This involves taking positions on a variety of financial instruments (equities, fixed income, currencies, derivatives) in anticipation of macroeconomic events. For example, if a manager believes that the U.S. will enter in a recession, he might be short U.S. equities, U.S. indices, or even the U.S. dollar. This strategy typically involves analysing interest rate trends, political changes, government policies, geopolitics, general money flows, etc.
This strategy involves taking a long or short position in a market, utilising market movements, trends, or inconsistencies when choosing instruments across a variety of markets. Some of those funds can focus on a specific region (i.e. Russia, emerging markets, etc) or sector (i.e. commodities, technology, etc).
Also classified as “special situation / special opportunity” strategies, this approach involves looking for events that are expected to make an impact over a relatively short period of time: corporate restructuring, bankruptcies, mergers, takeovers, share buybacks, bond upgrades, earnings surprises, and spin-offs.
Relative value strategies are designed to take advantage of perceived mispricing among related financial assets, such as a single company’s debt and equity securities. These strategies rely on the long-run tendency of market prices to revert to equilibrium relationships, while deviating in the short-run, providing profit opportunities. A few examples are as follows:
fixed-income arbitrage, yield curve arbitrage, corporate spread arbitrage (interest rate spread between the prices of corporate bonds and Treasury bills), Treasury-Eurodollar spread arbitrage, mortgage arbitrage, derivatives arbitrage, stock index futures arbitrage, regulatory arbitrage, etc.
Credit funds invest in fixed-income securities, often taking large investment positions using the ownership stake to participate in the management of a company.Traditionally, these funds have focused on corporate credit. In recent years, however, many funds have also expanded investment into sovereign debt and distressed debt holdings.
This type of investment fund trades positions based on computer models built to identify investment opportunities. These models can utilize an unlimited number of variables, which are programmed into complex, frequently updated algorithms and are also controlled by a portfolio manager. Quantitative funds models are used as a means of executing a number of other hedge fund strategies, including these: Long / Short Equity, Global Foreign Exchange, Global Fixed Income, and Futures and Forwards.
Hedge Fund Interview Questions:
The type of interview questions you will be asked regarding a hedge fund can varysubstantially depending on certain factors (i.e. the fund’s culture, strategy and regional focus), but are all aimed at judging your ability to think as an investor. Below are a few tips that can help you to prepare ahead for your hedge fund interview.
1. Research the fund and its strategy.
There are hundreds of different hedge fund strategies, so you need to determine the key elements of the fund strategy by finding the answers to these questions:
2. Prepare investment ideas that are relevant to the fund.
The type of investment ideas you propose need to show the following:
3. Catch up with the latest news and trends in relevant sectors.
Read the latest about the fund, the industry you chose for your investment ideas, and also the latest market news for the day and the prior weeks. Be ready to be quizzed on any event that happened fairly recently, but also very broad questions such as, “What are your thoughts on the equity and credit markets?”
4. Be ready to tell your story.
Expect the standard questions about your background:
Also, expect lots of questions about your prior investing experiences, which can include:
Step 5. Get some brainteaser practice
Since hedge fund jobs are always very analytical and often require working under pressure, you'll often get brainteasers during hedge fund interviews.
One of the most desirable job at an investment bank is being a trader. But what do professional traders at investments banks actually do? First of all, its not simply about buying and selling stocks to maximise profits - roles and objectives tend to be a bit more complex. Let us go through the two main types of traders at an investment bank.
The large majority of traders at investment banks are market makers. A market maker is essentially a middle man: the bank customers will call them to buy or sell a financial instrument, and their job will then be to offer them a price, and find other customers to buy or sell to, and pocket the price differential (commissions). Note that they are taking a calculated risk and this is why they are called traders. For example, if they buy shares in Google from a customer and the price falls before they are able to find another customer to sell to, they risk making a loss. This is why a market maker will take a spread on each stock they buy, either buying at a slight discount or selling at a slight premium. Using that previous example, as a market maker you can offer to buy the google stock from your customer at $1,000, and then offer to sell it at $1,001 to another customer. The $1 may not seem much, but the trading volumes are very large, so the profits can be substantial.
Proprietary traders do not deal with clients, but buy and sell financial instruments on their own account, aiming to make a profit. They are using the bank's money, and are allocated an amount of money to trade with. This is much riskier for the investment bank, and this is why proprietary traders remain a minority. Those traders are kept separate from clients, so taht they cannot engage in what is called "front-running". Front running is placing orders ahead of a client to benefit from a movement in price. For example, if your client calls you to place a very large order of Google stock that would move the share price, the trader could theoretically place an order beforehand and benefit from the price increase afterward, "piggy-backing" on the client.
What does a Trader do?
A professional trader is of the most desirable jobs at an investment bank – but what do traders actually do at investment banks? First of all, roles and objectives tend to be a bit more complex than just buying and selling stocks to maximise profits. Let’s review thetwo main types of traders at an investment bank.
The large majority of traders at investment banks are market makers. A market maker is essentially a middle-man; the bank customers will call him to buy or sell a financial instrument, and his job is to offer them a price, find other customers to buy or sell to, and pocket the price differential (commissions). Note that the market maker is taking a calculated risk and this is why he would be called a “trader”. For example, if he buys shares in Google from a customer and the price falls before he is able to find another customer to sell to, he risks making a loss. This is why a market maker will take a spread on each stock he buys, either buying at a slight discount or selling at a slight premium. Using that previous example, as a market maker you can offer to buy the Google stock from your customer at $1,000, and then offer to sell it at $1,001 to another customer. The $1 may not seem much, but the trading volumes are very large,so the profits can be substantial.
A proprietary trader does not deal with clients, but buys and sells financial instruments on her own account, aiming to make a profit. She is using the bank's money, and is allocated an amount of money to trade with. This is much riskier for the investment bank, and this is why the proprietary traders remain a minority. These traders are kept separate from clients, so that they cannot engage in what is called "front-running". Front running is placing orders ahead of a client to benefit from a movement in price. For example, if your client calls you to place a very large order of Google stock that would move the share price, the trader could theoretically place an order beforehand and benefit from the price increase afterward, thereby "piggy-backing" on the client.
What does a trader at a Hedge Fund do?
Hedge funds are pools of capital from various investors, used by hedge fund traders (also called Portfolio Managers) to generate profits in financial markets. These traders can be used to trade various types of instruments: equity, debt, derivatives, etc. Also, traders can make money in rising and falling markets. Traders at hedge funds basically have the same job as proprietary traders in investment banks, except that in a hedge fund they are trading investors' money as opposed to using the investment bank's money. Hedge fund traders get a cut of the profits they generate, but also charge a "management fee" to cover the costs of running the business: IT infrastructure, rent, basic salaries, etc. The cut of the profit they generate is paid out as bonuses to the traders, but typically a part is reinvested into the hedge fund.
So why would you work at a Hedge Fund as opposed to working at an Investment Bank?
The proprietary trading business at investment banks has been declining over the past few years, as it is very risky. Many traders at investment banks have now moved on to join or launch their own hedge funds. At a hedge fund, traders are able to invest their own money as well, and thus generate more profits for themselves if they are good at what they do. Large hedge funds can be particularly attractive as employers because of the "management fee" they charge. For example, a £1bn hedge fund can change a 2% management fee per year. This is equivalent to £20m per year, which more than covers the running costs of the fund, and can be a significant source of profits as well.
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