Hedge Fund vs Private Equity: The Ultimate Career Comparison (2024)

The “hedge fund vs private equity” question could refer to many things:

1. Investment vehicles – If you’re wealthy, should you invest in hedge funds or private equity funds? Also, how do they invest, and how do they charge fees?
2. Exit opportunities – If you’re currently in investment banking, sales & trading, or equity research, which one is best for the next step in your career?
3. Long-term careers – What are the trade-offs in terms of day-to-day work, advancement, and salaries, and will these industries be around for the next few decades?

Around 90% of the articles I found addressed point #1, often copying and pasting the same text, while completely ignoring points #2 and #3.

But we don’t use $5-per-hour writers in 3^rd world countries on this site, so I’m going to explain the differences and focus on hedge funds and private equity from a careers, compensation, promotion and exit opportunities perspective:

Hedge Funds vs Private Equity: What Do They Do?

Both private equity (PE) firms and hedge funds (HFs) are classified as “alternative investments” and share some high-level similarities.

For example, they both raise capital from outside investors, called Limited Partners (LPs), and then invest that capital into companies or other assets.

They attempt to earn a high return, and in exchange, they take a percentage of that return for their performance fee.

They also charge a management fee on the total amount of capital raised.

After that, however, almost everything else is different.

The biggest difference is that PE firms tend to acquire entire companies using equity and debt, while HFs acquire very small stakes in companies or other liquid, financial assets such as bonds, currencies, commodities, and derivatives.

As a result, PE firms have a long-term focus (often 3-5+ years for individual companies) and spend more time on operations and growth for their portfolio companies.

Hedge funds focus on finding mispriced financial assets and benefiting from quick gains in near-term, 12-month periods.

Because of this longer-term focus, PE firms require longer lock-up periods from their LPs, while redemptions are easier at HFs.

While both types of firms have management fees and performance fees, hedge funds usually charge lower percentages for both because of market factors and poor post-financial-crisis performance.

Private equity fees have fallen a bit over time, but they’ve remained close to the traditional “2 and 20” model – a 2% management fee and 20% performance fee – while the average hedge fund now charges a management fee of under 1.5% and a ~15% performance fee.

And the trend is toward even lower management fees, with performance fees that scale up or down based on annual returns.

Finally, “performance” is measured differently; it’s linked to IRRs and hurdle rates at PE firms, but net asset value (NAV) relative to the high-water mark at hedge funds.

So, if the fund’s previous highest NAV was $200, and it ends this year at $180, the performance fee will be $0 even if the fund earned a positive return in this year.

That exists because LPs don’t want to pay fees on returns that offset losses from previous years.

Is This Description Still True?

The description above is the “classical view” of the hedge fund vs private equity comparison.

However, both fund types are increasingly converging.

For example, many hedge funds have been moving into deals and acquisitions of entire companies.

And large private equity firms like Blackstone have been moving into hedge fund-like strategies, sometimes even acting as funds of hedge funds.

So, it’s not quite as clear a division as it once was, and you need to read the fine print about a firm’s strategy before making a decision.

For more, please see our coverage of hedge fund strategies and private equity strategies.

Hedge Fund vs Private Equity Recruiting and Candidates

In both fields, candidates who attended top universities or business schools, earned high grades, and worked at the top investment banks have an advantage.

But recruiting is quite different once you go beyond that.

Private equity is “Investment Banking 2.0,” so it attracts mostly former investment bankers, as well as some consultants and Big 4 and corporate development professionals.

On-cycle recruiting is highly structured, with rounds of interviews, modeling tests, and quick timelines (e.g., “We interviewed you this weekend and gave you an offer on Sunday – respond by Monday”).

To get in, you need to understand accounting, valuation, and financial modeling, but you must also have deal experience and know how to source, execute, and manage large transactions.

Hedge funds attract more diverse candidates, including investment bankers, equity research associates, buy-side analysts at other firms, and sales & trading professionals.

Quant funds also hire many math, computer science, and engineering students who can program and build mathematical models for the markets.

Most hedge fund recruiting is “off-cycle” and unstructured: you must screen for funds, network with professionals, and prepare for interviews independently.

You don’t know when you’ll hear back, how many rounds there will be, or how they’ll make a decision.

If you recruit for a hedge fund that does “fundamental analysis” (e.g., long/short equity, merger arbitrage, credit, etc.), then your knowledge of accounting and valuation is crucial, but you do not need deal experience in the same way you do for private equity.

Your passion for the markets and ability to generate, validate, and execute investment ideas are much more important.

For more about these differences, see our articles on how to get into private equity and how to get a job at a hedge fund.

Hedge Funds vs Private Equity: The Nature of the Work

The day-to-day tasks as a junior-level person in private equity include:

• Deal sourcing.
• Reviewing potential investments.
• Valuation and financial modeling.
• Monitoring portfolio companies.
• Assisting with bolt-on acquisitions or preparing portfolio companies to sell.
• Coordinating due diligence on potential deals.
• Administrative work such as editing NDAs or other deal documents.
• Meeting with bankers, lawyers, lenders, and other industry contacts.
• Preparing marketing materials for the fundraising process.

Similar to investment banking, you’ll spend a lot of time in Word, Excel, and PowerPoint, but you’ll take a critical eye to each company rather than selling your client(s).

That requires more brainpower, but it also means that you’ll spend a lot of time looking at marketing documents like the CIM and finding reasons to say “no” to deals.

By contrast, the daily tasks at traditional hedge funds fall into just two categories: research and analysis.

Everything is shorter-term and higher-tempo, there are no deals, and portfolio companies don’t exist in the same way, so you spend the bulk of your time:

1. Coming up with investment ideas;
2. Building models and doing research to support your ideas; and
3. Pitching your ideas to the senior team.

You still monitor your current positions, but many of the logistical and fund-wide issues are up to the Portfolio Manager, not the Analyst or Senior Analyst.

Both fields use valuation and financial modeling, but on average, financial models are more granular in private equity because of the longer holding periods.

You don’t need to create a 5,000-row Excel model to validate a quick arbitrage opportunity at a hedge fund – you just need to verify that, very roughly, the stock’s current price is way off.

Lifestyle and Culture

You should expect around 60-70 hours per week in both fields, with more consistent, market-based hours at hedge funds.

In private equity, the hours spike up and down with deal activity, and when a deal is in its final stages, you might be at the office all day and all night.

At hedge funds, hours can increase during earnings season – and if your fund hasn’t performed well in the year to date, and the end of the year is approaching.

At “mega-funds” in both industries, expect something more like investment banking hours (80+ per week).

The stress in private equity comes from deal deadlines and negotiating with other parties, while the stress in hedge funds comes from the market moving against you.

You may do some business travel at a hedge fund – to do channel checks, for example – but it’s far more common in private equity since you work with entire companies over many years.

The culture in private equity is much closer to the one in investment banking, with a similar amount of formality and similar people (high-achieving, “work hard, play hard” types).

You’re more likely to find eccentrics and oddballs at hedge funds because they care less about your formal credentials as long as you can generate high returns.

Founders and Portfolio Managers also tend to come from more diverse backgrounds, so the culture varies a lot more.

Hedge Fund vs Private Equity Careers, Advancement, and Salaries

Just as the work in private equity tends to be more structured and hierarchical, so too are careers.

We covered this in detail in the private equity career path article, but there’s a well-defined hierarchy (Analyst, Associate, Senior Associate, VP, Director/Principal, and MD/Partner), and your work and responsibilities change at each level.

Initially, you spend more time crunching numbers, churning out documents and analysis, and quarterbacking deals, but as you move up, you become more of a manager, then a negotiator, and finally a decision maker, fundraiser, and firm representative.

Firms look at specific criteria to decide whether or not you’ll advance to the next level, and almost everyone stays in each level for a specific number of years.

Hedge funds are different because the advancement process is more random, there are fewer levels in the hierarchy, and the nature of the job doesn’t change quite as much as you advance.

At the junior levels (Junior Analyst, Analyst, Research Associate), you spend time crunching numbers, doing research, and building investment theses.

But beyond that, even Senior Analysts, Sector Heads, and Portfolio Managers do some of those tasks as well.

PMs do have other responsibilities, such as fundraising, LP relations, risk management, and investment logistics, but the job is not as different as the private equity job at the Associate vs. Partner levels.

We gave approximate promotion time frames in the hedge fund career path article, but in practice, these vary widely.

Some people who “kill it” consistently might reach PM in only a few years, while others could reach Senior Analyst and stay there for a long time.

For a quick summary, plus salaries and bonuses, please see these tables:

Private Equity Compensation:

Hedge Fund Compensation:

Hedge fund compensation is more variable than private equity salaries + bonuses, but at the junior levels, you’ll most likely earn a bit more in private equity.

At the top levels, a star hedge fund PM who has a great year could easily earn more than an MD in private equity – depending on the fund size and structure.

The average case is similar, with total earnings in the high-six-figure-to-low-seven-figure range.

Exit Opportunities: Private Equity Wins

Private equity has the clear advantage in the breadth of exit opportunities: you could move to a normal company in a corporate finance, corporate development, or strategy role, you could move into venture capital, or (gasp) you could even move back into IB.

There’s also business school, starting your own company, and moving into other buy-side roles, such as hedge funds or asset management.

You develop a broader skill set that’s based on people and processes, along with financial analysis, so you’ll have a good number of exit options.

By contrast, it’s much harder to move into most of these fields if you’ve worked at a hedge fund for a significant period.

You won’t have the deal skills that PE firms and corporate development teams look for, you won’t look that appealing to most VC firms, and you won’t have enough “management” experience to join most normal companies.

So… you will most likely stay in hedge funds, move into asset management, or maybe do an MBA to make a complete switch.

You could also start your own company, especially in a field like fintech, but that option is not specific to hedge funds.

Future Outlook

If we focus on traditional/fundamental hedge funds vs. private equity, PE has a better outlook for a few reasons:

1. Post-financial-crisis hedge fund performance has been quite bad, significantly trailing the S&P 500.
2. Central banks have manipulated financial markets with QE and permanently low interest rates, making it harder for public markets investors to perform well.
3. Huge amounts of capital have moved out of active strategies and into passive and automated strategies.
4. Private equity performance has still been decent, partially because there’s more asymmetric information about private assets.

That said, I don’t think these trends will continue forever.

As soon as there’s another market crash or recession, I expect the passive investing bubble to deflate as people realize the risks of doing the same thing as everyone else.

Private equity still has the advantage, but hedge funds will probably do a bit better once one or more of the factors above changes.

Hedge Fund vs Private Equity: Summary

Summing up everything above, private equity is better if:

• You want to work on long-term investments, and you like structure, process, and relationship-building.
• You’re analytical, but you don’t like math enough to be a “quant,” and you want a variety of day-to-day work.
• You come from a traditional investment banking background, and you want to continue working on deals.
• You don’t mind hours that fluctuate with deal activity as well as a decent amount of business travel.
• You like the structured hierarchy and advancement process and the career visibility that accompanies them.
• You’re not 100% sure what you want to do in the future, and you want to leave your options open.

Hedge funds are better if:

• You are extremely passionate about the public markets and investing, and you want to spend the bulk of your time coming up with ideas and making investments.
• (For quant funds) You have a math, engineering, or computer science background, and you want to use it in a technical role.
• You don’t fit the mold of a “typical banker” (i.e., top undergrad, top bank, high grades), but you can make money in the markets.
• You like regular, predictable hours and a consistent location with less frequent travel.
• You don’t mind the random/unpredictable advancement process, and you can tolerate significant uncertainty.
• You’re very certain that you want a long-term career in investing, and you have no interest in joining a normal company or doing something outside of finance.

OK, But Which One is Right for You?

Instead of making “hedge fund vs private equity” an either/or question, it might be better to think of it as a sequence – because many people end up doing both.

The pattern I’ve seen repeatedly goes like this:

1. IB Analyst –> Person gets tired of the grunt work, office politics, and long hours.
2. PE Associate –> Person then gets tired of the process work, the need to monitor companies, and the continued emphasis on dotting i’s and crossing t’s.
3. Possible MBA Program or Other Firm –> Person then realizes that switching didn’t solve anything and that maybe hedge funds are better.
4. Hedge Fund Analyst / Senior Analyst –> Finally! After learning the ropes elsewhere, the person can now focus on investing.

So, if you still can’t decide, don’t panic.

Do both, and see what the last career standing is.

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