So You Want To Work In a Hedge Fund?

If you are interested to start a career in the hedge fund industry, read on. First, you have to understand what it means to be working as a trader or a fund manager in an asset management company. The sole mission of their jobs is to preserve the capital of their investors -- by making money in both bull and bear markets, i.e. in all market environments, by predicting the future. These companies are called hedge funds because they maintain a well hedged (balanced) and well diversified long / short portfolio. Their investment thesis and risk management processes are very refined, otherwise no one will invest in them.

At EDMW Capital, every trader would typically be required to hold 20 long positions and 20 short positions in their portfolio, covering stocks, currencies, commodities and bonds, with a 2.5% hard imposed single position limit of their assigned capital. This style of trading is mostly foreign to our new hired "Retail Traders" for a multitude of reasons:

(1) They are used to hold a concentrated portfolio consisting of just 5 stocks and are long in all of them, or their trading experience were limited to directional daytrading a few Forex pairs.

(2) They did not know how to calculate the volatility (either historical or implied) of the asset classes that they were trading.

(3) They quickly take profit in winning positions, and refuse to cut loss in losing positions.

(4) They seek to make money as fast as possible, and believe it is possible to trade full time for income.

All the above four reasons combined help to explain why retail traders always lose money. As a result, their trading accounts never grow, and only lose money over time. From watching movies or other sources, they think professional traders are always seeking to make money from short term opportunities in the market. Unfortunately, this view is totally wrong!

The "lobangs" of making money on a short term basis across all asset classes have all but disappeared, mainly due to algorithmic trading. Thus, portfolio positioning has to be longer than one month if you want to make money, i.e. one has to trade less often. As traders, we have to go where the money is, and adapt our style of trading to where the money is with a predominantly fundamental approach. As an example, we encountered numerous traders during past interviews, saying "I only trade SGX stocks", or "I only trade Forex." Basically, it means they had already limited themselves to opportunities in one asset class and had closed themselves off to all of the other potential opportunities in the world across all other asset classes. As to be expected, a significant number of these traders (> 70%) were unable to cope and resigned within two months -- which was also the length of their probation period. Most were unable to comprehend the fund's goal of obtaining risk adjusted profits, rather than pure profits. We had personally seen a large number who treated trading as gambling, as they were unable to give any reason for having their positions, except for their gut feelings and sixth sense. Even more wanted to leverage their Forex positions beyond the fund's imposed hard limit of 5:1 (5 times).

As an example, try to imagine you are a guest sitting in on a morning 7.30am meeting between traders, along with the Head of Trading and Head of Risk Management at DBS or UOB. Everyone present will be discussing their book positions -- one by one as they systematically go through all the positions they currently has in their own portfolio, and the reasons why they had the positions. Pivot points, future expectations and net exposures on the individual level and trading desk will be presented. Now, try to imagine a trader standing up and explaining to everyone why he had bought $20 million worth of Creative Technology last week, because "both the Relative Strength Index (RSI) and Average Directional Index (ADI) were predicting an upward trend on the daily chart", and that "the two minute Exponential Moving Average (EMA) was crossing the hourly EMA from below", and he intends to close the position later in the week if the stock rises by another 5%. This is known as rogue trading in the professional circle, and this trader would literally be fired on the spot!

Throughout every market day working in hedge funds, the investors and trading heads would be calling and messaging through the phone, and yelling at the losing traders literally every single hour, probing them the same questions over and over again. Some examples of commonly asked questions were:

* Are you sure of this losing position?
* What if a portion of your analysis was wrong?
* Do you realize how much you have lost so far?
* Is there any thing you could have possibly missed out?
* What are you going to do if the price continues plunging?

The stress level for a trader working professionally in a hedge fund and investing other people money, compared to trading his own fund, is a completely different ball game. Interested people who are considering of entering into the asset management industry should know and take heed of all the above facts, and think carefully if they are ready for such a stressful environment.

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25 comments
clim

can i ask...if each trader is allow to set SL for each selection? or there is a imposed rule on the SL across all traders?

clim

Reply to @EDMW_Capital : thank you... this is very enligtening for an outsider :)

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thestocker

who are the investors? anyone can invest their $ with u?

EDMW_Capital

Reply to @thestocker : We are our own investors, and it is unfortunately not open to the public.

Master_GongJiaowei

edmw kor kor are your hiring?

EDMW_Capital

Reply to @GongJiaowei : Unfortunately, no..

duckie

Anyway what is the benefits of being a trader for a hedge fund if he himself is damn good?
He can easily make the money himself right?

The only benefits I can think of is that if he lose, it won't be his own money

Songfabkt

Reply to @duckie : Thank you for invite. Kallang river too crowded already, prefer to stand far far and watch chio bu in bikini do breast stroke.
(@_@;)

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duckie

@thumbtackinvestor you suitable for this job le

ThumbTackInvestor

Reply to @duckie : I suitable meh
Seems like everyone here in IN more suitable than me.

thestocker

no offense but " retail traders always lose money" => i think not true to some of us here lol..

EDMW_Capital

Reply to @Baldwin : We have stated in the above article (point 4) that professionals do not trade full time for income, yet they do need an income after all. Collecting dividend is one of the methods. The reason for buying SingTel now is that we had noticed that the "flip" has occurred -- more buyers than sellers in the market.

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thestocker

the pay i presume must be good at least 5-figure, otherwise why would anyone endure the stress and scolding from bosses and market. What's the profit-sharing like?

clim

wao... informative and helpful... those successful traders really got a strong heart then... so much stressful than our (at least mine) working lifes...

MilkPower

Informative. Thanks EC.

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