Inside the Hedge Fund Boot Camps Where Star Traders Are Born

On today’s Big Take podcast: As hedge fund assets swell and talent gets harder to come by, firms are going to new lengths to cultivate top traders.

Published20 Jun 2024, 03:02 AM IST
Inside the Hedge Fund Boot Camps Where Star Traders Are Born
Inside the Hedge Fund Boot Camps Where Star Traders Are Born

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Here is a lightly edited transcript of the conversation:

Sarah Holder: Bloomberg's Nishant Kumar has covered hedge funds for nearly 15 years. 

Nishant Kumar: This is the most exciting job on planet, given the kind of people, personalities, you know, money, boom and bust... 

Holder: And Nishant says that... historically... hedge funds haven't had much trouble finding workers.

Kumar: Well, it's a, it's a dream job, isn't it? If you are made for it, that is.

Holder: Last year, he says more than 80,000 people applied just to intern at the top-tier hedge fund Citadel.

Kumar: Just 0.5% of those applicants get selected to be an intern. Forget about jobs, just to be an intern at these firms. It's easier to get into MIT or Harvard, which has a success rate of, of around 3 to 4% actually. So that's the odd you are talking about.

Holder: It's not great odds.

Kumar: Not, not at all, not at all, but you know, it has its rewards.

Holder: What do interns get paid?

Kumar: At Citadel, it could be as high as about $19,000 per month.

Holder: $19,000 a month?

Kumar: Yeah, I don't think many journalists get paid that. 

Holder: Certainly not. 

Kumar: But that's just the start. That's just the start.

Holder: Hedge funds have created dozens of billionaires in the last 20 years as the industry has boomed. In 2008, hedge funds managed about $1.4 trillion. Today, they manage $4.3 trillion. They’ve more than tripled their assets in less than two decades. These funds typically practice riskier investment strategies with the hope of seeing massive returns. And clearly, it’s been paying off. All that money flowing into hedge funds' coffers has meant they've needed more and more people to manage it. And Nishant says an all-out talent war has been roiling the world's top hedge funds. That’s led to the creation of something unprecedented in the industry: in-house hedge fund boot camps. Cutthroat training grounds meant to build out the next generation of star hedge fund traders in a sector that’s gotten very large, very fast. It sounds a little like it’s pulled straight out of a season of Industry on HBO…or maybe…the other way around.

Kumar: I find Industry to be a bit exaggerated.

Holder: I’ve been watching a lot of Industry lately. 

Kumar: Yeah.

Holder: Today on the show: The lengths hedge funds are going to cultivate top talent — and what the rise of the hedge fund boot camp means for one of the world's most competitive industries.

Holder: Hedge funds are pressure cookers. And Nishant says not everyone is cut out for them. 

Kumar: Talent is a given. You need to be super bright, expert at your subjects. That's just the basic stuff. The main qualities are temperament. And if you can handle all the stresses that come with it, you need to be absolutely on your toes to survive in this truly Darwinian industry. You are as good as your last trade, no matter who you are.

Holder: Part of what creates that Darwinian dynamic is that hedge fund investments tend to be riskier. And if your portfolio doesn’t meet strict performance standards, the consequences are swift and severe. 

Kumar: It's highly, highly competitive. If you lose 5% at some of these hedge funds, your capital will be cut into half. If you lose 2% more on top of that, you are fired.

Holder: That is a razor-thin margin. To put that into perspective, Nishant looked at the track record of one of the world's most storied investors.

Kumar: Just imagine how likely it is for a stock to move by 7% in a day. If Warren Buffett worked at one of these hedge funds, and looking at his stock price, he could have got fired on eight occasions over the last more than 10 years. So that's how tough it is to survive in this industry.

Holder: Those kinds of stakes — unlimited upside with zero room for error — create an extremely demanding environment. Sink or swim. And in the past, hedge funds have traditionally relied on a steady stream of seasoned professionals... people who could walk in and be trusted to successfully manage hundreds of millions or a billion dollars-worth of client money on Day One.

Kumar: So if you look at the evolution of hedge fund industry over the last three decades, most of the superstars — be it Alan Howard, Michael Platt, Steve Cohen, Ken Griffin — all these personalities worked at one or other investment banks.

Holder: In other words, investment banks were a key part of the hedge fund talent pipeline.

Kumar: They took risks with bank's own capital. They made billions out of it for themselves and for their companies. And that was the true, real training ground for a lot of these star traders.

Holder: Nishant says the financial crisis of 2008 started to change the game. Those higher-risk-oriented desks at investment banks where today's hedge fund titans cut their teeth were reigned in. But the industry boomed in the years that followed, and there were still enough people who had that banking background to propel hedge funds to new heights.

Kumar: A number of these prop traders from banks moved out and they started their own hedge funds or they started to work for other hedge funds. 

Holder: It was, broadly speaking, a great time to be a successful analyst or portfolio manager. These types of traders were in high demand. And the way for hedge funds to win... was to have a better roster of super star traders than their competitors.

Kumar: All these large hedge funds, they have dozens and dozens of people who are just keeping a track of who are the good people working at their rival, not only portfolio managers, but even the analysts who are the great analysts who are just emerging, who could be, you know, a great portfolio manager in future. And they are looking at the right opportunity to attract them and convince them to switch. So the party lasted for a few years because, you know, there was still many traders to pick from. 

Holder: But as the pipeline problem eventually caught up to the firms, talent started getting scarcer — and convincing people to switch started getting much more expensive.  I asked Nishant just how much more expensive…

Kumar: I mean, God knows, like, I knew about someone getting paid more than $120 million in guaranteed. I'm not sure that's one-off case, there might be a few others like that. I've heard that there have been a few cases of $50 million dollar-plus payouts and $10 to $15 million is becoming more frequent. So just think about it. You leave your job, agree to join your rival, and your rival is saying, “Okay, I'll pay you $10 million even before you start making money for me.”

Holder: This worked for a while. But in more recent years, Nishant says a new trend has emerged — in part because the industry has shifted away from its focus on superstar talents.

Kumar: So the problem with individual traders is you are relying on the intelligence of one person to take the right call, and be right all the time. It doesn't happen that way. If you look at returns of some of those individual hedge fund managers, they will have a few great years and then they will blow up. Like, we see several dozen cases of this kind every year. Even the rock star traders, they will keep making money and then lose everything in one year. 

Holder: One strategy that's taken hold at dominant firms like Point72 or Millennium or Citadel... is to build huge teams of traders.

Kumar: Find all these bright individuals and put them together and bind them in chains that look, you can't lose money. Of course, make as much money as you want, but just you can't lose money. And if you combine them, a number of those individuals intelligently, and if you risk-manage them properly, give them all the resources to prosper, give them enough capital to manage, the end result is quite good.

Holder: That new approach has helped some top firms see returns of 10% or better. It gives them an edge. According to data compiled by Bloomberg, the average hedge fund had a return of about 8% last year. But this strategy relies on having a lot of capable people... people who have only grown harder and harder to find since the investment bank training ground disappeared. The talent is so scarce, at this point it’s impacting how much money hedge funds can accept.

Kumar: I wrote a story and I tracked Top 20 of these large hedge funds. A majority of them are no longer accepting new capital. That's only because they can't hire people who could manage those additional capital. So this is called the capacity issue in the industry.

Holder: That's why — for the first time — hedge funds are trying a new strategy. Rather than assembling teams of elite investing mercenaries, they're building their own armies. And that means they’re putting these someday-managers through basic training. So what happens at hedge fund training camps? And what does the shift mean for the industry? That's after the break.

Holder: Over the last 20 years, as the industry grew and traditional pathways to hedge funds dried up, the field got more competitive — and hedge funds found themselves entrenched in a poaching war. So they decided to try something new: Instead of finding the perfect trader, they wanted to create the perfect trader from scratch.

Point72 Podcast: The Academy is our program to take investment talent without any background or experience and turn them into long, short investors at our firm.

Holder: That’s a clip from the Point72 Academy podcast. It’s a training series produced by the Point72 hedge fund – that gives a taste of how their program molds promising new hires — into formidable investors.

Holder: How does a hedge fund boot camp do that? What happens inside those walls.

Kumar: So it's a long process. It's training slash mentoring slash on the job experience. So, of course, interns are fresh, so they will have more classroom teachings or more formal kind of teaching. If you are an analyst who has joined one of these programs, more like on the job, uh, experience; if you are a portfolio manager, say junior portfolio manager or senior portfolio manager who is being trained to become a portfolio manager, that would be like managing real money with certain constraint, with someone overlooking you, that sort of approach. So it could be as simple as, you know, talking to experienced, portfolio managers, giving them that opportunity to talk to some of these experienced people and learn from them, learn about their successes, their mistakes, how they behave in a certain market conditions, how they look at securities, what kind of questions they ask when they meet management, what kind of body language they observe. These are simple things, but when you learn from a pro, you can really inherit those qualities. And if you keep on doing it repeatedly, you sort of become a person like him or even better than him.

Holder: And how are these trainees being assessed? How can you excel?

Kumar: So everyone is looking for different things: the inflection points that when is a person ready to manage a billion dollars or money and it really varies. So, for example, hedge funds would like to see in you whether you are able to build a team around you, whether you have capacity to risk real dollars on ideas generated by someone else. Once you do it, maybe, you know, over a period of time, say 12 months, which is the case at Balyasny, for example, a minimum of 12 months where you need to prove yourself, then you might be ready to take over as a portfolio manager.

Holder: So how has this conveyor belt of talent or assembly line of talent worked out so far for hedge funds?

Kumar: So far so good actually. If you look at Point72, more than half of their stock pickers come through their training program. The average tenure life of a trader at Point72 has been six years now. That's their data. If you look at hedge funds that have shut, their life has been 6.6 years. So hedge funds don't survive that long. Forget about individual traders. Let's take Phil Lee, who is the head of one of the stocks trading units at Citadel. He joined the firm as an analyst and within 10 years, he rose to become the head of that business.

Holder: Wow.

Kumar: That's an incredible journey. So, you know, these training programs are genuinely producing talent. They're genuinely making people stay longer and giving hedge funds a real chance that they can find another way of hiring people rather than just throwing investors money at the next hot stock trader.

Holder: What does the rise of these boot camps mean for the industry?

Kumar: It's a better way of managing money. See, all of this is funded ultimately by end investors. Maybe it's your and mine pension fund. Of every dollar that a hedge fund makes—some of these hedge funds make, not all—60 cents goes to pay for talent to run their businesses and to pay for themselves. If that can be minimized a little bit, either through growing your talent in house or reducing competition as a result, reducing this war for talent, then maybe there will be more money left for investors. So that's what’s at stake here

--With assistance from Sarah Holder.

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First Published:20 Jun 2024, 03:02 AM IST
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