Hedge funds are investment firms that are exempt from the requirements of national securities regulators. Hedge fund traders are investment professionals who buy and sell securities on behalf of the fund with the stated goal of making money for the fund and its investors. Most hedge fund traders start out as brokers for mutual funds or other registered investment companies, in which case they are subject to more government regulation than the hedge funds for which they work.
Junior hedge fund traders carry out fund managers’ orders. Traders must try to negotiate the lowest possible price for securities sales and accept the highest possible bid for securities sales. Some traders have seats at major stock exchanges, which means they work on the floor of the exchange and execute trades in real time. Other traders work from remote locations, but hedge funds typically have high-speed, secure connections to global markets, allowing them to see the latest securities prices a fraction of a second before the exchange traders.
A background in finance helps traders develop strategies for generating returns investing in complex securities, and many hedge fund traders have college degrees in finance, accounting, or related fields. Other traders do not have a college education and begin their careers as bank or investment firm salespeople. Rather than being paid salaries, these traders are paid commissions based on the performance of the fund they manage. In theory, there are no earnings caps for traders because hedge funds typically split a certain percentage of their net earnings among their traders. Successful traders are frequently hired as fund managers other companies, and some traders go on to start their own hedge funds.
A hedge fund, unlike other investment companies like mutual funds, is not required to disclose its investment strategy to its shareholders. Hedge fund traders, as a result, frequently have a great deal of freedom to invest the fund’s money in any type of investment that appears to have a good chance of producing high returns. Hedge fund traders look for high-risk securities with high potential rewards, such as junk bonds or cheap stocks in companies on the verge of bankruptcy, in order to maximize their profits. Traders also purchase more exotic investments such as credit default swaps, which are unregulated insurance contracts issued financial institutions to one another.