Hedge Funds: What Are They?

If you’re exploring roles in the hedge fund space, it’s worth taking a moment to revisit the basics.

Understanding what hedge funds do, how they’re structured, and the differences between fund types will help you navigate interviews, assess opportunities more confidently, and speak the language of the industry.

We’ve put together a clear overview to help you brush up and understand the hedge fund landscape, with a particular focus on quantitative funds (quant funds), which are increasingly shaping the market.

What Is a Hedge Fund?

A hedge fund is a private investment vehicle that pools capital from accredited investors or institutions and aims to generate strong returns through a wide range of strategies. Unlike traditional investment funds, hedge funds have fewer regulatory constraints and more freedom to invest across markets and asset classes, including equities, fixed income, derivatives, currencies, and even alternative assets like crypto or commodities.

What Makes Hedge Funds Different?

These are some key differences that set hedge funds apart from other kinds of investment funds:

• Active Management: Hedge funds are actively managed by professional fund managers to seek alpha (returns above market benchmarks).
• Flexibility in Strategy: They can go long or short, use leverage, and operate across global markets.
• Sophisticated Techniques: Many hedge funds use complex modelling, data science, and trading algorithms, especially quant funds.
• Limited Access: They are typically only open to institutional investors and high-net-worth individuals.

Most hedge funds charge a performance fee (usually around 20%) on top of a management fee (typically 2%) – this is known as the "2 and 20" model. This is typically higher than what conventional investment funds charge.

The management fee is calculated annually on the fund’s net asset value (NAV) and is paid regardless of performance. It’s designed to cover operational costs, infrastructure, and to compensate the fund manager and investment team.

The performance fee is based on the profits generated and is usually only charged when returns exceed a set benchmark or “hurdle rate.” Many funds also have a “high-water mark” provision, meaning performance fees are only paid when the fund surpasses its previous profit peak.

Common Hedge Fund Types & Strategies

Understanding the different ways hedge funds can function is key to positioning yourself effectively in interviews, especially when applying to roles within funds or tech teams supporting them.

1. Long/Short Equity

These funds go long on stocks they expect to rise and short on those they expect to fall. This is one of the most traditional hedge fund strategies and focuses heavily on fundamental analysis.

2. Market Neutral

These funds aim to eliminate market exposure by maintaining equal long and short positions, focusing instead on exploiting pricing inefficiencies. This approach is often seen in statistical arbitrage and quant equity strategies.

3. Global Macro

These funds make bets on macroeconomic trends using currencies, interest rates, or geopolitical factors. They require high-level economic insight and can be either discretionary or systematic.

4. Event-Driven

These funds capitalise on corporate events such as mergers, acquisitions, bankruptcies, or restructurings. Analysts at these funds need strong modelling and fundamental skills.

5. Quantitative Funds (Quant Funds)

Quant funds use algorithms, mathematical models, and large-scale data to identify opportunities and execute trades automatically. They include:

• Statistical Arbitrage Funds: Focus on short-term opportunities in pricing inefficiencies in securities.
• High-Frequency Trading (HFT): Use ultra-fast execution to profit from micro-opportunities in the market.
• Machine Learning-Based Funds: Apply AI techniques to adapt strategies in real-time.

Quant funds are a major destination for data scientists, software engineers, and PhDs in mathematics, physics, and computer science. Their performance fees are tied to returns generated through model-driven, algorithmic strategies rather than traditional discretionary investing.

Since quant funds often require substantial investment in specialist technology, research, and data science talent, their fees tend to be even higher than other hedge funds, though they often still follow the “2 and 20” structure.

Key Roles in Hedge Funds

Most hedge funds have three main functional teams:

• Investment Function: Comprising portfolio managers and research analysts, this team develops, tests, and selects investment ideas, ultimately deciding where to allocate capital.
• Trading Function: Made up of execution traders, this group turns investment decisions into market transactions, working to secure optimal execution and pricing.
• Middle and Back Office: Encompasses functions such as compliance, finance, operations, and IT, ensuring the fund runs smoothly and within regulatory boundaries.

Roles like risk management and investor relations may operate independently or be integrated into the broader functions above.

Roles in Quantitative Funds

Quantitative hedge funds share many structural similarities with traditional hedge funds, but they also require several additional specialist roles to meet the demands of algorithmic trading. These positions attract professionals from both finance and technology backgrounds, offering exciting opportunities for those with the right skill sets.

• Quant Researchers, Quant Analysts, & Data Scientists: These professionals draw on academic research to design, test, and refine mathematical models. The work is well-suited to exceptional statisticians and physicists capable of handling complex calculations.
• Quant Developers / Software Engineers: Responsible for building and maintaining trading platforms, data pipelines, and technical infrastructure. In addition to advanced programming expertise and hardware knowledge, they also need a strong understanding of financial markets and trading strategies.
• Quant Traders: While their role includes trade execution like in traditional hedge funds, they also leverage programming skills to optimise trading efficiency and reduce latency. This is crucial in the high-speed environment of quant funds.

Preparing for Hedge Fund Interviews

If you're looking to start interviewing for roles at hedge funds, particularly quant funds, you’ll want to brush up on:

• Core market mechanics and trading strategies
• Basics of options, futures, and other derivatives
• Technical questions in Python, C++, or SQL (for tech roles)
• Statistics, probability, and linear algebra (for quant roles)
• Problem-solving and case-based questions

Final Thoughts

Hedge funds are high-performance environments that reward skill, innovation, and deep domain knowledge, and this is even more so at quant funds.

If you're serious about moving into this space or levelling up your current role, familiarising yourself with the structure and strategy of these funds is a must! Get comfortable using the language and discussing the different strategies and expectations. It’ll help you stand out in interviews and hit the ground running.