funds do this as well, but it’s less common and not seen as quite as much of a “requirement” there.

How These Business Model Differences Also Explain Recruiting and Compensation Differences

Since the economics of mutual funds and hedge funds are quite different, each fund type hires, grows, and operates differently as well:

  • Asset management firms are incentivized to grow their AUM to earn higher fees. Performance matters for client retention and winning new clients, but it doesn’t directly result in higher or lower bonuses.
  • So, the biggest asset management firms have over $1 trillion under management. But the biggest hedge funds are in the tens of billions, and Bridgewater is the only one with over $100 billion.
  • With higher AUM, mutual-fund firms need to operate more strategies to meet the diversification requirements. Also, not all strategies scale well, so “growth” usually means “run more strategies and teams.”
  • There’s a race to the bottom on fees because mutual funds also compete against index funds and ETFs. It’s difficult to win retail investors who could pay a 0.1% fee on a passive index fund when your firm charges 0.7% for an actively managed fund with average performance.

These differences mean that the compensation ceiling at mutual funds is lower, there’s less entry-level recruiting, and there’s lower turnover – especially at the top levels.

The name of the game is stability, which is great for 20-year veterans and not so great for students who want to get into the industry.

Ideal Candidates at a Hedge Fund vs. Mutual Fund

Both fund types seek similar qualities in candidates:

  1. Passion for the markets and investing.
  2. Ability and willingness to be a team player.
  3. Work experience in a related field, such as equity research or smaller mutual funds.
  4. Ability to generate new investment ideas.
  5. Risk management and staying calm under pressure.

Yes, grades and university/MBA quality still matter, and, unlike in IB/PE, the CFA designation helps.

As a student, you can boost your chances of breaking into both industries with internships, participation in investment clubs, and networking, networking, and more networking.

With all that said, there are some important differences in the types of candidates that each fund type recruits.

First, there is far less entry-level recruiting at long-only mutual funds because turnover is much lower than it is at hedge funds.

Similar to equity research, “Associates” are at the bottom of the hierarchy at large asset management firms, and they’re the ones who are hired out of undergraduate programs.

They usually support the Analysts with a bit of modeling and research, but there isn’t a direct promotion path to Analyst or PM.

Above Associates are the Analysts, who are often recruited out of MBA programs or from other AM firms, hedge funds, equity research, or sales & trading.

The large AM firms might hire a few new Analysts each year, but they don’t have huge classes.

By contrast, there’s huge turnover at multi-manager hedge funds because they’re always promoting people and firing underperforming PMs and Analysts.

A larger MM hedge fund might make several dozen new hires per year.

Aggregated globally, there are probably 500 – 1,500 entry-level hedge fund hires per year vs. maybe ~100, or something in the high dozens to low hundreds, at asset management firms.

In practice, this means that investment bankers and sales & trading professionals are much more likely to end up at hedge funds than at asset management firms.

It also means that conversion rates from internships into full-time roles can be quite low in AM.

People often say that mutual funds recruit from a broader set of universities and MBA programs than the top banks, so recruiting is less “elitist” than IB/PE recruiting.

There’s some truth to that, but the problem is that there aren’t that many entry-level spots to begin with.

The Hedge Fund vs. Mutual Fund Recruiting Process

The recruiting process is similar for both firm types: apply online or do a lot of networking, expect an initial phone or HireVue interview, and then do a series of in-person or video interviews where you meet the entire team.

We’ve covered process details in the article on asset management internships previously; see the articles on hedge fund internships and how to get a job at a hedge fund for coverage of the process there.

There’s a heavy focus on stock pitches (or pitches for other investment types at certain hedge funds) in the interview process, and you can expect technical questions about accounting and valuation.

You’re unlikely to get many M&A and LBO-related questions unless you’re interviewing at a hedge fund that uses merger arbitrage or one that acts more like a PE firm.

The best advice for stock pitches is to know your audience and pitch appropriately.

For example, if you’re interviewing at a fund that likes mature, undervalued industrial companies, don’t pitch a tech company growing at 100% per year that’s currently trading at 20x revenue.

Different Portfolio Managers use different criteria to evaluate investments, and some like specific companies/industries, some emphasize valuation multiples, and others like to do in-depth research.

Rather than spending days on a detailed stock pitch, ask about the preferences of the PM and the group as a whole, and go from there.

You’ll perform much better with a 1-page pitch and simple DCF model if your idea fits the PM’s preferences than you will with a 20-page pitch and complex model that has nothing to do with their strategy.

Beyond stock pitches, structured case studies are also possible, but they’ll usually be fairly simple 3-statement modeling or valuation tests.

Finally, one general difference in interviews is that in asset management, you could receive much broader questions about trade policy, economics, regulation, and other macro topics.

There’s no single source to learn everything about those subjects, so you have to read the WSJ, FT, and other financial publications to stay apprised.

Hedge Fund vs. Mutual Fund: The Best Firms

With mutual funds, you’re usually better off starting at one of the largest firms worldwide with $100+ billion in AUM – the likes of Fidelity, Wellington, T. Rowe Price, PIMCO, MFS, and so on.

The higher the AUM, the higher the fees, and the higher your potential compensation.

Also, most entry-level hiring takes place at these larger firms.

If the firm’s AUM is below ~$10 billion, the economics get squeezed unless the team is extremely lean.

Just make sure that you work in a group that does active investing instead of passive investing.

For example, Vanguard is a great firm with huge AUM, but most funds there are passive – so it’s not the ideal place to build a career as a stock picker.

With hedge funds, there are some advantages to starting at the larger funds, but it’s more of a mixed picture because management fees are higher, and performance fees can make even smaller funds quite lucrative.

Also, the main question with hedge funds is not so much size but single-manager (SM) vs. multi-manager (MM).

You could potentially earn similar amounts at either one, but MM funds tend to be short-term, trading-oriented with higher stress levels, while SM funds often take a longer-term view.

Finally, note that if you join a smaller or startup hedge fund, that doesn’t necessarily mean that you have a higher potential for advancement.

It may be a slower process because the PM of a smaller fund will be reluctant to promote you and reduce his paycheck unless you add a lot of value.

At the larger, multi-manager funds, there’s more of a structured promotion process based on your performance.

Daily Life, Lifestyle, and Culture

Life at hedge funds and mutual funds doesn’t seem that different because you complete similar daily tasks in both:

  1. Generate and evaluate investment ideas.
  2. Monitor current positions.
  3. Build financial models and gather data to support your views.

If you look at our coverage of the hedge fund Analyst and hedge fund Portfolio Manager roles, you’ll have a good idea of what to expect.

Asset management offers a few subtle but significant differences:

  1. Somewhat Lower Stress Levels and Shorter Hours – The hours at many hedge funds are in the 60-70 per week range (12-14 hours per weekday), while many AM professionals work closer to 50-60 hours per week. Also, stress levels tend to be lower because you’re not paid directly based on performance.
  2. Less Granular Analysis – Many hedge funds, especially single-manager ones, tend to be fairly concentrated in specific positions. But many mutual funds hold dozens or even 100+ stocks. At that level, it’s not possible to analyze each company’s new quarterly or annual reports in detail.
  3. Less “Banker Culture” – While hedge funds recruit plenty of former bankers and private equity professionals, the mix of professionals is quite different in asset management. As a broad generalization, the culture is less “fratty” and more intellectual.

These points may sound small, but they add up to fairly significant differences.

In general, asset management offers better work/life balance and less stress, but also a lower compensation ceiling and slower advancement.

Again, though, many differences depend on the single-manager vs. multi-manager distinction.

If you’re working at a newer single-manager fund with a small team, your daily life and hours might be similar to those at a mutual fund.

Hedge Fund vs. Mutual Fund Salaries and Bonuses

As a post-MBA Analyst at a large mutual fund, total compensation might be on par with what post-MBA IB Associates earn: maybe something in the $250K to $350K range.

We listed a much wider compensation range for HF Analysts in the hedge fund career path article ($200K to $600K), and the upper end of that range is extremely-unlikely-to-impossible at mutual funds.

And if you start as an Associate, i.e., out of undergrad rather than an MBA program, expect something closer to hedge fund Junior Analyst pay: the $100K to $150K range.

These figures assume that you are working at a large asset management firm, i.e., one with $100+ billion in AUM.

At smaller firms, you can assume lower compensation closer to the bottom of these ranges.

At the Portfolio Manager level, once again, size matters: PMs at larger AM firms might earn around $1.0 – $1.5 million per year.

But at much smaller funds, total compensation could be closer to $500K.

We’ve listed the compensation range for hedge fund PMs as $500K to $3 million… so, what’s the difference?

The short answer is that the average compensation for PMs at hedge funds vs. mutual funds isn’t much different, but the ceiling is higher at hedge funds because of the performance fees.

If you have a blowout year as a PM at a hedge fund, you could potentially earn a multi-million-dollar or $10+ million bonus.

That would not happen at a mutual fund because even if you beat the S&P by 10%, you still earn only a percentage of your AUM.

Institutional Investor has a good summary of hedge fund vs. mutual fund compensation.

(Note: Compensation figures as of 2020.)

Long-Term Careers and Advancement

Another big difference is that the path to the top can be much slower in asset management because turnover is lower.

You have to perform well against your index and also be in a group that keeps attracting and retaining client money.

Also, some AM firms have a model where PMs earn more the longer their tenure, which further incentivizes people to stick around for 10, 15, or 20+ years.

On the hedge fund side, if you have a few great years, you could reach the Senior Analyst or PM positions quickly – but if you underperform, you could also get fired very quickly.

Even when you reach the PM level or start your own fund, the job doesn’t become “easier” – in fact, it’s arguably more stressful at that level.

In short, mutual funds offer more of a slow, stable climb to the top, while the pathway is rockier but also potentially faster at hedge funds.

Hedge Fund vs. Mutual Fund Exit Opportunities

There isn’t a big difference between the fund types here: your most likely exit opportunities are other funds that use similar strategies.

You are unlikely to get into fields like private equity, investment banking, venture capital, or corporate development because they all require deal experience.

You may be able to do it if you’ve worked in one of those before joining a hedge fund or mutual fund, or you complete an MBA, but otherwise, it’s a challenge.

Doing investment analysis at both hedge funds and mutual funds is fairly specialized, so if you decide that you hate it and need a total career change, you may have to complete an MBA to make it happen.

It’s probably easier to move from a hedge fund to a mutual fund than to do the reverse because the mutual fund lifestyle, hours, and stress levels are all better.

But if you’re at a mutual fund and you find a hedge fund that uses a similar strategy and needs to hire someone ASAP, it’s possible to move in that direction as well.

Long-Term Industry Outlook

If you’ve been breathing oxygen, you’ve seen all the negative headlines about hedge fund performance since the 2008 financial crisis.

The Credit Suisse hedge fund index offers a good summary: HFs have outperformed the MSCI World Index but greatly underperformed the S&P 500.

Some individual funds have done quite well, but in aggregate, it’s hard to justify the fees they charge. As a result, both management fees and performance fees have been falling.

Fee compression is a big issue in both industries, but actively managed mutual funds are probably worse off because they’re directly competing against index funds, ETFs, and robo-advisers.

And unlike hedge funds, they can’t point to fancy strategies or quantitative models or “quantamental” strategies to justify their fees.

To be clear, I’m not saying that either industry will “disappear.”

You can still make money even in a declining industry if you’re good enough at your job.

But if the number of firms declines, you can expect lower compensation and less hiring in the future.

Hedge Fund vs. Mutual Fund Summary

Summing up everything above, hedge funds are better if:

  • You have a traditional IB/PE background, and now you want to invest in the markets rather than work on deals.
  • You want a higher probability of making it into the industry, even if it means working at a multi-manager fund.
  • You want faster advancement and potentially higher compensation, at the expense of a less stable career and higher stress levels.
  • You’re interested in investment strategies beyond traditional stocks and bonds (e.g., derivatives, distressed debt, alternative assets, merger arbitrage, quant funds, convertible arbitrage, global macro, etc.).

And mutual funds or “asset management firms” are better if:

  • You have more of a public-markets background, you have a longer track record of investing, and you want to stick with investing.
  • You’re willing to compete for a very limited number of entry-level spots at one of the large asset management firms.
  • You can accept slower advancement and lower potential compensation at the top, knowing that you’ll have more stability and lower stress levels.
  • You’re more interested in traditional equities and fixed income, and you don’t necessarily care about fancier strategies.

And if you just can’t decide, intern in both, and pick the winner for your full-time job.

Additional Reading

You might be interested in

About the Author

Brian DeChesare is the Founder of Mergers & Inquisitions and Breaking Into Wall Street. In his spare time, he enjoys lifting weights, running, traveling, obsessively watching TV shows, and defeating Sauron.

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Read below or Add a comment

  1. Hi Brian, how do you see the middle office investment portfolio compliance and monitoring job in top asset management mutual fund? many thanks..

    1. Sorry, I haven’t done much research on those jobs, so can’t really give you an intelligent comment here. But in general, compliance requirements will only increase over time as the industry consolidates, so they’re quite good if you like the work or at least can tolerate it. The main downside is that you’ll rarely be able to move into front-office/investing positions from compliance.

  2. Hi Brian! You mentioned Vanguard wouldn’t be a good place to build a career as a student. I’m hoping for more insight on this; is working in passive investing a dead end for students?

    1. It’s fine if you want to stay in passive investing for the long term. But the point is that it would be difficult to move from Vanguard to, say, a hedge fund or any other fund that does more than passive investing. I’m also a bit skeptical that passive investing will “take over” any more than it already has, as it’s largely linked to central bank policies, which will not last forever.

  3. When you work at a hedge fund are you trading with the companies money or your own money?

    1. When you first start, the firm’s money. But as you advance, you’ll have to contribute some of your personal net worth to the firm in most cases, which means you’re at risk losing it if things go poorly.

      1. Do you think the hedge fund industry is dead? Is it impossible to start your own fund now a days?

        1. It’s not “dead” but it is getting more difficult to start your own fund.

          1. Why is it more difficult to start your own fund now compared to the early 2000’s

          2. You need much more capital and more of a track record.

  4. libraryboi

    Hi I am the libraryboi from Twitter, this is off topic. You have permission to email me if you would rather. I was accepted into Arizona State MSF. I am really conflicted and need someone to help me make a final decision if I should go through with the program. Is it cool if I gave some background info on my life? Or sent it to you in a email for more privacy? I am scared if I will fit in and be able to network. Basically TL:DR, I have a weird messed up background and am bad at math but love people and love investing in stocks.

    1. It’s impossible to answer your question without more background information. Feel free to reply to one of the newsletters here if you want brief advice (I’m not going to read a multi-page life story or respond with more than 1-2 sentences).

  5. Any idea if merger arb funds or groups are just as stressful as other hedge fund groups such as long/short or distressed? Or is it a little bit more relaxed vs. other strategies?

    1. I think they’re all about the same. I don’t see how merger arb could be *less* stressful than the others, considering that you’re betting on specific events taking place or not taking place and not on a company’s long-term prospects over many years.

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