"A lot of funds are set up in such a way that analysts are responsible for telling the traders what to buy or sell up to a certain dollar amount," explains an executive at a Connecticut hedge fund who did not want to be named. This particular fund has industry analysts, "such as a health care analyst who specializes in health care companies and makes recommendations which could be on a company, an index, or some kind of basket trade," as well as generalists who might be asked by portfolio managers to research a trading idea or a specific company.
Other analysts develop ideas on their own, then present them to the portfolio manager to explore why a company should be included in the portfolio as either a long or short position.
"Hedge fund analyst" is a broad term, notes Peter Arian, managing director of Analytic Recruiting in New York. "It's like asking what a baseball player does - the answer depends on whether he is a catcher or a pitcher."
In a "typical long-short equity, fundamentally based hedge fund - a place like Viking," Arian says, analysts support the portfolio manager by developing ideas or conducting company- or sector-specific research to find "relative value plays in an industry." Typically, portfolio managers evaluate ideas from several analysts in deciding how to invest the capital they have on-hand.
A fund investing in credit-sensitive mortgage-backed securities would have at least one analyst going through data to predict how different types of bonds would behave under certain changes in interest rates and credit spreads.
Arian says hedge fund analysts earn at least $100,000 a year. Their pay can rise reach several million dollars annually.
Working on the buy side, analysts have to be comfortable with the fact their firm is investing in their recommendations, observers say. "The typical sell side researcher never has to put his money where his mouth is," Arian says.