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Investment Banking vs Hedge Fund : A Detailed Analysis

With a CAGR of 3.14% hedge funds are the black horse of the financial sector. People with deep pockets and institutional companies are eying over hedge funds. Investment banking shows a CAGR of 2.31% and assists all startups, governments, and other such projects to raise money. Both investment banking and hedge funds are different from each other. The only aspect that harmonizes with each other is that both of them are related to the finance industry. This article will accentuate in detail investment banking vs hedge fund management.

INVESTMENT BANKING VS HEDGE FUND A DETAILED ANALYSIS

Both investment banking and hedge funds are different arenas in the finance industry. Investment banking aids in raising capital for the investees from the investors. Hedge funds assist high-profile individuals and institutions to get the maximum return from the money they are investing. Both sectors are different from each other. Let us check them in a detailed way.

Overview of Investment Banking

Starting its journey in the 19th century, when European merchants started trading. From then on foreign banks have donned the merchant banking sector.  It was the State Bank of India that started the Bureau of Merchant Banking in 1970. In India, ICICI Securities became the first one to offer merchant banking services. From then, there was no looking back. Many banks joined the troop. Securities and Exchange Board of India (SEBI) has witnessed that around 1500 banks came under it to offer investment banking services. To check all the regulations and to maintain all its norms SEBI created the Association of Investment Bankers of India (AIBI).  This is how the investment bank made its step in India and is now ruling.

We are talking about investment banking vs hedge fund management; we need to know what investment banking means. Investment banking is a banking service that promotes capital raising through underwriting, mergers and acquisitions, Initial Public Offering (IPO), trading and other such financial instruments. Investment banks perform as an intervenor between the investor and the investee. The government, startups and organizations make their dealings in investment banks.

Investment banking is seeing stunning growth all over the world. As per the values of Statista, it will have a growth rate of 2.31% by 2028. Its value might be increased to $0.37 trillion by 2028. The highest revenue generated in 2023 in the United States (US) is $114.50 billion.

Some investment bank companies are JP Morgan, Morgan Stanley, Barclays, Goldman Sachs, Credit Suisse, BNP Paribas, ICICI Securities, Axis Banka, Wells Fargo, IDBI Capital and many more.

This was just an overview of investment banking that included its history and its definition.

 

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Types of Investment Banking

Understanding the types of investment banking is an essential part when discussing investment banking vs hedge fund management. Both the sectors have various types. Let us discuss the types of investment banking now, the later part of the article will discuss hedge fund types.

Three types of investment banks rule the sector. All the three types are described briefly below,

Boutique Banks

Boutique banks are the compact types of investment banks. They are the smallest in terms of clients handled, services offered and size of the banks. They handle a smaller number of deals. Their deals may range from $50million to $100million. It is further split into two categories.

Regional Boutique Banks

These banks are small. They are spread in regional sectors. They offer very limited service to limited clients. Usually, they will cover only one or two services. Like only Underwriting or only Mergers and Acquisitions.

Elite Boutique Bank

These banks are elite or premium compared to regional boutique banks. They too handle fewer clients and do not offer the entire range of services offered by the investment banking sector. They have their presence nationwide but not on a huge scale. Some of the elite banks are Evercore Group LLC, Signal Hill, Veda Corp and Lazard LLC.

Middle Bracket Banks

These banks are middle-level banks. Middle-bracket banks are neither as large as bulge-bracket banks nor are they as small as boutique banks. They are recognised nationally and have a very limited international presence. They provide many investment banking services to their clients. The number of clients handled is more compared to boutique banks. They deal with a cap of $50 million to $500 million. Examples of middle-bracket banks, are Piper Sandler Companies, O3 Capital, Spark Capital and Houlihan Lokey.

Bulge Bracket Banks

These are the colossal of the investment banking sector. They offer all the services of investment banking and are spread across the international market. It has a maximum number of clients in its buckets. Their deals usually capture above $1billion. They also run their business in retail banking which provides more benefits. Some bulge bracket banks are JP Morgan, Morgan Stanley, Credit Suisse and Goldman Sachs.

Services of Investment Banking

The ultimate service of the investment banks is to raise funds from the investors. They aid the investors to invest their money in appropriate schemes that serve them huge returns. The borrower companies are also at gain as they need financing for their growth and establishment. Let us check out what services investment banks have in their queue for us.

Underwriting

Underwriting is the most vital arena of investment banking. Here investment bankers assess the risks involved. Underwriting is the process where investment banks raise capital by selling shares and bonds. The banks act as underwriters and quote a price for the shares and then they sell them to the public.

Mergers and Acquisitions(M&A)

M&A is another interesting service that is offered by the banks. In acquisition service, the investment banks assess the risk and get through all the details of the buyer company. Then they help the seller company to buy it. So, here one company buys another company.

In merger services, both the companies come together and invest in each other. The investment banks help both companies to get the maximum gain from the contract.

Equity Financing

As the name goes in equity financing, money is raised by selling equities like stocks and shares.

Debt Financing

Debt financing is when the company sells its bonds or fixed-income products to raise capital.

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Initial Public Offerings (IPO)

When a private company decides to go public it is referred to as IPO. Here the company decides to sell a portion of its share to the public so that it can get the required money for the betterment of business activities. The investment banks help the company to decide how to shares to sell, and give them the details about the situation and market before they go for IPO.

Selling and Trading

In this service investment banking helps in selling and buying shares, stocks and other financial instruments to raise capital from the market.

Research and Advisory

Investment banks assist their clients by providing them with advice regarding what steps they should take for better gain.

Investment bankers also perform extensive research work about their clients, business organizations and market conditions so that they can provide help to their clients as required.

These are a few of the functions of investment banking. These services make the investment banks most popular among the business brands, governments and start-ups. Discussions about investment banking vs hedge fund management thus pool in the functions of each sector too.

Roles of Investment Bankers

The role played by investment bankers and hedge fund managers are important aspects of investment banking vs hedge fund management. Investment bankers are the persons who are working for investment banks. They are the one who measures the risk, do research work, prepare the pitchbook and act as underwriters. In short, investment bankers carry out all the functions of investment banks smoothly and efficiently.

Investment banker’s jobs are quite stressful and hectic, but their luxurious salary and commissions are worth the job. The salary is indeed a motivational factor for the 80-100 hours weekly job. As per data, the average earning of an analyst is $100K and it can go up to the Managing Director level with a $600K maximum. Along with it, there are various types of bonuses and compensations. The package is indeed attractive.

The Career Goal of an Investment Banker is Like This:

  • Analyst
  • Associates
  • Vice President
  • Director or Senior Vice President
  • Managing Director

This is the overview of the role of an investment banker who raises capital from the market and builds trust and relationships with the client for bank profitability. Investment banking vs hedge fund management thus helps us to gather knowledge in this aspect as well.

 

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Scope of Investment Banking

Though the life of an investment bank is like a roller coaster ride, because it is dependent on the market conditions, definitely it offers a bright future for its clients and employees. As for India, India is now emerging as one of the most important countries where various foreign investment banks are coming up to take shelter. As the Indian economy is growing enormously, so is investment banking in India. India is also coming up with many start-ups and other foreign business organizations are also coming to India. So, overall investment banking will shine in the future.

Overview- Hedge Fund Management

The term hedge fund came into existence in 1949. Sociologist Alfred W. Jones fabricated the term hedge fund and also created the first hedge fund structure. In the 1920s the partnership between Benjamin Graham and his business partner Jerry Newman was termed as the Graham-Newman partnership. This partnership was seen by Warren Buffet in 2006 and it was considered as the first hedge fund and Graham’s investment firm is considered as the first hedge fund.

In 1970, the single strategy was followed by hedge fund managers which is the long/short equity model. Hedge funds started to take up speed in the bull and bear market. In the 21st century, people became more familiar with hedge funds.

As told earlier while discussing investment banking vs hedge fund management we studied about history and definition of the sectors. After going through investment banking, now let us see the definition of hedge funds.

The hedge fund is a part of the financial industry that uses amalgamated capital to draw profits or returns from the market. It holds the assets that it receives from the pooled funds and uses various methods and techniques to gain over the benchmark returns. They invest in many shares, stocks and other financial instruments. The money invested can be withdrawn after the maturity period or at set times of the year. The hedge is usually managed by the hedge fund managers.

 

 

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The hedge funds provide large returns but with large risks. Wealthy individuals like high-net-worth individuals, accredited investors, and institutional investors like pension funds and insurance companies can go for hedge fund investments.

The hedge fund has a CAGR of 3.14% during 2023-2028. In terms of AUM the hedge fund is expected to grow from $4.60trillion in 2023 to $5.30trillion by 2028.

Some of the eminent hedge fund companies are Motilal Oswal’s off-shore hedge fund, India Zen Fund, Citadel, Renaissance Technologies, Two Sigma and AQR Capital Management.

As discussed earlier the overview of investment banking, this part is the overview of hedge funds. This helps us in identifying the aspects of investment banking vs hedge fund management.

Types of Hedge Funds

Another part that helps us to discuss investment banking vs hedge fund management is the types. As the types of investment banking are discussed earlier, now we will discuss the types of hedge funds.

Global Macro Hedge Funds

In this type of hedge fund, the fund managers use macroeconomic techniques to gain maximum return from the investments made by the investors. It analyses based on global macroeconomic trends and strategies because it offers more flexibility. It is further segmented into discretional approaches and systematic approaches.

 

Discretional Approach

This is done by investment managers. The investment managers are the ones who are responsible for identifying the investment options and also selecting them for better returns.

Systematic Approach

This trading technique is operated by the software with less human involvement. This is entirely based on the mathematical model.

Relative Value Hedge Funds

In this hedge fund managers check for discrepancies in price among the securities, which occur due to market overall, mispricing and underlying securities. The fund managers use various techniques to identify the discrepancies in pricing and proceed with the rest.

Activist Hegde Funds

In this type of hedge fund, the hedge fund managers invest in the companies that raise the price of the stocks by force. It demands a change of board of directors, cost-cutting and assets restructuring.

Equity Hedge Funds

This type is a bit safe to play. In this type, the investment is made in such stocks that do not get much affected by the market turmoil.

Strategies of Hedge Funds

As we have viewed the investment bank’s services or strategies like IPO and M&A, the hedge fund also has its strategies. When we are talking about investment banking vs hedge fund management we should talk about strategies of both spheres.

Event Driven

Here hedge funds take advantage of the price movements. These price movements are generated by corporate events like merger arbitrage funds and others as such.

Market Neutral

These strategies seek to minimise market risks. Examples are short and long equity funds and convertible bonds.

Long and Short Selling

In this strategy, the security is sold to buy it in future when the price drops and then get the profits.

Arbitrage

This is an interesting phenomenon. Here, the hedge fund managers buy the security from the low-price market and sell the securities in the market where it is priced at a higher value. In this way, they bag in a lot of returns.

Market-driven

The fund managers make a macro analysis of the market situation and then go for investments. They not only concentrate on the national world but also focus on the international market. As global markets are more flexible, they can gain more returns out of their investments. So, this strategy proves healthy for the hedge fund investors.

Roles of Hedge Fund Managers

In both investment banking and hedge funds, the managers or the employees play the crucial role of maintaining a healthy relationship with the customers and carrying out its functions. When doing a study on investment banking vs hedge fund management we need to look into the roles of the fund managers. This gives a vivid picture of how they are different from each other.

The hedge fund managers are the individuals or firms who are responsible for giving the maximum return to the investors by using the maximum leverage techniques. The hedge fund managers are the persons who are responsible for choosing the investment type of the investors and the strategies by which they will yield the maximum profits. They build excellent relationships with clients to get more capital. They are the one who hires analysts and traders who can help with investment management.

The average salary for a hedge fund manager in India is around INR 17,50,000 per year. The work is comparatively low when compared with investment bankers.

The Career Options in a Hedge Fund Are:

  • Analyst/Researcher
  • Senior Analyst
  • Sector head/ Senior Analyst
  • Portfolio manager
  • Junior trader
  • Head Trader

These are the basic roles of the hedge fund managers. This was essential to know how the responsibilities of hedge fund managers when discussing investment banking vs hedge fund management.

Scope of Hedge Funds

The hedge fund sector is gaining ground in the present era. But as of now, it is only for the high-income individuals and the institutional firms. There is a scope that the investors are willing to invest their money in hedge funds, because of higher returns. It is also providing job opportunities that will help people get more money. Though the risk is high and the investment amount is also high, the return that is earned through this financial sector is over and above the benchmark. It yields maximum profits when compared to other financial bodies. So, while discussing investment banking vs hedge fund management it can be revealed that hedge funds can see a lot of scopes in the coming future.

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Frequently Asked Questions (FAQs)

1.  Does hedge fund is riskier than investment banking?

Yes, the hedge fund is a risky investment.

2. Does a hedge fund manager need to be a finance graduate?

Yes, a bachelor’s degree in finance or a related field like accounting, or economics can also be considered. But profound knowledge in finance is always a preference.

3. What minimum amount is invested in hedge funds?

The minimum amount that is to be invested by the investors is around INR 1 crore.

4. What are the fees of the hedge funds?

The charges of the hedge funds are quite a lot. It charges around 1% to 2% of the invested amount.  The fees also include 20% of the hedge fund’s profit as their performance fees.

Conclusion

As we wrap up the discussion of investment banking vs hedge fund management, it can be said that both are different spheres of the finance industry. Investment banking aids in raising capital from the market, whereas, hedge funds are the pooled funds that help the investors get above average returns by using various methods of risk elimination. Both their salary structure and work culture are all different. The roles of investment bankers and hedge fund managers also vary from each other. The services offered are also different. Both are different segments under the finance umbrella. To conclude about the topic of investment banking vs hedge fund management it can be said, that both have a lot of scope and a good future. Hope you gained insights and learned a lot. Happy reading!!

 

 

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