# Understanding Hedge Fund Managers: Roles, Strategies, and Pay Structure

## What Is a Hedge Fund Manager?

A hedge fund manager is an individual or financial firm that manages and makes investment decisions and oversees the operations of a hedge fund. Managing a [hedge fund](https://www.investopedia.com/terms/h/hedgefund.asp) can be an attractive career option because of its high earnings potential.

To succeed, hedge fund managers need a [competitive advantage](https://www.investopedia.com/terms/c/competitive_advantage.asp), a clear [investment strategy](https://www.investopedia.com/investing/investing-strategies/), proper funding, and marketing and risk management plans.

### Key Takeaways

*   Hedge fund managers are responsible for the overall management, investment strategies, and operations of hedge funds, utilizing various strategies like global macro and event-driven to maximize returns.
*   Compensation for hedge fund managers can be substantial, often structured as "two and twenty," meaning a 2% management fee and a 20% performance fee, allowing top managers to earn millions annually.
*   A key differentiation of hedge funds from other investment vehicles is their high-risk, aggressive strategies, and their requirement for investors to meet stringent income and net worth criteria.
*   Despite high earnings potential, hedge fund managers face significant risks, as their personal finances are often directly tied to the performance of the hedge fund.
*   The education and experience required to become a hedge fund manager typically include advanced degrees in finance or related fields, extensive work experience, and necessary licensing.

## Key Responsibilities of Hedge Fund Managers

Hedge fund managers often own the firms that manage the portfolios. This means that they are entitled to a large percentage of the profits that the hedge fund makes.

Investors pay [management fees](https://www.investopedia.com/terms/m/managementfee.asp) for operating costs and [performance fees](https://www.investopedia.com/terms/p/performance-fee.asp) that are shared with the owners as profit.

Hedge fund managers' personal worth is often directly tied to their funds.

### Responsibilities

The [duties](https://www.investopedia.com/articles/professionals/112515/day-life-hedge-fund-manager.asp#:~:text=A%20typical%20day%20in%20the,with%20research%20and%20sales%20work.) of a hedge fund manager involve:

*   Selecting analysts and traders who can research investment opportunities and execute trades
*   Deciding how to invest the money invested in the fund
*   Selecting high-risk investments in accordance with the fund's mandate for high profitability
*   Monitoring markets and fund investments closely and rebalancing the portfolio to meet a risk-reward benchmark
*   Meeting with potential and existing investors, and raising capital for fund investments
*   Handling other matters that concern fund operations  
    

### Payment

Top hedge fund managers hold some of the most well-paid positions in any industry, far outpacing CEOs of major companies. In fact, some of the highest-grossing managers make close to $4 billion a year.

This extraordinary compensation potential requires hedge fund managers to stay competitive, to consistently create winning investment strategies, and to make advantageous trade choices.

Note that many hedge fund managers make much less than the top-paid managers, in some cases because their funds generate lower profits.

> **Important**
>
> Individuals wishing to invest in hedge funds must meet income and net worth requirements. Hedge funds can be considered high risk because they pursue aggressive investment strategies and are less regulated than many other types of investments.

## Popular Investment Strategies Used by Hedge Fund Managers

Hedge fund managers can use multiple strategies to maximize returns for their firms and clients.

**1.** One popular strategy is using something called [global macro investing](https://www.investopedia.com/terms/g/globalmacro.asp). This strategy involves investing large amounts based on predicted global economic trends.

This type of strategy gives hedge fund managers the necessary flexibility they need. But it is heavily dependent on excellent timing.

**2.** An [event-driven strategy](https://www.investopedia.com/terms/e/eventdriven.asp) is another popular tactic that has made hedge fund managers billionaires.

Examples of this include mergers and acquisitions, bankruptcies, and shareholder buyback initiatives. Managers using this strategy seek to capitalize on any market inconsistencies. It's similar to using a [value investing](https://www.investopedia.com/terms/v/valueinvesting.asp) approach.

Hedge fund managers often go this route because of the vast resources they have behind them.

> **Fast Fact**
>
> According to an analysis by veteran business-to-business publisher Institutional Investor, despite the tough year for the markets, "2022 was a very good year for multistrategy, macro, trend-following, and fixed-income [hedge fund] managers."

## Understanding Hedge Fund Manager Compensation

[Two and twenty](https://www.investopedia.com/terms/t/two_and_twenty.asp) (or "2 and 20") is a typical fee arrangement for hedge fund managers that is standard in the hedge fund industry. It is also common in the venture capital and private equity sectors.

Hedge fund companies usually charge clients management and performance fees. "Two" means 2% of [assets under management (AUM)](https://www.investopedia.com/terms/a/aum.asp), and refers to the annual management fee charged by the hedge fund for managing assets.

"Twenty" refers to the standard performance or incentive fee of 20% of the profits made by the fund, above a certain predefined benchmark.

While this lucrative fee arrangement has resulted in many hedge fund managers becoming extremely wealthy, in recent years, the [fee structure](https://www.investopedia.com/terms/f/fee-structure.asp) has come under fire from investors and politicians for varying reasons.

Some hedge fund managers also have to contend with a [high watermark](https://www.investopedia.com/terms/h/highwatermark.asp) that is applicable to their performance fee. A high watermark policy specifies that the fund manager will only be paid a percentage of the profits if the fund's net value exceeds its previous highest value.

This precludes the fund manager being paid large sums for poor performance and ensures that any losses must be made up before performance fees are paid out.

### Compensation Examples

In 2022, the 25 highest-paid hedge fund managers made $21.5 billion (an average of approximately $860 million for each). The hedge fund manager who earned the most, Ken Griffin, banked $4.1 billion.

The median amount earned by hedge fund managers in 2022 was $570 million.

## Is a Hedge Fund Manager Different From a Portfolio Manager?

Broadly speaking, both manage a portfolio of investments. But a hedge fund manager is responsible for the affairs, in their entirety, of a hedge fund and may be a limited partner in the fund. A portfolio manager is focused on making and managing investments in a portfolio, which could relate to the investments of an individual investor or a mutual fund. Plus, the portfolio manager typically isn't as geared toward the high risk strategies and investments that a hedge fund manager is.

## What Is a Hedge Fund?

It's a limited partnership of high-net-worth accredited investors that seeks above-average returns from actively managed investments and mandates non-traditional, high-risk positions to achieve them.

## What Education Does a Hedge Fund Manager Need?

Normally, hedge fund managers need, at minimum, a college degree in a relevant area of study, such as finance, as well as [work experience in the investment field](https://www.investopedia.com/articles/investing/051415/top-skills-hedge-funds-look-job-candidates.asp). Undergraduate experience, for example, as an intern at a financial firm, is beneficial. An advanced degree, e.g., a Master of Finance, can also be an advantage for such job seekers. They'll require a [business license to operate](https://www.investopedia.com/ask/answers/100515/what-licenses-does-hedge-fund-manager-need-have.asp), and earning credentials are also valuable.

## The Bottom Line

A hedge fund manager is an individual or financial firm that is responsible for a hedge fund and for achieving the substantial profitability mandated by the partnership of investors behind it.

Some hedge fund managers earn enormous amounts of money each year, with some earning hundreds of thousands.

> **Article Sources**
>
> 1.  Institutional Investor. "[The Rich List: The 22nd Annual Ranking of the Highest-Earning Hedge Fund Managers](https://www.institutionalinvestor.com/article/2bstpd4t08pc8xwj4we80/corner-office/the-rich-list-the-22nd-annual-ranking-of-the-highest-earning-hedge-fund-managers#:~:text=The%20median%20manager%20earned%20%24570,history%20of%20the%20Rich%20List.)."
>     
> 2.  Indeed. "[Portfolio Manager vs. Hedge Fund Manager: How They Differ](https://www.indeed.com/career-advice/finding-a-job/portfolio-manager-vs-hedge-fund-manager#:~:text=Unlike%20portfolio%20managers%2C%20the%20choices,investment%20returns%20for%20everyone%20involved.)."
>     
> 3.  Glass Door. "[Hedge Fund Manager Salaries](https://www.glassdoor.com/Salaries/hedge-fund-manager-salary-SRCH_KO0,18.htm#:~:text=The%20estimated%20total%20pay%20for,salaries%20collected%20from%20our%20users.)."