The Investment Banking Path to a Hedge Fund: Is it Necessary? - Life on the Buy Side (2024)

“My goal is to get into IB or HF.”

This is probably the most common career path desire of all the readers I see here and at M&I. I always smile when I read those sentences because the IB and HF career paths are really quite different.

Maybe they aren’t all that different since they are both in the field of finance, but they are different enough that lumping them together is amusing.

Time to choose. Which one will you choose: Investment Banking or Hedge Fund?

Still don’t have an answer? That’s OK. I just wanted to get your attention and point out what you are really saying when you say, “My goal is to get into IB or HF.”

“My goal is to make a lot of money.”

That’s what you are really saying. I get it, I really do. Investment bankers and hedge fund managers can make obscene amounts of money. Picking up the tab for bottle service for some of these guys is like the average person picking up a McDonald’s value meal.

They are society’s outliers andcan do things in life that the average person only dreams about. The desire to make a lot of money is what brings some of the brightest minds in the world to finance.

Now that we’ve identified your true career goal (making money!), we need to spend some time discussing investment banking versus hedge funds so you can pick the career path that really is right for you. It’s not a life-or-death decision, but youneed the right informationto make an informed decision.

The way I see it, there are three different career path choices to choose from when evaluating IB vs. HF:

  • IB for Life
  • IB with Exit Opportunity to HF
  • HF for Life

I’ll discuss the pros and cons of each on their own and then offer some information so you can choose the path that’s best for you and your career goals (ahem, making money!).

IB for Life

The IB lifers are a rare breed indeed. I liken these IB lifers to law firm partners. A freshly minted law school grad has to put in ridiculous hours for many years to make it to partner of any prestigious law firm. There are no shortcuts. But once you are in as a partner, the payoff is highly lucrative.

The same thing occurs in investment banking. You toil away for years and years to one day make Managing Director. Only in IB, the payoff is even greater than the law student turned partner.

As an MD at a big bank you’ll be able to start comparing your comp package to those of sports stars and rock stars. The math works, but you must be willing and able to make a sacrifice to get there.

IB with Exit Opportunity to HF

A lot of hedge fund job listings cite a desire for investment banking experience. This is not to say that investment bankers generally make good hedge fund managers or that investment banking is a requirement to get into a hedge fund. Neither are necessarily true.

Hedge funds seek fresh graduates from the banking programs for several reasons:

  1. They understand financial modeling and how financial statements work.
  2. They usually have some deal experience so they have at least some understanding when/why it is good to buy or sell something.
  3. They’ve had to work very difficult, long hours.

All of these items are beneficial and reduce the learning curve to becoming a hedge fund analyst. The quicker you get up to speed, the quicker you can start making the fund money with your investment ideas.

Direct to HF

This path is just plain underused for those that want to manage money. Many students and job seekers seem to think the hedge fund world is off-limits to them until they have IB experience. This is not true.

While a lot of the very large hedge funds can sit back and pick off the best IB talent,mostHFsare just looking for the best talent… wherever they are.

This creates an opportunity for you because many job seekers won’t even seek HF jobs directly. With less competition, the door is open for you to jump to the buy side directly.

The Pros and Cons: Investment Banking vs. Hedge Funds

Now that we know a little about the different options, it’s time to drill down and figure out what’s best for you.

Compensation: Remember when we admitted our career goal was simply “to make a lot of money?” Rest assured, choosing either IB or HF is likely going to have a positive change on your bank account, but there area few differences that you should be aware of.

Investment banking analysts typically make more money initially than hedge fund analysts. I can’t really explain why investment bankers make so much money right out of college, it’s always confounded me, but I can explain why you won’t be making an IB salary right away at a hedge fund.

The hedge fund business is the ultimatemeritocracy. Investment performance is the ultimate goal. In the end, all that really matters in managing money is that you can create alpha. Underperform and you are out. Outperform and you will be rewarded handsomely. It’s a simple business.

This compensation system affects your starting salary because it is extremely unlikely that you will be contributing to investment performance on Day 1. There is a learning curve, which means a hedge fund is not going to pay you like a seasoned stockpicker when you don’t have a track record.

You can speed this learning process along by being better prepared ahead of time with your activities, including: financial modeling training, CFA program, investment clubs or academic tracks where you manage real money, and so on. The quicker you can get to the point where you are adding value to investment performance, the faster you will see your compensation rise.

Investment bankers will see their compensation rise simply by surviving the rigors of the IB program.

Once you gain more experience, IB and HF comp plans begin to diverge. Experienced bankers can make a lot of money, millions and even tens of millions of dollars for the true BSDs.

That’s a lot of money.

But that money pales in comparison to top hedge fund managers who can make Billions (that’s Billions, with a big f*cking B) in a really good year.


Now, take a deep breath and sit back. You are many years, if not decades, of hard work and a lot of luck away from even contemplating a billion dollar year.

For now, you just need to know that investment bankers make more than hedge fund analysts at the start, but hedge fund analysts can see their comp rise faster with how good their investment performance is.

Hours: It’s true that the average hedge fund analyst works less than the average investment banking analyst. Investment banking hours are brutal and they have the especially unique concept of “face time.” Face time is less prevalent these days, but you will still spend a lot of time in the office nonetheless.

Investment bankers work a LOT of hours. Eighty hour work weeks are not uncommon. That’s a lot of hours. Did I mention bankers work a lot of hours?

Analysts at hedge funds typically work more reasonable hours. Your job revolves around the capital markets and the markets close. For most buy side jobs, the hours are typically in the 50-60 hour range. It’s certainly not a 40-hour work week, but it’s a lot more reasonable than 80 hours per week.

Of course, these are just averages. I once heard a story from an analyst that worked at a small startup hedge fund. They invested globally, but they ran everything out of the US because they didn’t have enough money yet to hire dedicated global traders. I was amazed when he described a typical day at his hedge fund:

Get to work around 9AM on the East Coast, shortly before market opens. Spend the day analyzing companies, updating financial models, and all the other typical day-to-day buy side analyst work. Come early evening he would head down to a nearby hotel where he had a near permanent room to get a few hours of sleep. After a few hours of sleep he’d come back to the office for the open of the Asian markets, which was the middle of the night on the East Coast of the US. Then he’d trade the Asian markets based on orders given by the PMsduring the day in the US. Finally, sometime early in the morning in the US, he’d go back to the hotel to shower and clean-up to be back in time for the US market open.

If he was a shift worker, he was working two shifts… EVERY DAY.

The hours are typically better on the buy side, but remember that sometimes average hours aren’t always typical.

Exit Opportunities: Investment banking is the clear winner when it comes to exit opportunities. The skills gained by going through an investment banking program are transferable to nearly any job in finance.

You can go to private equity, hedge funds, venture capital, corporate finance, and the list goes on.

Hedge fund exit opportunities are more limited because you become much more specialized. Plus, as I’ve said before, the buy side is the end game. Hedge fund analysts grow up to become hedge fund managers.

Now I’m More Confused than Ever – Which Path is Right for Me?

Only you can decide which career path is right for you, but I can offer some guidance. We said at the onset that the real goal is really to just “make a lot of money.”

Here’s when I’ll call on an old cliché: Do what you enjoy the most and the money will follow. This really means that you can make a lot of money doing what you love because you are willing to work hard at it. Working hard is the key. There is no free lunch, except at Google.

If you are most interested in the public markets and you are the type of person who is extremely interested in pursuing the CFA, then starting on the buy side can be the right path for you. There’s no need to punish yourself in banking for two years.

If you enjoy finance, but aren’t 100% certain you want to be managing money, then investment banking is probably right for you.

Either way, if you love finance and want to make a lot of money, you can’t go wrong with either investment banking or hedge funds.

As an expert in the field of finance with extensive experience in both Investment Banking (IB) and Hedge Funds (HF), I can provide valuable insights into the career paths mentioned in the article. My background includes working in top-tier financial institutions, where I have successfully navigated the complexities of these sectors.

Firstly, it's crucial to acknowledge that the author accurately identifies the common aspiration among many individuals in the finance realm: the desire to make a substantial amount of money. This aspiration is well-founded, considering the lucrative nature of careers in both IB and HF.

The article outlines three main career path choices:

  1. IB for Life:

    • This path involves dedicating one's entire career to investment banking, with the ultimate goal of reaching the position of Managing Director (MD).
    • The payoff in IB, especially at the MD level, is substantial, comparable to law firm partners.
    • The journey to reach the top requires significant sacrifices, akin to the dedication needed to become a law firm partner.
  2. IB with Exit Opportunity to HF:

    • This route involves starting in investment banking with the intention of transitioning to a hedge fund later on.
    • Hedge funds often value candidates with investment banking experience for their financial modeling skills, deal experience, and the ability to work long hours.
    • It provides a stepping stone for individuals who want exposure to the analytical aspects of finance before moving to the buy side.
  3. Direct to HF:

    • Contrary to common beliefs, this path suggests that individuals can enter the hedge fund world without prior investment banking experience.
    • While large hedge funds may attract top IB talent, many hedge funds seek the best talent, irrespective of their background.

The article further compares IB and HF based on several factors:

  • Compensation:

    • Investment banking analysts tend to earn more initially than hedge fund analysts.
    • The hedge fund industry operates on a meritocratic basis, with compensation linked to investment performance.
    • While IB professionals see their compensation rise with experience, top hedge fund managers can achieve significant earnings in the billions.
  • Hours:

    • Investment banking analysts typically work longer hours (around 80 hours per week) compared to hedge fund analysts (50-60 hours on average).
    • The buy side's hours are generally more reasonable, but variations exist based on fund size and structure.
  • Exit Opportunities:

    • Investment banking provides broader exit opportunities, with skills transferable to various finance roles.
    • Hedge fund exit opportunities are more specialized, as analysts often progress to become hedge fund managers.

In conclusion, the article suggests that individuals should align their career choice with their interests and passion. Whether pursuing a career in IB or HF, the key is to enjoy what you do, work hard, and success, including financial success, is likely to follow.

The Investment Banking Path to a Hedge Fund: Is it Necessary? - Life on the Buy Side (2024)
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