What Do Hedge Fund Traders Do?

Hedge funds are investment companies that do not have to register with national securities regulators. Investors pool their money together in these funds, and hedge fund traders are investment professionals who buy and sell securities on behalf of the fund with the stated intention of creating a profit for the fund and its investors. Most hedge fund traders begin their careers working as brokers for mutual funds or other registered investment companies, in which case these traders are subject to more government regulation than the hedge funds they work for.

Junior hedge fund traders execute orders from fund managers. The traders have to try and negotiate the lowest possible price for sales of securities and agree to the highest possible bid for sales of securities. Some traders have seats at major stock exchanges, which means that they operate on the market floor and complete trades in real time. Other traders operate from remote locations, but hedge funds usually have high speed secure connections to world markets so the traders can see the latest securities prices within a fraction of a second after the traders who are based at the exchanges.

Many hedge fund traders have college degrees in finance, accounting, or related fields, and a background in finance helps traders develop strategies for generating returns by investing in complex securities. Other traders do not have college degrees and instead begin their careers working as sales people at banks or investment firms. These traders earn commissions based on the performance of the fund that they operate rather than salaries. A hedge fund typically splits a certain percentage of its net earnings between the traders, so in theory there are no earnings caps for traders. Successful traders are often recruited by other firms to work as fund managers, and some traders eventually establish their own hedge funds.

Unlike other investment companies, such as mutual funds, a hedge fund does not have to disclose its investment strategy to its shareholders. Hedge fund traders consequently often have a great deal of flexibility to invest the fund's money in any kind of investment that seems likely to yield high returns. In the pursuit of maximum earnings, hedge fund traders search for high risk securities that offer high potential rewards, such as junk bonds or cheap stocks in companies that are close to insolvency. Traders also buy more exotic investments such as credit default swaps, which are like unregulated insurance contracts that finance companies issue to one another.