PM and Analyst Transition: Asset Management to Hedge Funds

While it is no secret that hedge funds strongly prefer hiring from the sell-side or from direct competitors, transitioning from asset management to a hedge fund is indeed possible, although challenging and unfortunately not possible in all instances. In this article, we explore the challenges and opportunities associated with this career move option and provide insights to help guide your journey, as well as to manage expectations.

Why Hedge Funds Usually Prefer Talent from the Sell-Side and From Other Hedge Funds:

While not all hedge funds are the same in terms of culture, risk/drawdown limits and performance expectations, they mostly prioritize hiring individuals with specific skill sets that align closely with their risk management and trading philosophies. Here are some reasons why hedge funds traditionally prefer candidates from the sell-side or from direct competitors:

1. Strong Understanding of Risk Management: Sell-side and other Hedge Fund professionals are usually (not always though!) well-versed in risk management, which is crucial in the hedge fund world. Hedge funds typically hire candidates who can confidently navigate tight risk limits and employ effective stop-loss strategies. Interestingly enough, many (but not all!) PMs we speak with that work in leading asset managers do not think of stop-losses and find that articulating their thought process on the subject can be a stumbling block when it comes to succeeding in a hedge fund interview setting. There are always exceptions to the above and we know some excellent PMs and Analysts working at asset managers that would be better suited in a hedge fund setting, however for the vast majority this is not the case.
2. Disciplined Framework for Downside Protection: Hedge funds value discipline when it comes to protecting capital. Sell-side trading experience (for example) often instils a disciplined approach that hedge funds find appealing, regardless of the asset class & instruments being traded. Many traders on the sell-side will already be covering hedge fund clients and will understand how they approach risk, while many analysts and strategists on the sell-side will also be having regular interactions with a range of hedge fund clients and will understand their thought process and investment philosophy.
3. Absolute Return Mindset: The majority of PMs within asset managers operate within the constraints of benchmark-driven strategies, while hedge funds focus on absolute returns. This difference in mindset can make it challenging for many asset management professionals to adapt to the hedge fund environment. Having said that, there are of course a range of very successful absolute return macro & multi-asset funds within asset management, as well as a range of Equity Long/Short and Credit Long/Short funds that we are aware of with strong returns, however the vast majority of funds within real money and asset owners are long-only biased.

Despite these challenges, we have seen numerous asset management PMs and Analysts that have successfully made a move to hedge funds, although this probably only accounts for around 10% of total talent that Hedge Funds hire. Here are some tips that can potentially help increase your chances of success if you are looking to make the move:

Keys to Transitioning from Asset Management to Hedge Funds

1. Earlier Career Moves: Transitioning becomes easier if you make the move early in your career, especially while still at analyst level rather than a portfolio manager. This is an unfortunate reality, however we have still seen some Senior PMs that have also made the move in past years, however in the vast majority of instances, they are already running a Total Return, Absolute Return, or Long/Short strategy within an asset management setting.
2. Prior Sell-Side Experience: If you worked at a top-tier sell-side firm as an analyst, strategist, or trader before transitioning to working in an asset manager, it can enhance your appeal to hedge funds, as there is a good chance you will have been generating trade ideas (if an analyst) or trading (if a trader) with a client base that will have included hedge funds. Again, it will depend how long you have been at the asset manager and if 10+ years have passed, it might make the earlier sell-side experience less relevant (but of course still helpful).
3. Long/Short or Absolute Return Experience: If you are already managing or supporting (as an Analyst/Strategist/APM) absolute return or long/short funds within an asset management setting, this can be a significant advantage vs someone from a pure long-only, benchmark-focused background.
4. Derivatives and Non-Linear Products: Proficiency in expressing trades using derivatives and non-linear products which are typically employed within most hedge fund strategies can make you a more attractive candidate.
5. Exceptional Track Record: A strong track record of performance vs competitors, even in a long-only context, can open doors. If you are PM looking to move from an asset manager to a hedge fund, exceptional performance (typically top decile at a minimum) vs peer group is almost a requirement, although again, we have seen some exceptions. It also significantly helps if you have full ownership of the track record, as making the move as a Co-PM with shared investment performance accountability can make your individual success and contributions more difficult to quantify, although it sometimes might be enough to land you an Assistant PM/Associate PM role.
6. Adapting to Hedge Fund Mindset: As a PM, you must be able to clearly emphasize your understanding of risk management, and portfolio construction, as well as your capability to protect capital in volatile markets. As an analyst or strategist, you should be able to express trade ideas with clear entry and exit points, as well as return targets on each of your trades, if possible. Simply saying “I think we should be overweight Brazillian Bonds” will most likely not be enough if you cannot articulate how you would suggest implementing the trade.
7. Short Ideas for Analysts: Equity (or other asset class) analysts from long-only backgrounds can impress hedge funds by presenting strong short trade ideas during interviews. We have seen an instance where one of the pods we were hiring for put on a short position recommended in an interview by a long-only analyst (from an asset manager) and then they made hiring decisions based on how the position performed (in this instance it played out).
8. Sharpe Ratio Helps: While Sharpe ratio may not be a primary success metric in asset management or even with certain hedge funds, having a good Sharpe as a PM within a real money setting can substantially bolster your appeal to hedge funds, as it demonstrates your ability to generate strong returns with minimal vol. This of course will vary widely depending on strategy, as certain strategies can be substantially more volatile than others. An excellent Sharpe Ratio for a Macro Strategy would typically be 1.5+, however for other strategies, such as Opportunistic Credit (typically a lot more volatile), the Sharpe ratio would not be as important and sometimes even irrelevant (and instead the focus would be placed on annualized returns and drawdowns during volatile periods).
9. Be open to Assistant/Associate PM Roles: Even if you are a Senior PM running a large fund within an asset management setting, you will need to be open to starting out in an Assistant PM/Associate PM roles to prove your worth and eventually transition successfully running your own fund as a lead risk-taker again.
10. Directional Hedge Funds: Some hedge funds have a more directional focus, making the transition slightly easier, however a stellar profile still remains essential.

In conclusion, transitioning from asset management to hedge funds is a challenging yet achievable career move, if you are willing to put in the work on preparing for any interviews. Whether you are an analyst early in your career or an experienced portfolio manager with exceptional performance, it is possible but still challenging to make the transition.

While the bar may be much higher, the rewards in terms of career growth and opportunities can be substantial, however it is important to remember that hedge funds are not for everyone, and a career move should be approached with caution. Hedge funds demand a lot from their investment teams and the expectations can be exceptionally high. The hours are usually a lot longer versus asset management and the work environment can be significantly more competitive. Not everyone who joins a hedge fund manages to thrive, and we regularly see individuals looking to leave hedge funds after a short period of time, either due to culture shock or disappointing performance.

However, for those who are truly confident in their abilities and clear about their framework, the rewards can be significant, sometimes even reaching 10x to 20x or more in terms of compensation for the top 1% of PMs.

If you are considering the move from asset management to hedge funds, remember that it is a path filled with both challenges and opportunities.