The HF Recruiting Guide.
Everything you need to know about hedge fund recruiting — what L/S and Long-Only investing actually means, how to build the 3-statement and DCF that every interview turns on, and what makes a good investment.
Section 01
The Associate Role.
This is a very different job from banking. It's much more similar to equity research than anything else.
HF Associate Responsibilities
Writing Investment Memos
(Making pretty word docs)
Modeling Investments
(Digging deep into 3-statement models)
Taking Notes on Earnings Calls
(this is mostly automated!)
Portfolio Work
(running screens, analyzing add-on opportunities, and maintaining coverage)
You own the names.
This is a very different job from banking. In fact, it is much more similar to equity research than anything else. As an associate, you'll cover a small group of companies and learn to ‘own the names’ by becoming an expert on everything related to those businesses.
The detail required can be excruciating. Some models are 5,000+ lines deep with endless scenario analysis. The idea is that you should digest every single piece of available information to arrive at the best possible conclusion of the viability of an investment.
Overall, this is true investing. You're not calling the shots by any means, but you're seriously analyzing different companies to determine where there could be a good place to deploy capital. There is much less politicking and negotiation within the HF realm and you rarely ‘set it and forget it’ as you would in a transaction-oriented role such as PE, VC, or PC.
Your principal and managers will actually be the ones deciding where to invest capital. You'll be conducting the analysis needed to help shape a view to decide one way or another.
Section 02
A little about HF.
Brief by design — anything you can Google, we'll keep tight.
The business model
As previously mentioned, I will only be speaking in the context of Long-Only and Long / Short hedge fund strategies. I will not be covering anything quantitative or even macro since those are largely out of the scope for the target audience.
A long-only strategy involves a fund taking long positions across a concentrated portfolio of ‘good companies.’ These are typically ‘compounders.’ Compounders are companies with incredible ROIC, semi-monopolistic business models, and deep moats. A long-short strategy involves a fund taking long and short positions across a mostly concentrated portfolio of good and bad companies. Most hedge funds do not take large enough positions to dictate the operations of any given company.
A traditional hedge fund is designed to be a capital-preservation vehicle so that you can always achieve X% regardless of the economic environment. This can be accomplished by taking longs and hedging some risk with shorts.
Hedge funds have largely evolved from capital-preservation vehicles into outperformance vehicles. Many hedge funds now have a goal to beat a certain index such as the S&P 500. The idea is that a group of professionals meticulously combing through investment material can create a portfolio that beats the market (rarely happens after fees). Just like private equity and private credit, hedge funds are designed with a lucrative business model. Fees vary widely across funds, but it is usually in the ballpark of a 2/20 model (2% of AUM, 20% of outperformance).
It is important to note that a large differentiator between hedge funds and private equity funds is the underlying fund design. Hedge funds invest capital from a similar pool of LPs found in a PE fund such as endowments, pension funds, and insurance companies. However, they call all capital upfront in exchange for looser redemption provisions to allow investors to pull their money upon their discretion. After all, hedge funds are largely investing in liquid, public equities.
Section 03
Different types of HF.
Segmented by manager structure, then by strategy.
Manager structure
Multi-Manager
Large funds like Millennium, Citadel, DE Shaw, etc. Many managers running pods that roll up under a single name.
Single-Manager
Smaller shops that usually only have one manager calling the shots.
Different strategies
- 1Traditional L/S (taking longs and shorts) — most HF roles are L/S
- 2Long-Only (taking only longs)
- 3Event-Driven (investing only during large corporate events such as M&A)
- 4Macro (only investing in the macroeconomic story)
- 5Emerging Market (investing in emerging market economies)
- 6Distressed (only investing in underperforming businesses)
- 7Short-Only (only taking shorts)
- 8Activist (taking large positions to exhibit control on a company)
Section 04
Building a 3-statement model.
The foundational deliverable — every HF case study, every modeling test, every coverage memo starts here.
7 steps, end to end
- 1Bust open 10-Ks, 10-Qs, and earnings presentations to input ~3 years of historical information
- 2Assess historical performance and current events to drive some assumptions for your model (revenue growth, EBITDA margin, NWC changes, Capex, debt issuance, etc). For the most part, all income statement assumptions are a % of sales
- 3Use your assumptions to forecast the income statement over 5-10 years
- 4Forecast core balance sheet items such as working capital line items (AR, AP, Inventory), PP&E, and the debt balance
- 5Tie back items such as D&A and interest expense into the income statement. Add net income to shareholders' equity and complete the balance sheet projection. Cash should be the last item to plug
- 6Use the income statement and balance sheet to drive the cash flow statement
- 7Tie your ending cash balance back to the balance sheet. At this point, your balance sheet should balance and you'll complete your 3-statement model
Section 05
Building a DCF.
Discounted cash flow analysis — the second half of every interview's technical bar.
6 steps, end to end
- 1Spread revenue, EBITDA, and unlevered free cash flow over 5-10 years (you can leverage your 3-statement model here)
- 2Calculate your WACC. You should know how to do this by now
- 3Calculate your terminal value using the Gordon Growth Method and Multiples Method
- 4Discount back your unlevered free cash flow and terminal value using the WACC to arrive at your enterprise value
- 5Deduct debt and add back cash to arrive at your equity value
- 6Divide equity value by the fully diluted shares outstanding to arrive at your share price
Section 06
Core components of a good investment.
The five questions every HF analyst pressure-tests every position against — plus the other considerations that show up in modeling.
The five questions
Is it the right price?
Is the business aptly profitable?
Do I understand the business model?
What's the competitive landscape?
Is management strong?
Other Considerations?
Beyond the five core questions, your model should also account for:
Stock Buybacks
Stock Issuance
Dividend Policy
M&A Optionality
Practice on real cases
Real L/S and Long-Only case studies from premier funds.
Real HF stock pitches and modeling cases from actual recruiting processes — each with a complete answer key. Available to Premium subscribers.
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