There are many different investment vehicles that are used to gain exposure to stocks, bonds, real estate, and other assets. Financial analysts are needed at all of them, but the skill sets required and the day-to-day operations at each fund will vary tremendously. Here’s a quick rundown of the different kinds of funds out there and how they’re different from each other.
Long-Only Funds
Usually mutual funds, “long-only funds” tend to focus on long-term performance and providing growth to investors. These funds tend to have lower fees than some of the more exotic funds out there, and they also have a massive client base of mostly retail investors and some institutional investors who use these funds to gain exposure to a specific asset class or portfolio manager. These funds can vary in size, but because of their focus on stability rather than growth, financial analysts will find themselves focusing on risk management and a conservative approach to markets more than anything else.
Hedge Funds
Known in the industry as long-short funds, although many hedge funds employ different strategies nowadays, the hedge fund is shrouded in mystery for many people. But the hedge fund at its core operates much like any other fund, with analysts, portfolio managers, traders, and salespeople all operating to grow the fund’s assets under management (AUM). Hedge funds have a significant amount of discretion in their investing, which can both make things much more interesting for analysts and a tad more chaotic. Compensation at hedge funds is famously massive, but entry-level analysts may be surprised to learn they will earn less than $100,000 per year; this is especially true at smaller funds. Hedge funds focus on capital preservation more than anything, and they will use incredibly complicated strategies to preserve capital. As such, expect a lot more math and complex analysis here than at a long-only fund, which will often use more traditional fundamental investing analysis.
Quant Funds
Many hedge funds are quant funds and many quant funds are called hedge funds although they aren’t. These funds use statistical analysis to find investment opportunities (many are called “stat-arbs”, or “statistical arbitrage” funds). Obviously, very complex math is at the core of these funds, so a firm foundation in very complicated math is the only way to get your foot in the door. However, quant funds also demand some level of computer literacy, in particular programming abilities. Any financier hoping to get to a quant fund would be wise to double major in computer science or develop an intense skill set in computer programming as soon as possible.
Closed-End Funds
Relatively obscure and small in scope, closed-end funds are often managed by firms that specialize in mutual funds. CEFs are typically a small business to them, but CEFs also tend to have higher management fees. As with mutual funds, CEFs often have a mandate that restricts investing to a very specific strategy or style, but they also tend to offer more freedom and involve more complex investing strategies. Most CEFs focus on bonds, so if you want to work at one of these companies you better learn things such as convexity, yield-to-worst, and other bond-specific financial concepts.
ETFs
Exploding in popularity and largely replacing mutual funds as the most popular investment vehicle, ETFs have a mostly retail investor clientele and a relatively risk-averse approach to investing. While there are some exceptions, most ETFs focus on very specific mandates with very limited discretion from analysts and portfolio managers. Low expense ratios and “rule-based” investing strategies also mean there’s little work for analysts to do here beyond what could be considered basic housekeeping and portfolio maintenance. These mean ETF jobs are often poorly remunerated, and rarely require the advanced skill set of a financial professional.
Index Funds
As goes with ETFs goes even more for index funds. Index funds employ very few people and the jobs they require involve ensuring that the fund uses new capital to invest according to the index it tracks as accurately as possible. While there is tremendous growth in index funds, there is limited work for analysts here; an index fund job is not well paid and will often involve more legal, regulatory, and accounting work than actual financial work.
Private Equity Funds
Finally, PE funds are in many ways the most exotic, complicated, and best paying employers out there. PE funds will use capital to invest in assets that are typically illiquid, are hard to evaluate and price, and are often obscure and complicated. This means PE funds hire extremely talented and intelligent financial analysts with deep financial knowledge. PE funds are wise to hire CFA charterholders or people with similar finance chops; they also know how much they need their people, so they tend to pay well. But PE funds are often demanding, sometimes requiring work schedules that rival investment banking analyst positions (where 100 hour weeks are typical). Work-to-life balance is not something easily found at these funds, especially for newcomers.