What I Didn’t Learn Working at A Hedge Fund

What I Didn’t Learn Working At a Hedge Fund

Note: This is part of my hedge fund series. Click for the Introduction. and Part 1, “What I Learned Working At A Hedge Fund”, and Part 2, “Career Advice From a Hedge Fund Pro”

There are a lot of really interesting things you can learn working at a prestigious hedge fund. In a previous post, I detailed some of the core concepts about markets and investing that I picked up while working at hedge funds. We could call them “hedge  fund lessons”. However, other factors have been equally important to my success as an investor that I didn’t learn working at a hedge fund, but which are just as relevant. I’d like to highlight a few:


Ultimately, trading or investing involves putting money at risk in order to make a return. “No pain, no gain” applies equally to the fitness and money worlds. All day long, you are doing the homework necessary to make the best risk reward decisions possible. You want the best tradeoff between risk and reward, or at least the one that you’re most comfortable with. But no one can teach you to be comfortable with taking financial risk, and no one can instruct you in where that comfort point lies.  This is something you have to find out for yourself.

Some of the most famous hedge fund managers are renowned for being skilled risk takers from a young age. Steve Cohen was a fanatical and very successful poker player in his youth. Stanley Druckenmiller was the same. George Soros had much experience from risk, having hid from the Nazis during World War II. Others, like Michael Platt of Bluecrest, started investing in the stock market in their school days, accumulating years of experience before they even entered university.

Amongst the general population, we can observe huge differences in risk appetite. I have friends who invest only in money market funds and very conservative corporate bond funds and will panic if their portfolio drops 1% from peak to trough. In short, they have zero risk appetite. On the other hand, I know others who will trade stocks, on margin, without even having properly researched them and sit through 20% swings. Most people will fall somewhere in the middle.  Financial risk tolerance is an individual trait and it’s mostly emotional. If you get scared of risk, or at least of some kinds of risk, then that’s just how you react. If you love the adrenaline rush, then that’s where you get your kicks.

Given your individual risk tolerance, if you are too risk-averse or too much of a reckless gambler, then you will not succeed as a full-time trader. If you are super risk-averse, then you will no doubt find the whole process of taking risk to be too uncomfortable to do as a full-time profession. You would probably find it completely unnatural! In summary, you want to find balance in your risk appetite in order to be a good trader—the right blend of seeking risk in order to make a return, while also being respectful of risk so that you don’t get carried out.

The varying risk appetites that I described are how people are naturally. Some people will have the wrong temperament to be a success on Wall Street, while others will already be a good fit. But if we don’t naturally have the perfect risk tolerance to be a success, can we do we do anything about it? If we want to be the most successful risk takers, can we work on ourselves in such a way that we sharpen our risk appetite and risk-taking abilities?

The answer is that risk appetite can change, and for most people it does fluctuate in their life. Think of wild and reckless teenagers who will undertake the most risky things imaginable in the name of “fun”; contrast that with a cowed elderly person. Many people who would embrace financial risks and entrepreneurship become much more conservative and risk-averse once they have families to support or mortgages to pay. Some famous traders who used to swing for the fences in their earlier years are now trying to eke out 10% per year with low volatility. Risk appetites definitely change—why is that?

There are really two components to changing risk appetite: intellectual and emotional. The intellectual part means understanding both the risks and rewards of a particular investment. You carefully consider how much you could make, how much you could lose, and the odds of winning versus losing to make decision informed by the probabilities. For instance, if you risked one dollar and had a 50% chance of making two dollars profit, then that’s a good bet. If you understand this way of thinking—that by taking smart risks, you can make money over time—it will improve your willingness to take risks. On any given trade, you will feel better about taking the risk if you have done your homework and understand all of the pluses and minuses.

This may also mean doing a prudent appraisal of your overall situation. Take the example of a successful corporate executive who has stored up some savings and wants to start trading. However, he has a mortgage and a family to support, so he prudently decides not to risk his entire savings but rather just a bit, say $25,000. That is an amount that he can afford to lose in the market without adversely impacting his other obligations. He ventures into the market with this small amount and works hard to get his methodology and risk management proven and profitable. He waits until it’s working before putting a bigger portion of his savings into his trading account and taking bigger risks.

The other aspect is emotional. Behavioral finance research has shown us that are much more sensitive, emotionally speaking, to a loss than an equivalent gain. No one likes to lose a lot of money, no matter how big the potential reward was. No one likes to feel a lot poorer and also like an idiot, all at the same time. Moreover, some people may unknowingly sabotage their risk-taking efforts due to a confused relationship with money and success, something I talked about in a post “Rich Trader Poor Trader”.

How do you change your risk appetite? Practice, practice, practice. To change the intellectual side, you need to keep working on it. Keep looking at and researching different trades, with their respective risk/reward ratios, and you’ll get an idea of what works and what doesn’t. Focus on making good risk/reward decisions, keeping losses small, and you will start to become profitable. As you become profitable, then your tolerance for risk improves, because you will associate risk with winning, rather than losing, and you will grow to understand that dumb decisions are more damaging than well thought-out trades that happened to lose. A lot of fear of risk is the fear of the unknown or unquantifiable—what might I lose? How does this all work? By gaining experience and knowledge, you will have enough of a knowledge base to insulate you.

The other result of practice is increased exposure. As you get more and more exposure to risk, then you become desensitized to it and it loses its emotional hold. Sensibly done, increased exposure to risk will prevent you being too scared of it—because you will have risked and won when the stakes were small, thereby reducing your fear. But It will also take away the adrenaline rush that can come with trading, thereby giving you a much more level head and balanced perspective.

By cultivating the proper approach to risk and the right level of risk appetite from both angles, you will become a powerful force in the markets. You will turn into a prudent, sensible risk-taker by nature. This is something which no one else can teach you and which is an invaluable resource in the hedge fund world.


One key element of hedge fund pros is that they are extraordinarily driven. They work with the focus of a brain surgeon and an intensity that would make Superman tire. They want to “succeed” very, very much—whether you define it as “winning” or “making money” or “being better than the rest”. As such, to be successful in that environment, you also need a very powerful drive.

In any profession, the key to sustained drive is passion. Ultimately, in order to keep up intense efforts over time and to compete with top-flight professionals, you need to be extremely passionate about the very thing that you are doing. If you want to be a top-notch basketball player, you have to love playing and practicing basketball; nothing else will get you there. If you’re in it for the money or the glamour, that will not keep you going.

Thus, you have to think about the hedge fund world and find something that speaks to you and makes you passionate. It has to connect on a very deep, emotional level, otherwise it’s pointless. Maybe it could be the research aspect of finding a good investment—one Market Wizard called it a “Treasure Hunt”.  It could be the desire to solve puzzles; Bruce Kovner, another Market Wizard, loved the intellectual challenge of figuring out what’s going on in the world. It could be more intellectual—George Soros described himself as a “failed philosopher”, but from his book Alchemy of Finance, it’s clear that he loved developing and testing various intellectual theories in the market. Obviously, the specific passion will differ by person, but you get the idea by now.

Once you find an angle to the hedge fund world, one that makes you passionate, then make sure you’re in a role where you play to that passion. If you love the treasure hunt, then you shouldn’t be designing quantitative, trend-following systems. If you like global politics and economics, then you shouldn’t be taking activist positions in companies. You get the idea. Make sure you know what your passion is and then find a role that lets you indulge it every of your life. In order to work hard and well, you need to find something you enjoy. You need to feel like it’s not work at all, and that it’s something you would be doing for free.  

This goes hand in hand with risk-taking, which I discussed earlier. If you are passionate about the job, then you will be more interested in and better able to handle taking risks. You will do the work necessary to sharpen your decision-making. You will want to stay in the industry and you will want the rewards from the job, which will let you be more comfortable taking risk.

In addition, when there are rewards to the job, enjoy them. Be grateful. Say a “Thank you” to the universe if you met someone really interesting or found a great investment. If you work hard and have a fabulous year, give yourself a pat on the back in some form—it could be a treat to yourself like a new car or a special vacation with your spouse. But by focusing on the benefits, you will be better able to sustain your drive and motivation.

Intellectual Curiosity

This is the related to passion. We need to be genuinely intellectual curious because we want to learn. There’s a lot to learn in the hedge fund world—we have to research everything that’s relevant about our investments. We have to read up on the world and be sensitive to how it could impact our investments. We need to study ourselves and our past trades to examine what’s working and what we could change.  Thus, the job requires genuine intellectual curiosity just to sustain the necessary effort.

There’s an additional layer.  To be successful at trading in general, you need an “edge” of some sort. Usually, this is a way of making decisions and getting into and out of trades that will give you a consistent advantage and make you a winner net-net. But each person’s edge is different because our personalities are different. Very methodical and systematic traders would embrace quantitative systems, whereas action-oriented decision makers, like athletes and poker players, would be better suited to trading actively.

In order to be the best, you need tremendous intellectual curiosity, because you always need to be on the hunt for the best opportunities and to want to research them. But you also need it in order to study yourself and what you’re doing in a way that you can define and then constantly work on your “edge”. You can only find what works for you by exploring many different paths and strategies in the market and by holding a mirror up to yourself. This kind of introspection and exploration would only occur to people with genuine intellectual curiosity.

 The one pre-requisite for intellectual curiosity is fascination. Think of little kids—they stare at something, like a star-filled sky or a dollhouse, with wide-eyed wonder and instantly want to know more. They are hooked. Just like with passion, there should be something about markets that fascinates you, that draws you in. That is the stepping stone to learning about everything else.


For those who are suited for it, the hedge fund world has a lot to offer. It’s fascinating, challenging, competitive and enjoyable. The caliber of the people is exceptional. The financial rewards are immense. A lot of what you need to learn to succeed is out there—I discussed some of it already in my post “What I Learned Working At A Hedge Fund”. But some things I didn’t learn at a fund. Rather, they’re important to learn outside of a fund, because you won’t learn them working on the job and because you’ll want them once you get there.


By Bruce Bower | E-mail: Bruce [at] howoftrading.com

Blog: www.howoftrading.com | Twitter: @HowOfTrading



Leave a Reply

Sign up for our newsletter