Investment Banking vs Hedge Fund – Most people go for Investment Banking or Hedge Fund thinking they pay huge money. Yes, they do. But that can’t be the only reason for which you want to choose a career. You need to see other aspects as well – how many hours of work you need to do daily, how your learning curve will trend, how would you be able to survive the long hours you would be investing in your career putting everything on hold, how happy you would be in the long term. These are the questions you should ask before you jump right off the college into one of these lucrative career opportunities.

In this article, we will see how these both can resonate with you and how you would be able to find a sweet spot between what you want and the reality. On the surface, everything glitters but that doesn’t mean everything is gold. No, we’re not discouraging you from taking any of the paths; all we want you to do is to make an informed decision. Just read this article and do your own due diligence and then decide what career suits you best. There’s nothing to be confused about these two career paths, because they are completely different than each other; only commonality is that they, both are career paths in finance domain.

Investment Banking vs Hedge Fund – Outlook

See these two career paths in this perspective.

We assume first of all, you want to make good bucks and that is your main goal to choose these two career paths. So, we will talk about compensation, in real terms.

Ready?

Investment banking is like saving money in the bank and earning simple interest; whereas hedge fund is saving the same money and earning compound interest in the long run. If big money is your motto, you should have a close look at this.

When an investment banking associate starts out he earns big bucks, because his job is to raise capital! So when he is able to bridge the gap between businesses and capital, he wins and earns big money.

But hedge fund is not really that simple math. Hedge fund managers don’t get a lot of money just after joining. They get less in the beginning, much less than investment bankers in the beginning. Because, success in hedge fund is all about meritocracy! If you want to be successful in hedge funds, you need to know that it’s all about investment performance. All you need to do is to create alpha in managing money. If you underperform, you will be out of business. If you outperform, you are in and will be able to earn great money in the long run.

So, what if you want to be a hedge fund manager? All you need to do is to build yourself before you join as a hedge fund manager. Take financial modelling training, enrol yourself for CFA program and join academic & investment clubs. The more you will be able to add value to investment, better would be your chances.

From the following fact, you will realize why we are saying this.

Let’s have a look at what happens after 10 years.

As an investment banker if you invest 10 years into your career, you would be able to earn millions, even tens of millions.

And if you invest your career for 10 years in hedge fund, you will earn in billions. You read it right! It is billion dollars.

So, now you can understand why we told you that investment banking is like earning simple interest whereas, hedge fund is all about earning compound interest.

Investment Banking vs Hedge Fund – Education

Going to work in a top bank or with a hedge fund needs some work on your side. Why the top-notch investment bank/ hedge fund will hire you? Of course, they will look at your background and then your capacities to bring them the results they are looking for.

So, simply you need education and a background that supports you career moves.

For being hired by top-notch investment bank, your first motto would be to earn an MBA from an outstanding B-School. Make a list of top 10 B-School in the world. Check constraints like budget, time, career prospects, faculties and benefits. Choose the best. And then you are done. If you are selected in a top-notch MBA school, half of your work is done. Study hard and prepare and keep on investing your time, money and effort in learning more about investment banking.

In case of hedge fund, it is a different story all together. It’s more about investment performance. So you need to have a knack and a lot of knowledge in the investments. To ensure that you make the mark, enrol yourself for CFA program. CFA is the best program if you want to be a top-notch investment professional. Learn everything you can learn about financial modelling. Associate with people who are already doing the thing you dream of doing. For them, making time is hard. But still, you can invite them to lunch and ask most important questions about the industry and the profession. And while doing all that, try to get an internship in a top-notch hedge fund. If you can get access to their internship program, you will be able to get a real life experience and chances are they will appoint you full time as hedge fund manager.

Primary tasks or roles to play

Let’s see what an investment banking professional or a hedge fund manager does on day to day basis.

Let’s talk about the investment banking first. Your chief tasks on daily basis would be – pitch book creation, modelling and administrative work. Your main work revolves around pitch-book creating and modelling. Administrative work is less and often you can do it in your spare time. Now what is pitch-book creation? A pitch-book simply means buy-side client presentation. As investment banking professionals, you need to understand the market overview and you also need to take care of graphical representation of possible exchange ratios. Other than creating pitch-book, you also need to handle multiple deals at the same time. You will prepare models for mergers (or any other models) for multiple deals at the same time and try to make it enticing for clients; as on the basis of your representation, the decisions would be taken. You also need to handle all the scenarios and will require you to perform sensitivity analyses. In short, you need to handle multiple clients at the same time and expect the day to be hectic.

As hedge fund manager, you need to handle the following things on regular basis –

• New investments/ new memos: Primary focus of hedge fund is to evaluate and research investment. We have already mentioned that as a hedge fund manager, you need to make sure that your ultimate goal is to improve investment performance. After evaluating the investments, you will send an email outlining the same (key pointers) to your PM. Or sometimes, if the investment needs to be given more emphasis, you can create a whole memo detailing your findings and send across.

• Source & structure deals: Your main emphasis in a day would be to decide on the structure of the terms on less liquid assets or private/ semi-private deals. You also need to put together presentations for potential deal scenarios to clients.

• Investment updates: As hedge fund manager, you would be working on many holdings. Thus, if any major change has occurred which can impact the investment in a major way, you need to provide updates. It may also require you to update the full thesis.

• Marketing materials: You need to create marketing materials depending on the size of your fund, so that you can pitch to your potential clients. You need to include benchmark, alpha/beta, sharp ratio etc. and the whole strategy as well in the marketing materials to benefit your clients.

Investment Banking vs Hedge Fund – Culture & Lifestyle

If you talk about work-life balance, then investment banking professionals can’t have it. Because they need to work 12-16 hours a day and the chances are that two-three times per week they need to pull all night for finishing important deals. How can you expect to have family time or to do anything else? But investment banking profession pays very well from the beginning. Thus, professionals who have the drive to earn huge money can trade off other things for their careers.

In case hedge fund managers, they need to work hard too; but working hours are not as hectic as of investment banking professionals. That doesn’t mean that hedge fund managers enjoy 4 hours per day of work. Nope. Their working hours revolve around 12 hours a day and very rarely, they need to stay at night to work on important deals. Thus they get time to sleep well and take care of their health. And in the weekend they also get time for family.

If we do a comparative study, hedge fund managers have more work-life balance than investment banking professionals.

Investment Banking vs Hedge Fund Salary

As we have already mentioned before that for an investment banker, from the day one he will start earning huge bucks. But for hedge fund managers, it’s the merit that stands out. Better you are in improving the performance of the investment, better would be your chances of making big money.

It’s all about sticking to the career you choose. If you stick to investment banking, in the long run you will earn millions. But the pay-off in hedge funds is much more. Your earning may reach a billion dollars. The idea is do some soul-searching before you start so that you can pull through in tough times.

Investment Banking vs Hedge Fund –  Pros and cons

Let’s look at some of the merits and demerits of investment banking and hedge funds.

Investment banking

Pros:

• Investment banking is a lucrative profession where you would be the center of attraction. No matter where you go, you will create charisma around you. Think about it. If you are an investment banking professional, depending on your modelling companies will sign those big, whopping deals.

• Investment banking profession pays well from the day one. If you can finish up your MBA from a top-notch institute, you will be given a direct opportunity to work with a top-notch bank.

• Investment banking allows a professional to network in areas where usually people can’t reach. You will be able to know CEOs, MDs, CFOs and make great connections with them which will ultimately help you sign huge deals.

Cons:

• Investment banking profession is not for the faint hearted. You won’t get to see your family as much as you would see your colleagues in office. You would have to work 12-16 hours per day, even in the weekend. Thus, maintaining work-life balance is not for investment banking professionals.

• Investment banking surely pays huge. But compared to what a hedge fund manager earns in 10 years down the line, compensation for investment banking professionals is chicken-feed.

• It’s called investment banking, but the main business is capital-raising. Thus, if you think it’s all about investment, you would be wrong. You need to work your major time on pitch-book creation and business deals.

Hedge Fund

Pros:

• The hedge fund manager is a tortoise in the story. He builds his career slowly. As hedge fund career depends totally on meritocracy, there is ample chance of growth, if you are ready to work on yourself.

• Even if you need to work 12 hours a day, you will be able to maintain a good work-life balance as rarely you need to pull through all night and you can get breaks in weekends also.

• Your chances of earning huge money are up to you. Don’t get discouraged by the little pay in the beginning. Stick to it for years. Think long term. Work hard on yourself. You will be able to earn billion dollars if you stay in this profession for ten years or more.

Cons:

• The path to become a hedge fund manager is harder. You need to be the best of all to be able to earn huge money.

• In the beginning, there is much less money. Because you can’t expect to outperform everyone in your team from day one. But as you learn and get better, your earning will get multiplied.

Final analysis

From above discussion, you may have idea about what your inclinations are. Follow your bliss. Money is just a by-product. So, make sure that whatever you choose, it should be something you can’t stop doing till the last breath of your life. And then think about money.

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