Hedge Fund Trader Interview Questions And Answers

It's a private, unregistered investment pool encompassing all types of investment funds, companies, and private partnerships that can use a variety of investment techniques such as borrowing money through leverage, selling short, and derivatives for directional investing and options.

Sector Head - The person is in-charge of "sectors" working within a fund, such as the healthcare sector or the technology sector.

It's an investment strategy that seeks to exploit pricing inefficiencies between a convertible bond and the underlying stock. Managers will typically long the convertible bond and short the underlying stock.

This type has a lot of Portfolio Managers running independent funds.

All the involved managers are entrusted with the task of implementing various strategies and in the end, a specific fee is paid to the 'platform'. SAC and Citadel are well-known examples of multi-manager platforms.

There are strict limitations on risk; there is extensive leverage use, and more capital is poured to the best performing funds and the underperformers are terminated.

Working at a multi-manager hedge fund is fraught with pressure, which is not always competitive. A significant advantage here is that since the platform takes care of the administrative part, the PMs and the analysts can focus on the investment, singularly.

The pay depends on the platform and its relation with the PM, and the relation between PM and the analyst.

This question varies by individual, but think about examples like the following:

You have a specific interest in the fund manager's strategy. You were always interested in merger arbitrage, fixed income arbitrage, etc.

You don't like to be confined by the stricter rules that mutual funds have to follow and would appreciate the ability to look for short positions and/or use derivatives.

You would like to work in a smaller shop-many mutual funds are huge-and therefore if you like smaller, possibly more challenging, work environments then state this.

Portfolio Manager (PM) - The person is a decision-maker, responsible for a portfolio's growth.

Hedge Fund Manager (HFM) - The person has complete control over the fund.

Analyst - The person who researches and sells ideas to the PM.

The main distinguishing characteristics are that hedge funds use derivatives, can short sell, and have the ability to use leverage.

I was a research analyst, which means I conducted investment research and generated investment ideas for portfolio managers.

I first started covering distressed debt and equity investments all over the world, and then I began spending more time on short selling, also getting into distressed assets.

We only worked with public companies, but some funds cover private companies too.

This is also specific to the firm you are interviewing with, and will be partly based on your answer to No. 6. Once you've found the strategy that the fund is pursuing, research the current environment of the fund. For example, if it is a merger arbitrage strategy, look to find any recent announcement mergers and be prepared to discuss your opinions on it. Current news events, market trends, and new financial regulations can also affect a fund's strategy.

☛ If you had $100,000 to invest, where would you put it?
☛ Do you have a Personal Account? What stocks do you own?
☛ Give me a long idea. Give me a short idea.
☛ How do you screen for stocks? What is your holding period?
☛ What is the Federal Funds Rate?
☛ What do you think of the economy?
☛ Where do you think interest rates are going? What is driving them?
☛ What does the yield curve look like and what does it mean?
☛ What has been happening in the market the past six months?
☛ What do you read to find out your news? Wall Street Journal? The New York Times?
☛ What is Duration? What is Convexity?
☛ What does the term delta mean? What does Alpha mean?
☛ What is meant by the term "securities lending"?
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☛ How many Hershey's chocolate bars were sold in the U.S. last year?
☛ If you look at a clock and the time is 3:15, what is the angle between the hour and the minute hands?
☛ You have a five-gallon jug and a three-gallon jug. You must obtain exactly four gallons of water. How will you do it?
☛ You are faced with two doors. One door leads to your job offer (the one you want!), and the other leads to the exit. In front of each door is a guard. One guard always tells the truth. The other always lies. You can ask one question to decide which door is the correct one. What will you ask?
☛ I am drinking beer and you are drinking light beer. Your light beer is 1/3 less filling than my regular beer. I drink 3 beers. How many do you have to drink to be equally full?
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☛ Tell me about yourself. Walk me through your resume.
☛ Why do you want to work for a hedge fund?
☛ Do you have an industry preference?
☛ What do you plan to do in the next 5-10 years?
☛ Have you had a performance review? What did it say?
☛ What skills do you feel are transferable to this industry?
☛ What separates you from other candidates?
☛ Why are you working in your current industry?
☛ Do you plan on going to business school? Why or why not?
☛ Why do you want to work for our firm in particular? What is attractive about our firm?
☛ What would you say are our firm's strengths and weaknesses?
☛ What skills do you bring to our firm?
☛ Why do you think you'll be successful as a hedge fund analyst?
☛ What do you invest in?
☛ What do you think of the markets in general right now?
☛ If you could invest in anything, anywhere in the world right now, what would that be?
☛ Do you own any stocks or do any non-work related investing?
☛ Who is your favorite portfolio manager?
☛ What books are you currently reading?
☛ What happened when you worked with a team and one member wasn't contributing? How did you respond?
☛ What happens when you face more work than you can handle?
☛ What are you biggest strengths? Biggest weaknesses?
☛ What are the easiest decisions for you?
☛ Are you risk-averse or do you like taking risk?
☛ What would your work colleagues say about you?
☛ Who else are you interviewing with?

☛ If you are paid a dollar a year for the rest of your life, how much is that worth today?
☛ How much is a dollar in 20 years worth today?
☛ What is the relationship between the yield and the price of the bond?
☛ How does the future value of money relates to the present value (i.e. FV=PV(1+r)^t)?
☛ What major factors affect the yield on a corporate bond?
☛ What is the Black-Scholes model?
☛ How does the yield curve look like?
☛ You have a 10% note maturing in five years trading at 70. What is the current yield?
☛ Define the difference between the "yield" and the "rate of return" on a bond.
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☛ What is EBITDA?
☛ Walk me through the major line items of a Cash Flow Statement.
☛ Say you knew a company's net income. How would you figure out its cash flows?
☛ What is the difference between the balance sheet and the income statement?
☛ What is Goodwill? How does it affect Net Income? NOTE: there is a basic answer to this question, a complex, tricky one as well.
☛ A firm is using LIFO, the COGS start decreasing. What are effects on I/S, BS and CFS?
☛ What is the difference between Purchase and Pooling accounting? Under what circumstances would you use one or the other?
☛ What are deferred taxes? How do they arise?
☛ What is working capital? How would you calculate it?
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☛ What did our firm's stock close at yesterday?
☛ What is the DJIA at today? NASDAQ? S&P500? Long Bond? Fed funds rate?
☛ Where is the market going? Bond, equity and foreign exchange? Where do you think?
☛ What do you think interest rates will be in the next 12 months?
☛ What happened in the markets in the past three months?
☛ Do you read the Wall Street Journal everyday? What is on the front page today?
☛ Do you follow an industry, a stock?
☛ What do personally invest in?
☛ What industry do you follow and what numbers do you look at to determine if a firm is doing well in the industry?
☛ Do you know what the difference between a put and a call option is?
☛ What determines the premium you place on growth stocks relative to their peers?
☛ You have three companies in three different industries: retail, tech, and pharma. What would you look for in their 10-Ks beyond financials?
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That's an investment strategy seeking to identify and exploit pricing inefficiencies that have been caused by some sort of corporate event, such as a merger, spin-off, distressed situation, or recapitalization.

When a single manager fund grows too much, making it difficult for a PM to manage, it is split up into multiple funds, with each fund having its own PM or sector heads. They are given complete discretion over the assigned portfolios.

The decision maker is usually the PM but is restricted to one kind of fund. Or, there are Chief Investment Officers who are involved with all the funds.

In this kind, there is less access to the senior personnel but sector heads and analysts can still communicate with the PM directly. There aren't any generalist roles.

The pay is similar to single manager funds. Analysts, on the other hand, get a bit less since the Fund Manager and the PM both get a share of the P/L.

This is specific to the firm you are interviewing with. Try to do the following:

Search the Web to find any articles on the fund or its founders.
Search Bloomberg to find any articles written on the fund.
Search online databases to see if the firm is listed.

This is the most important part of the pitch. I usually begin, "ABC is currently valued at 10x [insert multiple], but is being unfairly discounted because of the incompetency of the prior management team. Since the current management team has taken over [insert metric] has improved XYZ. As of right now the market has not recognized the improvement in XYZ or the overall business, but I expect that [insert catalyst] will demonstrate ABC's true value to the market within [insert time frame

The answer to this question at my fund, and consequently any other fundamental L/S fund I am aware of is Return on Invested Capital [ROIC]. We will also accept Normalized Free Cash Flow Yield.

ROIC is the return a company earns on each dollar invested in the business. Therefore, obviously, the greater ROIC is the better. ROIC is used as a quantitative measure of competitive advantage and, as such, if you are going to make an investment decision based on a single factor it would serve you well to choose the business with the greatest competitive advantage.

I call these questions the "All risk - No Reward Questions" because, simply put, answering them well will not earn you an offer, but answering them poorly can very well get you dinged quickly. Therefore, it is important that you prepare judiciously for these types of questions, but do not expect even amazing answers to earn you an offer.

Here's an example of a sector trade: Fred is a long/short equity hedge fund manager whose primary trading strategy focuses on sector trades. Fred noticed that in the tech sector, Microsoft (MSFT) was a relatively cheap stock when compared with Oracle (ORCL). Fred purchases 100 shares of MSFT because MSFT is undervalued relative to the theoretical price (fair value) and the market is expected to correct the price. Simultaneously, Fred sells short 100 shares of ORCL because ORCL is overvalued relative to its theoretical price.

More SEC regulation, continued growth in institutional investing, and the potential of offering hedge funds to average retail investors are all key issues.

These funds comprise a couple of analysts, sector heads and one PM. In this fund type, people have direct access to the decision maker and generally, there is a good mentoring environment and less bureaucracy.

The processes are transparent and sometimes, the analysts even contribute to the core decision-making process. The single manager fund team usually don't have more than ten members.

The pay is varied with the PM getting about 50% of the total profits.