reality of investment bankers / hedge funds

this is a highly simplified (though sincere) explanation attempt for the sake of understanding the basics. readers' discretion requested

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What is an investment bank?

= it is the trading BROKER to banks, funds and sophisticated hni clients. Gets COMMISSION to execute trades of its clients mostly DECIDED BY CLIENTS. They don’t trade with their own funds (except for a very small portion). Practically all they do is take orders like salesmen and punch in the computers. 100% of the trade is done by algorithms.  

Very few funds, banks etc hire them for their stock/investment research these days as everyone has their own in-house research teams. Investment bankers are endangered species. Investment bankers these days are living hand-to-mouth lives.

So, if someone says he is an investment banker, it will sound as “order clerk” to me (except for very few, which i will mention later)

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What is a hedge fund?

= (hedge fund is what i respect after knowing the definition of an investment bank.) a hedge fund, simply put, is the “mutual fund” of banks,funds and hni clients! Not only that, the main thing is that they put in their money also to trade (this is one of the clauses). So much so that they are bound to plough back 50% of their performance bonus back into trading (this is also in the clauses). This gives funds etc confidence to “risk” their money with a particular hedge fund.

Why is hedge fund so called?

Well simple....they take equal no of long and short positions (by value) to give broad umbrella security to the fund god forbid something really terrible happens! This is nothing but hedging. Any money they make while fulfilling this hedging condition is by picking and choosing good stocks for long and good stocks for short opportunities (highly simplified explanation)

They charge

a) fund management fee (typically 1% of AUM asset under management),

b) performance bonus (typically 20% of profits earned)

so a $1billion hedge fund will get $10million in management fee and $40million in performance bonus assuming $200 million profits.

(commission for investment bankers is 0.25% by the way....... not surprising for what they do)

a hedge fund client typically expects an annualised return of 20% with max volatility (running carried forward loss) of 15%, failing which he generally quits with his money in search of a better hedge fund, taking along, in the process, pride, reputation and track record of the hedge fund!

a hedge fund manager is more of a fundamental investor than a technical trader, though he is a quite skilled trader.

I was shocked to know that while fund management fee is invoiced locally, tax is payable on this in the country, while the performance bonus is invoiced at the out-of-country tax-haven office of hedge fund so that taxes are minimised, if not avoided!!!

Since hedge funds are thriving and investment bankers are “starving”, all good traders have left investment banks and either joined hedge funds or doing their own trading! (difficult to retire once u have smelled the big money)

by the way, every consistently successful trader is a mini hedge-fund manager (though managing, as of now, only one side of the hedge!)