by Brian DeChesare

Long-Only Hedge Funds: A Cozy Career, or a Complete Contradiction?

Long-Only Hedge Funds

When you hear the term “long-only hedge funds,” your first thought might be:

“How can a hedge fund hold only long positions? Doesn’t that contradict the term ‘hedge fund’? Why would investors pay high fees for what is effectively a mutual fund?”

These are all good questions.

The short answer is that there is no “formal” requirement for the strategies a hedge fund must use.

A hedge fund is defined by its structure: the split between Limited Partners (LPs) and General Partners (GPs) and the fees paid to each group.

Most hedge funds use leverage, short-selling, derivatives, and other strategies to manage their risk, but some non-hedge funds also use them.

If you’re interested in long-only hedge funds, you should ask a different set of questions:

  1. Do these long-only funds offer any advantages over strategies like long/short equity?
  2. And if you are interested in this strategy, should you even target hedge funds, or would a long-only asset management firm be better?

I’ll answer both questions here, but I want to start with a few definitions:

What is a Long-Only Hedge Fund?

Long-Only Hedge Fund Definition: A long-only hedge fund buys securities to earn a profit when they increase in price, and it does not bet against securities by borrowing to sell them in advance; the fund might invest in stocks, bonds, derivatives, structured products, and almost anything else.

Long-only hedge funds come in four main variations:

  1. “Best Of” Lists from a Long/Short Strategy – For example, a hedge fund might produce 10 – 20 long/short ideas and then pick the top few “long” ideas for a long-only fund.
  2. Long-Only with Derivatives to Hedge Risk – For example, a fund might only buy stocks, but it could use put options or other derivatives to hedge its risk and justify the fees.
  3. “Long Bias” – Some hedge funds mostly buy stocks but maintain a few short positions to hedge their risk and justify the fees. Technically, these funds are not “long only,” but many data sources group them together.
  4. Non-Equity Funds – Finally, it is difficult to “short” certain securities effectively, such as distressed debt and many types of credit (especially structured products). So, many distressed funds that pursue control strategies are “long-only” even if they market themselves as “distressed” or “deep value.”

This last category is the most common way hedge funds qualify as long-only.

Theoretically, an equity fund could be long-only and manage its risk by buying stocks that are negatively correlated with the market.

But this is extremely difficult because very few sizable companies have negative Betas – and when they do, it’s usually due to an anomaly or special situation.

So, in practice, many long-only equity funds outperform the market in good years and underperform in bad years.

What Makes Long-Only Hedge Funds Different?

I’ll use my favorite data set here to summarize the key differences:

Leverage for Equity Hedge Funds

Equity funds generally use moderate leverage, have moderate liquidity, and have a moderate time horizon (several months up to 1 year).

But if you consider long-only or “long-biased” funds, the liquidity and Beta are often higher:

Long-Only Hedge Funds - Beta to Stocks and Bonds

A fund that holds only stocks can easily sell them, and the lack of short positions makes it easier to unwind trades.

Also, many long-biased funds tend to have more concentrated portfolios since they often aim to become one of the top shareholders in each company.

Long-Only Hedge Funds vs. Long/Short Equity Hedge Funds vs. Long-Only Asset Management

With the definitions out of the way, let’s return to the more interesting questions:

  1. What are the advantages and disadvantages of joining a long-only hedge fund rather than a traditional long/short equity (or other) hedge fund?
  2. And if you are interested in long-only investing, should you target asset management firms instead?

If you compare long-only hedge funds to traditional long/short equity funds, the main differences are:

  1. Recruiting/Numbers – There are far more long/short equity funds than long-only or long-biased funds, so you’ll have an easier time finding jobs. Turnover is also high, especially at the large multi-managers.
  2. Investment Style – Long/short strategies depend more on timing and getting individual quarters and events right, while long-only strategies often use longer holding periods and require deeper dives into companies.
  3. Products and Strategies – Certain strategies, such as “control”-based distressed investing and activist investing, mostly work on the long side. So, if you want to pursue one of these, it might have to be at a long-only fund.
  4. Skill Transferability – Moving from long/short to long-only is easier than doing the reverse because shorting requires a different skill set and more of a “trader’s mindset.”

Compensation doesn’t vary much and depends mostly on the fund size, performance, and structure (single-manager vs. multi-manager).

More differences emerge when you compare long-only hedge funds to long-only asset management:

Investment Analysis and Financial Modeling

You complete similar analyses and financial models at any “fundamental” firm (long/short equity, long-only, activist, event-driven, etc.).

Think: a deep review of companies’ financial statements, 3-statement models, and DCF-based valuations.

The difference is that hedge funds have far more latitude in what they buy and sell, how long they hold positions, and much work they do for each position.

For example, a long-only hedge fund might do a deep dive into one company, acquire a 10% stake, and hold it for 5 years.

Or it might see a company that’s about to have a good quarter, acquire a ~1% stake, get a 20% bump when it reports positive results, and then sell the stake in 2 months.

This second trade would be much less likely at a long-only asset management firm.

These firms often plan to hold stocks for 3 – 5 years, and they often acquire much bigger stakes than hedge funds, which makes selling more difficult.

The hurdles to buy and sell are higher, so you spend more time researching each company, and there’s less portfolio turnover.

Compensation and Work-Life Balance

You will almost always earn less and work less at a long-only asset management firm than at any type of hedge fund.

This is mostly due to the higher fees that hedge funds charge and because the investment strategies depend more on specific catalysts.

You might think you’ll have a more relaxing lifestyle if you work at a distressed hedge fund that’s “long only” and has multi-year holding periods…

…but this is not really the case because anything distressed is incredibly sensitive to catalysts.

So, you must pay close attention to the markets, earnings, and any events that potentially impact the company’s debt covenants.

By contrast, these factors are much less important at a long-only asset management firm because you’re holding stocks for multiple years, not thinly traded bonds whose value might suddenly fall by 50%.

A single quarterly result might change the stock price, but it probably won’t change the 5-year profile by a whole lot.

To give specific numbers, at many long-only AM firms, total compensation for Year 1 “Research Associates” is around $150K USD, with some firms paying a bit lower ($120 – $130K range).

At many hedge funds, the entry-level pay is more like $200K – $300K or more, depending on fund size and performance.

These numbers increase at the MBA level (see the mutual funds vs. hedge funds article), but hedge funds still pay a significant premium.

The senior people at long-only asset management firms can still earn in the high-six-figure-to-low-seven-figure range, but they’re unlikely to go far beyond that.

At hedge funds, though, the sky is the limit if you reach a senior position and perform well.

In terms of work-life balance, the average workweek in long-only AM is ~50 hours, while it’s closer to 60-70 hours at many hedge funds.

Recruiting and Interviews

At both long/short equity and long-only hedge funds, most recruits come from equity research or investment banking backgrounds.

You need financial statement analysis and valuation skills for these roles, and ER and IB provide the most direct paths.

At long-only funds focused on certain credit strategies, people also join from areas like direct lending or distressed debt, restructuring, or turnaround groups.

Equity research and investment banking backgrounds are still common in long-only asset management, but you’ll see more variations.

For example, some consultants get into AM via MBA programs, and some firms like to make “industry hires” in areas like healthcare (e.g., hiring MDs to analyze biotech companies).

Some people also join from buy-side research, other asset management firms, and hedge funds.

The main difference is that there are many fewer spots at these firms (dozens vs. hundreds) because the turnover is lower, and there’s less of a structured “path.”

Interviews are similar in both: you need several high-quality stock pitches, and you can expect many questions about the markets and how you think about investment ideas.

The main difference is that long-only asset management firms test you on broader but shallower knowledge.

They might ask less detailed accounting/valuation questions, but they could go outside finance and ask you about economics, trade policy, or regulation.

Exit Opportunities

People often say moving from a hedge fund to an asset management firm is easier than doing the reverse because AM is perceived as a bit “sleepy” (i.e., lower intensity).

There is some truth to this, but once you gain a few years of experience in either hedge funds or asset management, you tend to stay there.

Jumping between them is trickier than you might think because they tend to attract candidates with different skill sets and career goals.

If I had to “rank” each firm type by exit opportunity breadth, it would look something like this:

  1. Long/Short Equity – You have the most potential exits here since you’ll have experience on both the long and short side, and most hedge fund strategies outside of global macro relate to equity in some way.
  2. Long-Only Hedge Funds – You won’t have as many opportunities at other hedge funds since you get no exposure to shorts. But it may be easier to move to a long-only asset management role since the skill sets overlap so much.
  3. Long-Only Asset Management – Finally, you have the fewest exit opportunities here because the strategies and skill sets differ from most hedge funds and even from equity research at banks. But you can still move to other AM firms or consider “corporate” roles at normal companies.

You do not have a good shot at exit opportunities such as private equity, investment banking, venture capital, or corporate development because they all require deal experience.

If you want to go into one of these, your best bet is to gain deal experience before you join any hedge fund or asset management firm.

The Top Long-Only Hedge Funds and Asset Management Firms

There aren’t that many long-only hedge funds, but the best-known one is probably Baupost Group, led by legendary investor Seth Klarman.

Other names include Abrams (long-biased and more than equity), BloombergSen, Brave Warrior, ESL (Edward Lampert), Falcon Point (also uses long/short and high-yield strategies), and Lansdowne and Egerton in the U.K. (both also do long/short equity).

You can add more names if you also count long-only credit funds, “control”-based distressed debt hedge funds, and activist funds, but we have separate articles for these.

On the long-only asset management side, the biggest firms are your best bet because most do structured recruiting at the MBA and undergraduate levels.

So, on the equities side, consider names like Fidelity, BlackRock, T. Rowe Price, and Wellington (Vanguard does little active management, so it’s not on this list).

In credit, PIMCO is the giant, but other notable firms include DoubleLine, TCW, Nuveen, and PGIM.

Final Thoughts on Long-Only Hedge Funds

Outside of a few areas (credit, distressed, and activist strategies), there just aren’t that many long-only hedge funds.

So, if you’re thinking about this topic, you should probably reframe your questions:

  1. Is there any reason to target long-only hedge funds rather than long/short equity or other strategies? Probably not – unless you’re interested in an inherently long-only strategy. Otherwise, recruiting will be more difficult because you won’t be able to find these firms easily.
  2. Should you join a long-only asset management firm rather than a long-only or long/short hedge fund? – It could make sense if you’re fine with lower compensation, more difficult recruiting, and a murkier career path in exchange for reduced hours/stress and a longer-term investment style.

If you have a clear preference and job offers from comparable firms, this question should be an easy decision.

It gets trickier if you have offers from very different firms.

For example, let’s say you have two offers: one from a $5 billion long-only asset management firm with a solid 15-year track record and one from a $200 million long/short equity hedge fund that has only been around for 2 years.

I would recommend the long-only AM offer because you’ll almost certainly get a better experience there, even if your initial compensation is lower.

Plus, the firm is more likely to keep operating for the long term, whereas the failure rate among small hedge funds is quite high.

As with the investment banking vs. private equity debate, many of these questions depend on the specific firms involved.

It’s almost always better to start at a brand-name firm, even if you want to switch industries later or even if it means lower entry-level compensation.

If these firms were closer in size and history (e.g., $3 vs. $5 billion and 10 years vs. 15 years), it would come down to your lifestyle/investing/career preferences.

Once you know those, you can resolve this contradiction – or find that nice middle ground.

Want More?

You might be interested in How to Start a Hedge Fund – and Why You Probably Shouldn’t.

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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