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Hedge fund interview questions: What to expect, and what to ask

Leaving banking to get a job in a hedge fund carries risks. Hedge funds have a comparatively low threshold for underperformance. If you don't perform, or the fund you join doesn't perform, or the pod within the fund you join doesn't will be out. 

There are rewards too, though. If you join a top fund, you will have "numerous exit opportunities," says Brett Caughran, a former banking analyst, private equity professional and hedge fund portfolio manager. The real problem with hedge funds is getting a job in one in the first place.

This is where Caughran can help. Since joining and then leaving everywhere from Two Sigma, to Schonfeld, DE Shaw, and Citadel, Caughran has become an expert in getting in. If you want a hedge fund job, he is the man to help. 

Hedge funds are looking for a particular confluence of talents, says Caughran. This includes intellectual talents ('intellectual horsepower' and curiosity), a mastery of financial concepts and a passion for investing. But it also includes nebulous cultural attributes like a sense of humor, and personal preferences like an enthusiasm for sport.

In their effort to unearth appropriate talent, hedge funds typically expect would-be hires to pitch complex investment ideas. But they will also put you through an interview, and Caughran says some interview questions come up again and again.

They are:

  • Why hedge funds & not private equity?
  • What is the best business in the world?
  • What's the biggest risk you've taken in your life?
  • Who's your favorite investor?
  • Pitch me a stock.
  • If you could only use one investment metric, what would you use to tell a good investment opportunity?
  • Which investment firm do you respect the most?

These are the core hedge fund interview questions. But there are also a series of more niche questions which Caughran crowdsourced from the hedge fund community on Twitter. And they include:

  • Which was the last book you read? Tell me about it.
  • Which applications do you have open on your desktop at all times?
  • What makes a stock go up by more than the market?
  • Tell me about two mistakes you made and what you learned?
  • What was your best stock pick & why did it work?
  • How do you build a model, why do you do it that way?
  • What risks scare you?
  • How would you define risk?
  • Pitch your favorite investment without talking about financial metrics or valuation.
  • Where do you have conviction that goes against the mainstream?
  • Give me three consensus opinions (in any field) that you disagree with. Why?

It's not enough to simply answer questions, though. If you want to make it through a hedge fund interview, Caughran says you'll also need to ask some questions of your own. And at the risk of being prescriptive, he suggests some of these too. 

They include:

  • Tell me about the most interesting investing debates in your sector right now?
  • • How does the fund think about managing gross & next exposure?
  • • What has been the career path for top analysts at the fund?
  • • How does the fund think about volatility?
  • What are the target & realized sharpe ratios?
  • What are the high-level limited partner (LP) dynamics?
  • Is there a seed (for new funds)?
  • What is the duration of capital? (generally good to ask later in process if deciding between a few opportunities)
  • Walk me through the process at the fund, from idea generation to portfolio inclusion?
  • How does the fund decide to sell a position? 

Most of all, though, Caughran advises reading up on the fund's top positions before the interview. You can then ask them about their thesis for holding those particular securities. "Most analysts love talking about their best ideas," he says. 👌👌👌

Click here to create a profile on eFinancialCareers. Make yourself visible to recruiters hiring for top jobs in hedge funds, or private equity if you really insist. 

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AUTHORSarah Butcher Global Editor

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