40 common hedge fund interview questions. Examples include technical, transactional, behavioral, and logical tests with sample answers
Hedge funds are one of the most important things that move markets around the world and affect how much money is available around the world. Hedge funds offer great bonus packages, so it’s not unusual for analysts in their mid- to late-20s to make well over $500,000 a year or more.
Because of this, it’s not a surprise that hedge funds are very picky about who they hire. Every year, they carefully sift through thousands of applications to find the best ones.
So, the key to turning an interview into an offer is to answer the technical, behavioral, and logical questions with confidence and consistency.
Hedge funds employ many different people, from equity researchers to asset managers to prop traders. You don’t need to have a background in finance to work for a hedge fund, but having experience with the markets is preferred. To get into a hedge fund, most people work at an investment bank for two to three years in an IBD, trading, asset management, or equity research role. They then get hired by a headhunter by a hedge fund.
The free WSO Hedge Funds interview guide below is a complete tool that will walk you through every step of the interview process, from the beginning to the end. This will greatly increase your chances of getting your dream job.
In our guide, we’ve put together 40 of the most common technical, behavioral, and logical questions that hedge fund professionals ask job candidates, along with examples of how to answer them.
We really think it’s a great place to start getting ready before you buy our more in-depth Hedge Fund Interview Course.
This resource includes 13 firm-specific questions from leading hedge funds (Bridgewater Associates, Citadel, etc.) and proven sample answers.
This interview guide consists of 10 sections, each focused on different phases of the interview process.
There are no excuses for not perfecting what is in your control. No matter the fund, the job, or the area, this question will always be asked because it’s standard in the finance business.
Getting ready for this question ahead of time, coming up with an interesting answer, and selling yourself on it will help you stand out from other applicants.
Landing a coveted role in the high-stakes world of hedge funds requires meticulous preparation. This guide equips you with the knowledge and tools to tackle every aspect of the interview process, from technical questions to behavioral assessments and brain teasers
This opening question sets the stage for your entire interview. Craft a compelling narrative that highlights your strengths, experiences, and passion for the industry. Align your story with the specific role and firm you’re targeting.
Here’s how to structure your response
- Hook the interviewer with a captivating opening sentence.
- Summarize your background and key accomplishments.
- Highlight skills and experiences relevant to the position.
- Express your enthusiasm for the hedge fund industry.
- End with a concise and confident statement.
Sample Answer:
“From a young age, I’ve been fascinated by the intricacies of the financial markets. This passion led me to pursue a degree in finance and actively participate in our university’s investment club During my internship at a boutique investment bank, I gained valuable experience in financial modeling and analysis, which further solidified my interest in pursuing a career in the hedge fund industry I’m particularly drawn to your firm’s focus on quantitative analysis and its track record of generating strong returns. I’m confident that my analytical skills, combined with my eagerness to learn and contribute, make me a strong candidate for this role.”
15 Common Hedge Fund Technical Questions: Demonstrating Your Expertise
Technical questions are your chance to showcase your in-depth knowledge and understanding of financial concepts. Prepare thoroughly for these questions, anticipating the types of scenarios you might encounter.
Here are 15 common technical questions, each with a sample answer:
1. Describe the impact of purchasing a new tractor on the three financial statements.
Sample Answer:
“The following are the effects on the three financial statements of buying a new tractor or any other fixed asset:
- Initially:
- No impact on the income statement.
- Cash decreases, while Property, Plant & Equipment (PP&E) increases on the balance sheet.
- The purchase of PP&E is a cash outflow in the cash flow statement.
- Over the asset’s life:
- Depreciation reduces net income on the income statement.
- PP&E decreases due to depreciation, while retained earnings decrease on the balance sheet.
- Depreciation is added back (as it’s a non-cash expense reducing net income) in the cash from operations section of the cash flow statement.”
2. What happens to Free Cash Flow (FCF) if Net Working Capital (NWC) increases?.
Sample Answer:
“Intuitively, working capital can be thought of as the net dollars tied up to run the business. As more cash is tied up (in accounts receivable, inventory, etc.), free cash flow will be reduced. Remember, if the value of an asset goes up, it’s a use of cash, whereas if the value of a liability goes up, it’s a source of cash.
We subtract the change in net working capital (NWC) when calculating FCF, so if NWC increases, your FCF decreases, and vice versa.
D. FCF = EBIT – (1 – tax rate)
3. What’s the difference between intrinsic and book value, and how can they deviate?
Sample Answer:
“Book value is what assets are carried out on a company’s balance sheet. Book value and Price to Book are common valuation measures for value-conscious investors.
Intrinsic value is the belief of what a business is truly worth. The intrinsic value would take into account things like the value of intellectual property or a brand like Coke that aren’t properly valued or shown on the balance sheet.
Additionally, when a holding company acquires a portfolio company, it is carried at cost on the balance sheet. As a result, its value won’t be “written up” to its intrinsic value over time as the company grows.
However, companies must write down intangible assets that lose value as per accounting standards.”
4. When would funds from operations (FFO) or Adjusted FFO (AFFO) be used, and why?
Sample Answer:
“FFO is commonly used in valuing real estate and REITs, but it can be used in other industries like Oil & Gas and Utilities.
FFO = Earnings + Depreciation + (–) Gains (losses) on disposals.
The FFO calculation can vary. It is likely the most relevant earnings figure for a REIT. This is because REITs are required to depreciate their assets just like anything else. However, because real estate tends to maintain its value over time, depreciation is often a non-cash expense that doesn’t reflect the true economic performance of the company.
AFFO takes FFO and makes more changes to it to account for ongoing cash costs like interest and ongoing capital expenditures for maintenance. This gives an even more accurate picture of the business’s cash flow that can be given to investors. “.
5. Explain the concept of beta and its significance in portfolio management.
Sample Answer:
“Beta measures the volatility of a security or portfolio relative to the market. A beta of 1 indicates that the security’s price will move in line with the market, while a beta greater than 1 suggests that the security will be more volatile than the market, and a beta less than 1 indicates that the security will be less volatile than the market.
Beta is a crucial factor in portfolio management as it helps investors assess the risk-return profile of their investments. By diversifying their portfolio with assets that have different betas, investors can reduce their overall portfolio risk without sacrificing potential returns.”
WSO Bonus Question: Current Markets
“The current market environment is characterized by high inflation, rising interest rates, and ongoing geopolitical uncertainty. These factors have led to increased volatility and a decline in asset prices across various sectors. However, amidst these challenges, there are still opportunities for investors who can identify undervalued assets and implement effective risk management strategies.”
8 Firm-Specific Hard Technical Questions: Putting Your Knowledge to the Test
These questions delve deeper into the firm’s specific investment strategies and require you to demonstrate your understanding of their approach.
Here are eight examples of firm-specific hard technical questions:
- What is your understanding of our firm’s long/short equity strategy?
- How would you identify potential investment opportunities in the current market environment?
- What are your thoughts on the impact of rising interest rates on our portfolio?
- How would you manage risk in a portfolio of high-growth technology stocks?
- What are your views on the potential impact of geopolitical events on our investments?
- How would you use quantitative analysis to support our investment decisions?
- What are your thoughts on the use of alternative data in hedge fund investing?
- How would you evaluate the performance of our portfolio?
The Stock Pitch: Showcasing Your Investment Acumen
This is your opportunity to showcase your ability to analyze a company, identify its investment potential, and present your findings in a clear and concise manner.
Here are the key steps to a successful stock pitch:
- Choose a company that you have thoroughly researched and believe has strong investment potential.
- Structure your pitch in a logical and easy-to-follow format.
- Highlight the company’s key strengths, competitive advantages, and growth potential.
- Address any potential risks or challenges facing the company.
- Conclude your pitch with a clear and concise investment thesis.
Remember, your goal is to convince the interviewer that you have a deep understanding of the company and its industry, and that you can identify and capitalize on investment opportunities.
5 Most Common Hedge Funds Behavioral/Fit Questions: Aligning Your Values
Behavioral questions assess your personality, work ethic, and cultural fit with the firm. Your answers should demonstrate your ability to work effectively in a fast-paced and demanding environment.
Here are five common behavioral questions, each with a sample answer:
1. Why do you want to work for a hedge fund?
Sample Answer:
“I’m drawn to the hedge fund industry because of the intellectual challenge, the fast-paced environment, and the opportunity to generate strong returns for investors. I’m particularly interested in your firm’s focus on quantitative analysis and its track record of success. I believe that my skills and experience would be a valuable asset to your team.”
2. How do you handle pressure and tight deadlines?
Sample Answer:
“I thrive in high-pressure environments and am accustomed to working under tight deadlines. I stay organized, prioritize tasks effectively, and communicate clearly with my colleagues to ensure that projects are completed on time and to a high standard. I also recognize the importance of taking breaks and maintaining a healthy work-life balance to avoid burnout.”
3. Tell me about a time you failed and what you learned from it.
Sample Answer:
“In my previous role, I was tasked with developing a financial model for a new investment opportunity. I made the mistake of not thoroughly reviewing the underlying assumptions, which led to inaccurate results. I learned the importance of double-checking my work and seeking feedback from others to avoid similar mistakes in the future.”
4. What are your strengths and weaknesses?
Sample Answer:
“One of my strengths is my analytical ability. I’m able to quickly identify
1 What are typical default rates for bonds? What are typical recovery rates for bonds? What impacts the recovery?
Sample Answer: The historical average default rate for high-yield bonds is just under 5%. However, the default rate for HY bonds has historically doubled to around 2010 during times of financial distress, such as during recessions.
- The rate of default for a bond that is already in trouble is a bit higher at 15% for the next two years.
- Where a bond stands in the capital structure compared to other creditors affects how much of its value it can get back. The more senior someone is, the more likely it is that the debt will be paid back. In the past, the recovery rate for senior unsecured debt has been around 204.0 percent. The rate of recovery is also affected by the type of recovery, such as through bankruptcy or a distressed exchange. Distressed exchanges have had better recovery rates lately. Recovery rates are published annually by the credit rating agencies.
- Recently, especially when it comes to energy defaults, exchanges that are in trouble have had better recovery rates.
What are the metrics you’d look at to assess a company’s creditworthiness?
Sample Answer: A company’s creditworthiness depends on a variety of factors. A few of them are:
- First is its profitability and ability to generate cash reliably.
- Second, how much debt the company has. If it has too much debt, it might not be able to make its interest payments or refinance the principal that will be due in the future. Successfully refinancing debt is credit positive.
- The third is how good the company is in general, how competitive it is in the market, and how well it is run. Are the fundamentals of the business stable or getting better? Is management too aggressive or too shareholder-friendly, giving out too many dividends and buybacks and putting the company’s ability to pay its debts at risk?
- Finally, the general macro environment and industry dynamics are important. For instance, a business in a very competitive field that is being shaken up by new competitors or outside forces (i e. , a drop in the price of oil) will make it less creditworthy. It might not be possible for a company to refinance its debt in the future if macroeconomic conditions are weak and the credit market is tight. Also, do the company’s debts depend on fixed or floating rates that will be affected by rising rates?
Hedge Fund Interview Questions | Elevate Career Network
FAQ
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How do you interview for a hedge fund job?
Common Hedge Fund interview questions, how to answer them, and sample answers from a certified career coach. Interviewing for a hedge fund job requires more than just knowledge of financial markets and the ability to crunch numbers. You have to be able to stand out from other applicants—and that starts with acing your interview.
How many hedge fund interview questions are there?
In this article, we list 35 hedge fund interview questions and explore five more questions in greater detail, with some example answers to help guide you. Here are 12 general hedge fund interview questions that aim to understand you and assess whether you might be a good fit for the role:
What makes a good hedge fund manager?
A hedge fund manager needs to be able to identify potential investment opportunities and assess the risks associated with them. Your answer to this question should show that you have a comprehensive approach to researching new industries, sectors, and markets, as well as an understanding of the data and analytics needed to make informed decisions.
What skills do hedge fund managers need?
The ability to develop a successful trading strategy is an essential skill for a hedge fund manager. An interviewer wants to know that you have an understanding of the markets, and can make well-informed decisions. They also want to know that you are able to analyze risk and make decisions that will be beneficial to the fund.
