9 Interview Questions Hedge Funds Ask (and How to Answer Them)

Published: Aug 31, 2015

Interview questions at hedge funds can vary depending on the type of job you're seeking. But one thing holds true across the industry: Interviewing at hedge funds is demanding. This is due to the massive amounts of money at stake; hedge funds look to hire only the best of the best to manage their money.

Before any hedge fund interview, you of course need to do your research. You need to study the portfolio and investing philosophy of the firm in question and be ready to pitch your own investment ideas if asked; having at least three ideas prepared is a good plan since the hiring manager might reject your first idea and ask you for another one.

You should also become an expert on all facets of the firm, making sure you know the fund's amount of assets under management, sector focus, investor base, firm culture, and current leaders, among other facts. Finally, you should practice thinking on your feet. Have a group of classmates or friends pepper you with questions about the hedge fund at which you're interviewing, industry trends, and your academic and professional background. Ask them to be relentless in their questioning because that's the type of environment you’ll encounter in the interview.

That said, to help you with your research, below are nine knowledge-based interview questions, along with example answers. These questions will gauge your understanding of hedge funds and the hedge fund industry. They typical follow behavioral questions like "What are your strengths and weaknesses?" and come before more technical questions such as "What's the difference between a put and a call option?" Note that you could receive the below questions at any point in the interview process, from the first round to subsequent follow-up rounds.

1. What is a hedge fund?

It's a private, unregistered investment pool encompassing all types of investment funds, companies, and private partnerships that can use a variety of investment techniques such as borrowing money through leverage, selling short, and derivatives for directional investing and options.

2. Why would you want to work for a hedge fund and not a mutual fund?

This question varies by individual, but think about examples like the following:

You have a specific interest in the fund manager's strategy. You were always interested in merger arbitrage, fixed income arbitrage, etc.

You don't like to be confined by the stricter rules that mutual funds have to follow and would appreciate the ability to look for short positions and/or use derivatives.

You would like to work in a smaller shop—many mutual funds are huge—and therefore if you like smaller, possibly more challenging, work environments then state this.

3. What makes hedge funds different?

The main distinguishing characteristics are that hedge funds use derivatives, can short sell, and have the ability to use leverage.

4. What is convertible arbitrage?

It's an investment strategy that seeks to exploit pricing inefficiencies between a convertible bond and the underlying stock. Managers will typically long the convertible bond and short the underlying stock.

5. What does it mean when a manager says that he is event-driven?

That's an investment strategy seeking to identify and exploit pricing inefficiencies that have been caused by some sort of corporate event, such as a merger, spin-off, distressed situation, or recapitalization.

6. What is the strategy of our fund?

This is specific to the firm you are interviewing with. Try to do the following:

Search the Web to find any articles on the fund or its founders.
Search Bloomberg to find any articles written on the fund.
Search online databases to see if the firm is listed.

7. What are the key issues that you think our fund must face?

This is also specific to the firm you are interviewing with, and will be partly based on your answer to No. 6. Once you've found the strategy that the fund is pursuing, research the current environment of the fund. For example, if it is a merger arbitrage strategy, look to find any recent announcement mergers and be prepared to discuss your opinions on it. Current news events, market trends, and new financial regulations can also affect a fund's strategy.

8. Give me an example of a sector trade.

Here's an example of a sector trade: Fred is a long/short equity hedge fund manager whose primary trading strategy focuses on sector trades. Fred noticed that in the tech sector, Microsoft (MSFT) was a relatively cheap stock when compared with Oracle (ORCL). Fred purchases 100 shares of MSFT because MSFT is undervalued relative to the theoretical price (fair value) and the market is expected to correct the price. Simultaneously, Fred sells short 100 shares of ORCL because ORCL is overvalued relative to its theoretical price.

Sector Trade:

Trade	Beg. Price	Sell Price	Profit
Buy 100 Shares of MSFT	$30	$35	$500
Short 100 Shares of ORCL	$12	$10	$200
Total			$700

Fred predicted that the price of Microsoft would rise and the price of Oracle would fall. He was correct and made a total profit of $700.

9. What important trends do you see in our industry?

More SEC regulation, continued growth in institutional investing, and the potential of offering hedge funds to average retail investors are all key issues.

The above was adapted from the new Vault Career Guide to Hedge Funds.

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