Inside the Hedge Fund Boot Camps Creating Star Traders

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Bloomberg's Nishan Kumar has covered hedge funds for nearly fifteen years.

This is the most exciting job on planet, given the kind of people personalities in money, Boom and bust and A.

Shant says that historically hedge funds haven't had much trouble finding workers.

Well, it's a dream job, isn't it if you are made for it.

That is, last year, he says, more than eighty thousand people applied just to intern at the top tier hedge fund Citadel.

Just zero point five percent 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 MIIT or Harvard, which has a success rate of around three to four percent. Actually, so that's the audio are talking about.

It's not great odds, not.

At all, not at all, but you know it has its rewards. What do interns get paid at Citadel? It could be as high as about nineteen thousand dollars per month.

Nineteen thousand dollars a month.

Yeah, I don't think many journeys get bid.

That, certainly not.

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

Hedge funds have created dozens of billionaires in the last twenty years as the industry has boomed. In two thousand and eight, hedge funds managed about one point four trillion dollars. Today they manage four point three 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

I find industry to be a bit exaggerated.

I've been watching a lot of industry lately yeah. 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. Hedge funds are pressure cookers, and Ashan says not everyone is cut out for them.

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.

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.

It's highly highly competitive. If you lose five percent at some of these hedge fund your capital will be cut into half. If you lose two percent more on top of that, you are fired.

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

Just imagine how likely it is for a stock to move by seven percent 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 ten years. So that's how tough it is to survive in this industry.

Those kinds of steaks, 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.

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

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

They took risk with banks owned 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.

Nashan says, the financial crisis of two thousand and eight started to change the game. Those higher risk oriented desks at investment banks where today's hedge fund titans cut their teeth, were rained 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.

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

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 superstar traders than their competitors.

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 analyst Who are the great analysts who are just emerging, who could be a great portfolio manager in future, and they are looking at the right opportunity to attack them and convince them to switch. So the party lasted for a few years because you know, there were still many traders to pick from.

But as the pipeline problem eventually caught up to the firm's talent started getting scarcer and convincing people to switch started getting much more expensive. I asked Naseean, just how much more expensive?

I mean, cordiners, like I knew about someone getting paid more than one hundred and twenty million in guaranteed. I'm not sure that's one off case. There might be a few others like that. I've heard that, Like, there have been a few cases of fifteen million dollar plus payouts, and ten to fifteen million is becoming more frequent. So

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

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 hetch 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.

One strategy that's taken hold at dominant firms like er point seventy two or Millennium or Citadel is to build huge teams of traders.

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 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.

That new approach has helped some top firms see returns of ten percent or better. It gives them an edge. According to data compiled by Bloomberg, the average hedge fund had a return of about eight percent 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.

I wrote a story and I tracked top twenty of these large hedge funds. The 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.

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 Over the last twenty years, as the industry grew and traditional pathways to hedge funds dried up, the field got more competitive and

So it's a long process. It's training slash mentoring slash on the job experience. So of course in turns 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 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

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

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, Hedgeman's 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.

So how has this conveyor belt of talent or assembly line of talent worked out. So far for hedge funds.

So far, so good. Actually, if you look at point seventy two, more than half of their stock pickers come through their training program. The average tenure life of a trader at point seventy two has been six years. Now, that's their data. If you look at hetch funds that have shot, their life has been six point six years. So hetche funes don't survive that long. Forget about individual traders. Let's take Phil Lee, who is the head of one

What does the rise of these boot camps mean for the industry.

It's a better way of managing money. See, all of these is funded ultimately by end investors. Maybe it's your and my pension fund. Of every dollar that a hedge fund makes, some of these hedgehunds make, not all sixty cents goes to pay for talent, to run their businesses

This is The Big Take from Bloomberg News. I'm Sarah Holder. This episode was produced by David Fox and Jessica Beck. It was edited by Aaron Edwards and James Boxel. It was mixed by Blake Maples. It was fact checked by Adriana Tapia. Naomi Shaven and Kim Gettleson are our senior producers. Our senior editor is Elizabeth Ponso. The Cool Beemsterbor is our executive producer. Sat Bowman is Bloomberg's head of Podcasts. If you liked the episode, make sure to subscribe and