Wealth Builders’ Dilemma: Investment Banking vs Hedge Funds

Investment banks and hedge funds are both financial entities. But, the similarities end there. They exist for different purposes, and their business models are not similar. More factors set these entities apart than what they have in common. We will go through the differences between investment banking vs hedge funds.

The first major difference is in their primary function. Investment banks focus on raising capital for the business. Also, they are offering financial advisory services. Hedge funds gather investment capital to invest in securities. They aim to generate returns for their investors. While investment banks work with governments and large corporations, hedge funds usually work with high-net-worth individuals.

They both offer a lot career-wise, but you need to bring different sets of expertise. If you want to start a career in investment banking or hedge funds, stay with us. We will cover both entities and what are their characteristics. We also gathered some FAQs so that you do not need to wander in search of answers.

Historical Context and Evolution

Origins and Growth of Investment Banking

The early origins of investment banking can be traced back to the 17th century. Investment banking started developing in Europe, especially in Amsterdam and London. But, the investment banking we know today started evolving in the United States in the 19th century.

The first investment bankers were merchants and financiers in Amsterdam. They conducted trade finance, and currency exchange and issued the first bonds. Not far, in London, the Bank of England was the first bank that managed public debt.

However, the potential of investment banking was identified 2 centuries later in the United States. The large-scale industrialization and the need to finance the growing railroad network demanded larger-scale investments. That triggered the development of investment banks that helped companies in raising capital by issuing bonds.

The need for fast development of the railroad network triggered the introduction of the first large investment banks like J.P. Morgan & Co. They were the key to underwriting and financing these massive railroad projects.

The need for larger-scale financing projects triggered the continuous development of investment banks. At the beginning of the 20th century, well-known banks like Goldman Sachs, Lehman Brothers, and Merrill Lynch emerged. Their services included not only underwriting, and issuing bonds, but also facilitating mergers and acquisitions. Investment banks also started offering advisory services to businesses.

All these diverse services offered by these banks have been identified as possible conflicts of interest. That led to regulatory changes, starting with The Glass-Steagall Act of 1933. This act separated commercial banking activities from investment banking services. This act and most of its goals were in place until 1999 with the introduction of the Gramm-Leach-Bliley Act.

After World War II the need for investment banking increased. Major reconstruction and building projects triggered the development of investment banking all over the world. New banks emerged, and the developed ones expanded their market. They helped in the realization of cross-border mergers and acquisitions.

By the end of the 20th century, technological advances played a crucial role in the development of investment funds. Electronic trade and computer-based financial models transformed how investment banks conducted business.

The economic crisis in 2008 brought new challenges to the finance industry and investment banking was not spared. Regulatory scrutiny increased, resulting in several changes in conducting business. Risk management practices were changed, and the focus was set on transparency and accountability.

Today, investment banks have already adopted a new regulatory landscape. They are utilizing new technology for improved efficiency and are facing constant challenges in the ever-changing finance market.

Emergence and Development of Hedge Funds

The emergence and development of hedge funds can be traced to after World War II. In 1949 Alfred W. Jones founded A.W. Jones & Co. It is considered to be the first hedge fund. They were the first to implement the strategy of taking long and short stock positions to hedge against market risk. Their protective strategy was used to name the type of investment vehicle that we know as a hedge fund.

By 1960 the hedge fund industry continued to develop attracting new investors. Hedge fund managers explored and developed new strategies, beyond short/long equity, and long-only equity strategies. In the next decade, they started employing leverage, and other derivatives to increase returns and manage risk. In this period new hedge fund types and strategies developed, like macro-economic and event-driven strategies.

During 1980 the next big thing was the rise of global macro hedge funds. They focused on betting and predicting global trading trends across different types of asset classes. The Quantum Fund led by George Soros became famous for employing successful global macro strategies.

In the next decade, hedge funds became ever more institutionalized. Pension funds, endowments, and other types of institutional investors recognized hedge funds as an important investment vehicle. Hedge funds were more popular than ever.

But, in 1990 the fall of highly leveraged Long-Term Capital Management had a huge impact on the whole hedge fund industry. This downfall raised questions regarding risks when investing with hedge funds. Since hedge funds were already major investment players, this brought crisis both to the investors and the hedge funds.

After this came other hedge fund scandals like the story of the Enron scandal and other accounting irregularities. This triggered a careful examination of the regulatory framework. This made a dent in the hedge fund’s reputation. Nonetheless, they continued to grow in terms of assets under management. Their unique approach to investment strategy and diversification was not so easy to nullify.

The next big hit for hedge fund companies was the 2008 Global Economic Crisis. One of the major moments was the bankruptcy of the investment bank Lehman Brothers. Many funds and institutions were highly leveraged and over-extended. This caused a major wave of redemptions from investors. They wanted to reduce risk, which led hedge funds to sell securities in the open market.

After the 2008 crisis, the risk management system was carefully evaluated. The balance between risk and reward was reassessed. Hedge funds are needed to adapt to the changes and challenges in the global market. That came with the development of a new regulatory environment.

The 2008 crisis triggered significant changes in the hedge fund industry. Different types of funds resorted to more careful investment strategies. Other companies continued with high risks and high return strategies.

The investment strategies became ever more diversified. The goal was to reduce the investment risk. The development of quantitative and algorithmic trading strategies was on the rise, due to the adoption of new technologies. This allowed hedge funds to analyze large data batches faster than ever. Hedge funds started investing in new asset classes like private equity and real estate.

In recent years, activist investing has become more popular than ever before. The goal is to take a significant share of stakes in the company with the idea of changing its business model. These hedge funds change the companies they invest in from the inside. When they improve the company, their value grows, resulting in increased returns.

The newest trend in hedge funds is using sophisticated technological advancements. They focus on utilizing new technology, trading algorithms, and data analytics to make investment decisions.

Take A Look At This This is How Hedge Funds Started… A Brief History: 

Core Functions and Structures

Structural Overview of Investment Banking

Investment banking is a major part of the financial sector. It provides a wide range of financial services mostly used by large clients, like corporations, governments, and institutions. We will go through the structural overview of the major components and functions of investment banking:

Organization of Investment Banking Divisions

Investment banks are usually organized into divisions. Each division is specialized in specific financial services. The main divisions include:

• Corporate finance. This banking division focuses on advising corporations on capital-raising activities. This includes issuing stocks and bonds and conducting mergers and acquisitions
• Sales and trading. This banking sector is responsible for conducting for buying financial securities. Those include stocks, bonds, and derivatives. They can do it in the banks or the client’s account
• Asset management. The bank is through this division managing investment portfolios in the client’s account. The client can be an individual investor, an institution, or a mutual fund
• Research. This banking division conducts financial analysis and creates reports on different subjects. The usual targets of the research campaigns are companies, industries, and markets. They are doing this research based on the client’s demands. The aim is to help them make investment decisions.

Besides these core functions, investment banks have several supporting functions. They provide smoother operation of the core functions.

• Legal and compliance. This function ensures that the bank is functioning while following all regulatory requirements and legal standards
• Operations. It handles back-office functions that include record-keeping and trade settlements
• Technology. Following through and developing technology infrastructure for trading, research, and other functions.

Key Characteristics of Hedge Funds

A hedge fund is a type of investment fund that pools capital from accredited individual and institutional investors. They use several different investment strategies to acquire high investment returns. To work or invest in a hedge fund requires specific finance experience. These are the key characteristics of hedge funds:

• Diversified investment strategies. Depending on the hedge fund type, they can employ several different strategies for achieving maximum returns. The most common strategies include long and short positions, leverage, event-driven, arbitrage, and other complex techniques
• They are flexible and adaptable. The changes in the market can quickly happen making a strong negative impact on the investments. Hedge funds have the flexibility to adjust their strategies to the new market conditions. This characteristic allows maximum fund performance by seizing new opportunities and managing risks
• Two-component fee structure. The hedge fund fee structure is based on management and performance fees. The management fee is calculated based on assets under management and is between 1% and 2%. The performance fee is calculated based on the higher returns than a before set benchmark. This fee comes in range between 15% and 20%. This fee is paid only if the investment has broken through this predetermined benchmark
• Available only to registered investors. Both individual and institutional investors have to be accredited to conduct hedge fund investing. To become an accredited investor an individual or an institution must have a specific level of net worth or annual income. These levels are often high, and only wealthy investors can participate in larger funds investing
• Limited and lighter regulation. When regulations of other investment funds like mutual or ETFs are compared to the hedge funds, they are very strict. This impacts the transparency and risk rates. But in recent times, and in certain jurisdictions, regulation scrutiny towards hedge funds has increased
• Use of leverage. Leverage or borrowed capital is often employed by all kinds of hedge funds. The aim is to increase their investment capital resulting in higher returns. This also increases investment risk and can lead to massive losses
• A large array of possible investment securities. Hedge funds can invest beyond traditional asset classes like bonds and stocks. Hedge funds often invest in currencies, commodities, real estate, and private equity. This further diversifies the investor’s investment portfolio and reduces the risk
• Different levels of liquidity. Funds employ different levels of liquidity depending on the investment strategy. Some hedge funds invest in highly liquid assets that allow investors frequent redemption periods. Also, funds can invest in less liquid assets, or illiquid assets like debt. That usually comes with long lock-up periods, when investors cannot reap the benefits of potential positive returns. But, in most cases, new investors will have to endure a lock-up period to some extent. The fund needs to find the best way to invest the money and to get positive returns
• Hedge funds focus on absolute return. Traditional investment funds aim to outperform a benchmark. This means that the investment returns need to be higher than the returns of the benchmark index that it is compared against. On the other hand, hedge funds have a focus on absolute return. This means that they can seek positive returns regardless of overall market performance
• Highly skilled fund managers and fund analysts. All types of hedge funds attract only the best and most experienced managers and analysts. They often seek employment because of high salaries and bonus fees. But, the success of the hedge funds solely depends on the capability of their employees. They need to have the ability to analyze the market, and the investment target, and find the opportunity to invest. They also need to carefully calculate and manage risk
• Limited level of transparency. Unlike other investment vehicles, that offer constant liquidity and monitoring of the investments, hedge funds have a limited degree of transparency. They often do not completely disclose their investment strategies to the investors. This disadvantage of hedge funds is slightly annulled with newer regulations that are stricter regarding hedge fund’s reporting
• Use of hurdle rates. Hedge funds frequently use hurdle rates, so the investment is required to achieve a certain degree of return before employing the performance fee. For this to function the goals must align with both the fund managers and the investors
• Varying lock-up periods. These are periods when investors cannot redeem their investments. This is often employed by hedge funds so the managers can count on the stability of the investment. If the lock-up periods didn’t exist that would often force managers to sell securities during market downturns, resulting in large losses.

When investors are choosing the type of hedge funds to invest they must take into account these characteristics. Their investment goals must be aligned with the strategies and other factors that the specific hedge fund is utilizing.

Comparative Analysis in Terms of Career

To fully understand the pros and cons of starting a career in a hedge fund or investment banking, we must undergo a complex analysis. Both of these corporate finance roles come with differences regarding work environment, job roles, compensation, lifestyle, and career trajectory.

Investment Banking

Starting a career in investment banking can bring financial upturns, development of economic and finance skills, and opportunities for career advancement. But, it comes with its share of cons which should be carefully evaluated.

Pros

• Competitive compensation plans. An investment banker’s salary usually has two components – base salary and annual bonuses. Some companies also use performance-based bonuses to stimulate good work. Depending on the seniority and overall performance, bankers can have substantial compensation
• Developing a broad range of skills. When working in the investment bank you can expect to develop several skills including financial modeling. Those include valuation, deal structuring, and client relationship management, and are a foundation in the finance sector. All these skills are important in different finance fields and industries
• An environment that encourages learning. Working in an investment bank is fast-paced and dynamic. You are surrounded by experienced professionals who have to make difficult decisions. That is an ideal environment for learning and developing both financial and mindset skills
• Chance to develop a wide professional network. As an investment banker, you are constantly in contact with finance professionals, clients, and leaders of the industry. You have a chance to develop a strong network of influential and powerful individuals. It can lead your career in different directions
• Developing deal-making experience. Investor bankers are daily subjected to making different types of deals. Those include managing mergers and acquisitions, initial public offerings, and raising capital for investment. This type of experience builds a foundation in finance that not everybody can achieve
• Possibility for career advancement. A career in investment banking can have a straightforward advancement path. You can start as an analyst and from there move to a managerial position. From there you can advance to an associate, and then into top management
• Building up a reputation. Working for a well-established investment bank is a recommendation alone for your future career steps and advances. With this kind of experience and reputation, you can choose a finance sector, anywhere in the world to pursue new challenges.

Cons

• Long working hours. Investment bankers have notorious long working hours, especially during busy periods, and times when closing a deal. You will have to frequently work overtime and during the weekends
• Frequent high-stress levels. Working in a fast-paced environment, where a lot of money is moved with significant risks, stress comes naturally. You have tight deadlines, clients always have high expectations, and you need to fulfill the company’s goals. This can bring high levels of stress that only people with certain mindsets can endure
• Work-life balance will be in jeopardy. Working long hours with high amounts of stress will have a significant impact on your private life. Only a specific type of person can carry all the responsibilities of investment banking, and still maintain a stable private life
• High demands for entry-level personnel. When you start working in the bank as an analyst it is expected to work extra long hours on repetitive jobs. You will have to analyze large amounts of data and offer your assessment based on your knowledge
• Narrow career path. Although investment banking can offer developing several important skills, that depends on your job description and expectations. Some roles in the investment banks have a narrow focus on the specific elements in the finance industry
• No job security. Working in a dynamic finance sector doesn’t guarantee a long-term job. Most of the work demands constant strong performances. During market crises, banks often have to make job cuts. You need to be on top of things if you want to have a stable job.

If you choose to start a career in investment banking you must be aware of all the pluses and minuses. Yes, you can learn skills that not many can acquire and you will be adequately compensated. But, long working hours and high stress levels will limit your private life. You need to count on these factors before you make a definitive choice about your future.

Hedge Funds

A career in a hedge fund can come with a set of rewards but it has its share of risks. We will go through both the advantages and disadvantages of this career path.

Pros

• A chance to earn high compensation. Both, fund analysts and managers if they are successful can count on high compensation. Their salaries have a different structure, but they can count on annual and performance-based bonuses on top of their base salary. Larger funds with bigger assets under management can offer both higher salaries and bonuses
• Dynamic work environment. Working in hedge funds is often fast-paced and dynamic. For individuals who strive to overcome challenges daily, this is a great incentive. All employees in the hedge funds are constantly under pressure from ever-changing conditions on the market
• High level of autonomy and decision-making. Professionals with higher experience levels have to make tough decisions every day. The function of the hedge fund depends on them. Whole management teams have the autonomy to conduct quick shifts in investing if the opportunity demands it
• Chance to experience entrepreneurship. If you choose a fund internship with a start-up hedge fund you can get involved in developing a business. This type of experience with the financial sector is a major stepping stone for a career in business
• Hedge fund fosters a performance-driven culture. Hedge fund culture strives and focuses on merit in everyday work. Since a significant part of the compensation is a performance-based bonus, everybody does their best to earn it. Once you went down the hedge fund career path for some time, you will be sturdily built for anything in the finance sector
• Opportunities for work around the globe. All types of hedge funds conduct business in the global financial market. This opens a door to a chance to work on an international scale in different sectors of the business industry.

Cons

But, with all these positives comes its share of downsides:

• It is difficult to start a career in hedge funds. If you do not have a track record in the hedge fund industry it can be difficult to start a career. Both larger and established and younger and smaller hedge funds prefer experienced managers and analysts. Entry-level positions are a bit more frequent in smaller and younger hedge funds, that cannot attract known names from the industry. These jobs usually bring smaller returns but offer valued experience
• Lack of job security. You managed to find a job in the hedge fund, and you think that you sealed the deal. Well, jobs in this finance sector are hard to keep. Everything is focused on performance. If the hedge fund has poor performance or there are sudden market movements, funds often downsize. The first on the list are underperformers
• Steep learning curve. Professionals who work in hedge funds are expected to have a wide knowledge of financial markets, investing strategies, and risk management. If you are new and do not have experience you will have to learn fast. Also, you will not have a lot of room for mistakes
• Intense and stressful work environment. Hedge funds often use high-risk strategies to gain massive returns. They have to calculate several factors before the investment happens. Their knowledge must be very wide so they can have a clear bigger picture. That can put a strain on a seasoned professional, not to mention a junior person. Everybody must adapt to constant changes in the market, especially in risky periods of market volatility. This frequently comes with long working hours and high-pressure situations
• Highly variable compensation rates. Some will argue that performance-based salaries are the only fair way to conduct business. But in the long run, it can put a strain on everybody. Hedge funds often invest in low-liquid investments or even debt capital that carry high risk. Sometimes, even if you do everything well, the market shifts, leaving you with almost nothing at the end of the month.

Category	Investment Banking	Hedge Funds
Pay	High base + bonuses	High base + performance fees
Hours	Extremely long	Long but more reasonable
Stress	Very high	High
Career growth	Clear path	Harder to enter
Job security	Low	Low
Skills developed	Broad	Specialized
Travel opportunities	Some	Global scope

Before you choose to start your career in hedge funds put the pros and cons at the scale. Then try to objectively estimate your possibilities. If you still think that you have the mindset, knowledge, and character then you can actively start working on your career. Pros of the hedge funds attract a lot of potential prospects, so be ready for solid competition.

Career Trajectories and Salaries

Typical Career Paths in Investment Banking and Hedge Funds

Both hedge funds and investment banks are crucial parts of the finance sector. They have their differences and similarities, but their career paths are very different. We will go through a typical career path of both financial institutions.

Investment Banking Career Paths

Here are the typical career paths in the investment bank:

• Investment banking analyst: This is an entry-level position that usually lasts between 1 and 3 years depending on different factors. Analyst’s work hours are long and often the tasks are tedious. Their main task is conducting due diligence which is essential for minimizing the investment risk. They also conduct financial modeling to predict future financial performance based on historical data and industry trends. These tasks are crucial in supporting the decision-making of the top-tier management
• Bank associates: Associates are considered to be mid-level in the employment structure. After moving from an analyst job they get more challenging tasks like interactions with clients and executing deals. Other tasks include the preparation of presentations for potential investors. Also, they need to be constantly in the loop regarding current marketing conditions and the newest industry trends. This step in the career takes around 5 years for most associates to overcome and move higher up
• Vice president: Moving a step up from an associate brings a mix of strategic, managerial, and client-facing responsibilities. VPs are responsible for interaction with clients, as a base for building stable and long business relationships. Together with senior leadership, they are making key decisions that lead up to deal execution. Their knowledge of complex financial concepts needs to be concise. VPs need to know how to explain these terms and strategies so the client can understand what the bank is offering them. They are also leaders who monitor the work of analysts and associates and offer them valuable knowledge and expertise
• Director/Executive Director: Capable vice presidents usually rise to the position of Director after 5 years. This is the first senior position in an investment banking structure. With this comes strategic decision-making that has a significant impact on the bank’s everyday work. They are involved in developing the overall business strategy. At the same time, they are ensuring that it is aligned with the bank’s goals and the newest market and industry trends. They make the key decisions that have a huge impact on new business opportunities and will guide a whole team in a specific direction. Directors are responsible for identifying potential new business opportunities. They are also important for developing a strong business network, which is essential for a good relationship with the clients. A well-developed business network can also bring new possibilities for brokering deals and investments
• Managing director/partner: A managing director or a partner is a senior executive position. They are responsible for the leadership on the company level and they designate the strategic direction of the company. They are monitoring the individual teams, and checking if their work is aligned with the company’s direction. One of the key roles of a managing director is identifying market opportunities and areas of growth. They are personally responsible for pursuing major deals. Also, they are representing the bank on external forums and finance industry conferences. They are the main connection with the regulatory bodies. All these factors in when building the reputation of the bank and attracting potential investors.

Salaries in Investment Banking According To Positions

Defining salaries for these positions is difficult because they can differ for several reasons. We will go through the salary grades that are typically applied to these positions:

• Investment Banking Analyst: In the first year, an analyst typically earns a base salary of $100,000. Analysts with three years of experience have an increase to typically $110,000. When we take bonuses into account, that figure can rise to anywhere between $170,000 and $230,000
• Bank Associate: A first-year bank associate makes a base salary of roughly $150,000. With experience, the base salary rises to a maximum of $200,000 after three years. With bonuses, the salary of a young associate rises to $200,000, while those with more experience can count on $250,000
• Vice President: The base compensation for the VP is between $250,000 and $300,000. With bonuses, the full compensation rises to anywhere between $400,000 and $700,000
• Director/Executive Director: With more responsibility comes another pay bump to a range of between $300,000 and $350,000. With bonuses that figure can rise to $700,000 and in some cases to a full $1 million.
• Managing Director/Partner: A partner or a managing director earns a base salary of $350,000 to $600,000. With bonuses, this figure can rise between 1$ million and several million depending on the company.

Hedge Fund Career Paths

The career path in the hedge fund starts with running similar tasks, but later becomes very different due to differences in these financial institutions:

• Research analyst: The main task of the analyst is to conduct thorough and detailed research. They analyze financial statements, economic data, industry trends, and company-specific information. Based on the results of those analyses they are making investment recommendations. Through research, they focus on identifying the fair value of a particular security. They also assess potential market, credit, and operational risks. Their job is also to monitor the current investments of the fund, suggesting an exit strategy if needed. Like with investment banks, this job is an entry-level position, with long working hours. A successful analyst moves up the corporate ladder after roughly 3 years.
• Senior research analyst: This position is an experience and knowledge upgrade from the junior analysts. The key duties remained the same, with a difference of being more involved in decision-making. The role of a senior analyst demands several important skills like advanced technical skills, industry expertise, and leadership abilities. Senior analysts often play a crucial role when picking a specific investment.
• Fund manager/portfolio manager: The role of a fund manager is crucial in every type of hedge fund. They both cover the responsibilities of choosing where to invest and at the same time manage the fund’s portfolio. This is crucial because those two decisions have the greatest impact on investment returns. Fund managers go from scoping the data that the analyst forwarded them, to conducting additional analyses if needed. Then based on the results of the analysis they are making investment decisions. They also have to employ risk management techniques. And their job doesn’t stop there. They continually oversee the state of the investments and are in live communication with the investors.
• Partner/Chief Investment Officer: This is a top-level leadership role at every hedge fund. They are responsible for creating an overall direction for the whole fund to follow. They choose the preferable strategies for the investments and oversee risk management execution. They are closely working with the fund managers ensuring that the fund’s portfolio is aligned with the overall fund’s strategy. They are on top of all important decision making and they approve all the major investments. Their responsibility is to keep funds operating under the regulatory guidelines. That includes maintaining transparency with regulatory authorities and adapting any changes in the regulations. An important function of people in this role is to evaluate the performance of the fund. They take the performance results and compare them to relevant benchmarks and goals set beforehand.

Salaries in Hedge Fund Career According To Positions

Several factors impact the full compensation of all hedge fund employees. The most important are the location of the business, the hedge fund itself, and bonuses that the employee earns. But, after analyzing hedge fund positions, we gathered relevant information on which we can make a good assumption about each position’s compensation.

• Research Analyst: Analysts who are starting a career in the hedge fund industry can expect a base salary in the range of $80,000 to $120,000. Regular analysts can count on a base salary in the range of $110,000 to $150,000. Senior research analysts get a pay bump, raising the base salary to a range between $150,000 and $250,000. Analysts at hedge funds besides base salary also receive annual bonuses. Depending on the fund performance this can raise the full compensation to more than $250,000.
• Fund Manager/Portfolio Manager: An entry-level fund manager gets a substantial base salary weighing between $250,000 and $500,000. With more experience, the base salary exponentially increases. Top-tier fund managers can earn up to $2 million. Bonuses are performance-based, and they vary from fund to fund. Depending on the success of the fund, the total compensation can rise to several million dollars.
• Partner/Chief Investment Officer: The compensation of top-tier management in hedge funds is substantial. It can have high variations depending on the fund, and its performance. The base salary rarely goes below $400,000 but can go up to more than $1 million. With bonuses, the total compensation can reach multi-million dollar figures.

Cultural and Work Environment

The cultural and work environment in hedge funds and investment banking differs. These are structurally different finance companies that garnish somewhat different approaches to work. Also, the environment is different in every hedge fund or investment bank.

There are several factors to consider when discussing this topic. The most important are the size of the institution, the specific business area, and the leadership style. But, there are general characteristics that can be associated with these different types of business.

But, before we move to specific differences between these finance institutions, we will shortly focus on what they have in common:

• Focus on achieving performance excellence. Success both in hedge funds and investment banking is closely connected with financial performance and client satisfaction. To achieve these goals you need to constantly deliver maximum. That demands a developed working ethic, and eagerness to learn and progress. In this line of business, no one forgives failure
• Fulfilling high expectations. This characteristic is almost merged with delivering high performance. When working in this line of business one is expected to work under pressure, with attention to detail, while finishing the job on an often tight schedule
• The whole work and career is based on meritocracy. This logic can be easily derived from the first two points. To climb on the hierarchy ladder an employee must constantly deliver positive results. The compensation is also based on performance. People working in the same position can receive very different bonuses, and they come as a result of overall commitment to work and achieved results.

Hedge funds

• Entrepreneurial culture. Hedge funds have a focus on entrepreneurial culture that includes risk-taking, innovation, autonomy, flexibility, and adaptivity. Since the structure is usually smaller employees have a higher degree of autonomy in everyday work. With that autonomy comes increased decision-making and responsibility. Making decisions in the hedge fund industry must be flexible and adaptable so the hedge fund can respond to sudden market shifts
• Performance driven. One of the most important characteristics of working in a hedge fund is the demand for constant high results. The success of the fund is measured by its ability to generate massive positive returns. To achieve that all employees must bring their maximum every day
• Niche specialization. Although hedge funds often combine several investment strategies, they will be specialized in only a few. This specialization leads to managers and analysts becoming experts in a specific niche. This brings its share of good and bad to the employee. Yes, you will probably become an expert in the field. But if you are stuck on the same task, you will fail to diversify your knowledge and experience
• Flat organizational structure. Hedge funds often have a flatter organizational structure than investment banks. In day-to-day operations, this means that the employees at different levels of the hierarchy will be more often in professional contact
• Fast-paced and dynamic workplace. Besides its performance-driven culture, work in the hedge fund is also very dynamic and fast. And it rarely slows down. You almost always have a ton of work that you had to finish yesterday. On the plus side, it is not chaotic like in investment banking, where you will regularly have to work over weekends. In the hedge fund, you still have a better chance for a quality private life.

Investment banks

• Structured organizational setup. When compared to the flat organizational structure of a hedge fund, investment banks have a clear structure with hierarchy levels. Roles and responsibilities have clear boundaries, and to progress an employee must rise on the hierarchy level
• Focus on the client. Investment banks are offering a range of financial services to corporate and government clients. This focus on the client is driving the work culture and resulting in the development of relationship management which is tied to client satisfaction
• Strong teamwork. While hedge funds often focus on individual strengths, investment banks heavily rely on teamwork. Often teams from different sectors must work together to achieve goals, so there is not a lot of space for individuality
• Regulatory oversight. When compared to hedge funds and their rather loose regulatory obligations, investment banks are highly regulated. A major part of the work culture is compliance with financial regulations and regulatory bodies
• Developed training programs. Most investment banks have programs for entry-level employees. Since a career in investment banking starts with an analyst position, all new employees need to master the skills that skillful analysts possess.

Category	Investment Banks	Hedge Funds
Purpose	Raise capital, provide financial advisory services	Invest in securities to generate returns for investors
Clients	Large corporations, governments	Wealthy individuals, institutions
Culture	Structured, team-focused	Entrepreneurial, performance-driven
Pay Structure	Base salary plus bonuses	Base salary plus performance fees
Regulation	Heavily regulated	Lightly regulated
Risk Levels	Lower risks	Higher risks from leverage
Work Hours	Extremely long hours	Also long but more reasonable

Impact of Market Trends

Market trends have a constant major impact on both hedge funds and investment banks. They shape activities and influence performance results. Corporations must choose an investment strategy based on the current market trends. But that is only the tip of the iceberg. We will overview how the market trends can affect these financial sectors:

• Bull and bear markets. During bull markets hedge funds can benefit from rising prices of securities, resulting in higher returns. Using short/long equity strategy and event-driven funds will see an increase in opportunities. On the other hand, during bear markets, hedge funds can face challenges as securities prices plummet. In these times it is best to use short-selling strategies and focus on risk management

Future Outlook

Do Hedge Funds Have a Future?

The hedge funds through history have shown that they can adapt to new business conditions, and recover from the biggest losses. The newest big impact on the global scale including the coronavirus pandemic made a dent in hedge fund operations. The development of new online investment platforms made a lasting impact. However, hedge funds are on a strong way to recovery.

To be able to assess the future of hedge funds we must discuss different factors that can make a difference:

• The possibility to evolve and adapt. Throughout history, hedge funds have been able to adapt to new market conditions and new challenges. The rise of cryptocurrencies, AI, and the impact of global climate change are the new challenges that hedge funds will have to tackle
• Pressure to reduce fees. Hedge funds have been known for their two-component fee structure. It includes the performance fee and the management fee, known as a 2/20 fee structure. Hedge funds are under pressure to justify these fees. Also, high competition is pushing certain hedge funds to lower these fees even to attract potential investors
• The integration of new technologies. There is a wide scope of new technologies that hedge funds can employ to minimize investment risk and conduct deep analysis. Funds that have successfully implemented these technologies in their strategies have a competitive advantage and a safer future
• Adapting to new investment strategies. A younger generation of investors has shown a demand for strategies that are aligned with environmental and social values. This will push hedge funds to adapt to those needs
• Combating the competition. Investing is now more popular than ever. Online trading systems, Robo-advisors, and cryptocurrency trading opened a door to a new breed of investors. Hedge funds must find a way to attract some of that investor base if they want to continue their growth
• Lowering conditions for investors. To invest in a hedge fund you need to be an accredited investor. There is nothing wrong with taking extra precautions, but becoming a hedge fund investor is now limited to only the very rich. Pressure from new investment platforms combined with limited potential investors is not good in the long run. Lowering the bar for investing would provide new sources for hedge funds to pool investments.

FAQs

Is It Risky to Get a Job in Investment Banking and Hedge Funds?

Choosing a career in investment banking or hedge funds comes with its share of risks. Before you decide to pursue these careers you should first consider these risk factors:

• High levels of stress. Both of these careers carry with them high levels of stress. But, investment banking, with its extremely long working hours, and high-pressure situations takes the cake.
• Job insecurity. Working in these financial sectors was never about security. These jobs are heavily related to results and goals that you fulfill. If the company is going through a rough patch you can easily lose a job. Even if you didn’t do anything wrong, you can end up without a job
• Tough competition. Although competition is demanding in both industries, hedge funds are even worse. Fighting for promotions and chances to earn more are constant, and the whole system works as an arena
• Difficulty in maintaining work-life balance. High-risk jobs with long working hours will bring problems to private life. Hedge fund work hours are not as demanding as in investment banking but can take a toll. Maintaining a stable family life can be a difficult task
• Fulfilling client and investor expectations. Your job depends on meeting the expectations of your clients. In case you do not deliver, your career reputation can take a hit. That can lead to other professional issues later on
• Instability due to external factors. Investment banking and hedge funds are highly susceptible to the influence of external factors. Those include changes in the global market or major political shifts. You cannot affect these processes but they can affect your career
• Following through on financial regulations. Regulatory bodies are always on the lookout for any breaking of the regulatory codes. It is important to comply with the latest financial regulations.

One thing that you always need to have in your mind is the importance and scale of your job. Mistakes in these professions can be very expensive. When working with someone else’s money, it is far more difficult than when handling yours. You need to pay attention to everything you do, and it is very difficult to create a certain routine in conducting business.

Can You Move from Investment Banking to Hedge Funds?

Yes, you can move from investment banking to hedge funds. But to successfully make this switch you must consider several factors:

• Create a strong foundation. Before your switch to hedge funds develop valuable skills. Those include valuation, finance modeling, and deal executing
• Gain expertise. To do this, you need to specialize in a specific industry or sector. Hedge funds are often on a search for professionals with specific specializations and skills
• Use your professional network. Let your network be a leverage with which you can explore possibilities in the hedge fund industry. Grow your network by attending hedge fund events, and gaining direct contact with professionals
• Gain relevant certificates. If you pursue acquiring specific certificates they can propel your hedge fund career. The most revered certificates you can get are Chartered Alternative Investment Analyst (CAIA), Chartered Financial Analyst (CFA), Certificate in Quantitative Finance (CQF), and Financial Risk Manager (FRM). These are not mandatory but will showcase your commitment to the industry, and enhance your credentials
• Customize your resume. In your resume focus on relevant skills and experiences that are aligned with those sought by the hedge funds. Highlight any experience with risk analysis, deal sourcing, and portfolio management
• Employ an executive search firm. These companies can connect you with the professionals in the hedge fund industry.

Final Thoughts

Choosing a career path in investment banking and hedge funds is tempting. That is mostly due to possible high compensation rates. However, the lives of business professionals are not all glamour and high-end lifestyles that the modern media wants to portray.

If you want to succeed and work in those famous mega-funds, and large investment banks, you need to bring a lot to the table. First, you should pursue your economic or business education to the master’s title. Learning about these investment vehicles is the next logical step. Once you know what it looks like, it is imperative to develop a business network from which you can gain access to these jobs.

Once you manage to start a career in these financial sectors, be ready to constantly learn and adapt. Free time will be scarce and you will need to focus on the job if you want to succeed. In the end, you need to adore this job to be able to carry the sheer level of stress and pressure that can build up on a daily level. Then, and only then you will be able to reap the successes of your hard work.