Hedge Funds interview preparation

Questions

100

Traced to a firm

39

Firms

16

Updated

September 2026

Asked at

All firmsMan Group10Balyasny Asset Management7Bridgewater Associates3DED.E. Shaw3Apollo Global Management2KKR2Oaktree Capital Management2Point722SCSquarepoint Capital2ACAQR Capital Management1BGBaupost Group1Coatue Management1HPS Investment Partners1Northern Trust1Viking Global Investors1Wolverine Trading1

Topic

All topicsStrategy taxonomy8Stock pitch10Short selling6Portfolio construction8Risk and drawdown8Performance and alpha7Event-driven and merger arb8Distressed and credit5Fund structure and economics7Financing, NAV and operations6Compliance and research process5Quant and systematic6India and Category III AIFs5Career and fit11

Level

AnyCoreIntermediateHard

Type

AnyTechnicalMarket viewBrainteaserCaseFit

1. 054What is a catalyst, and what makes a good one?Event-driven and merger arbIntermediatetechnicalLong-short equityEvent-driven

   Say this

   A catalyst is a dated, identifiable event that forces the market to reprice. A good one has three properties: it happens on a known timeline, it is material enough to move the numbers, and it resolves your specific disagreement with consensus rather than just being news.

   Then walk it

   1. Dated matters most. 'Eventually the market will notice' is not a catalyst, it is a hope, and it is how a thesis becomes a value trap that ties up capital for three years.
   2. The good ones in practice: an earnings print where your variant number becomes visible, a capacity ramp or product launch, a contract renewal, a refinancing or covenant test, a capital markets day, index inclusion or exclusion, a spin-off, a lock-up expiry, a regulatory decision.
   3. Materiality: it has to change the numbers people model, not just the narrative. A new disclosure that reveals segment profitability can be a bigger catalyst than a product announcement, because it changes the input rather than the story.
   4. Resolution is the subtle one. A good catalyst settles your disagreement either way. If the event can happen and leave the debate exactly where it was, it is not a catalyst for your thesis even if it moves the stock.
   5. Catalysts also enable risk management, which is the hedge fund reason they matter. A dated event gives you a review point and a natural place to size up or cut, so the position has a defined lifespan instead of drifting.
   6. The limitation to say: catalysts get anticipated. If the trade is well known, the move happens before the event and you get the classic sell-the-news outcome. So I would also ask how the stock is positioned going in, not just what is going to happen.

   Where candidates lose it

   Listing events without the dated and resolving criteria. Every stock has news coming. What makes something a catalyst for your position is that it tests your specific variant view on a known date. And do not ignore positioning: a widely anticipated catalyst in a crowded name is a reason to be smaller, not larger.

   Expect next

   • Give me a catalyst on a name you follow and the date.
   • What do you do when a catalyst passes and nothing happens?
   • How does positioning into a catalyst change the trade?
2. 056Describe what distressed debt is.Distressed and creditIntermediatetechnicalOaktree Capital ManagementRisk · Los Angeles · 2022

   Say this

   Debt of a company that the market believes will not be repaid in full, so it trades at a large discount to par, conventionally below 70 cents or at a spread above 1,000 basis points. You are not buying a yield, you are buying a claim on a restructuring and underwriting what that claim recovers.

   Then walk it

   1. The analytical shift is the point. In performing credit you ask whether the company can pay the coupon. In distressed you assume it cannot, value the enterprise, and work out where your claim sits against that value.
   2. So the work is a waterfall exercise. Enterprise value first, then apply it down the capital structure in priority order: super-senior and DIP, secured bank debt, senior unsecured, subordinated, then equity. Wherever the value runs out, that is the fulcrum.
   3. Two distinct approaches, and it is worth naming both. Trading distressed is buying mispriced paper for a recovery, in and out. Loan-to-own is buying the fulcrum deliberately to convert into equity and control the reorganised business.
   4. It is a legal business as much as a financial one. Intercreditor agreements, covenants, collateral perfection, credit bidding rights, voting classes and the cramdown rules determine the outcome more often than the operating forecast does.
   5. The classic mistake is to buy on price alone. Paper at 30 cents is not cheap if the claim is structurally subordinated and recovers 10. Cheapness is expressed relative to modelled recovery, never relative to par.
   6. Say the limitations honestly: illiquid, so marks are estimates and can be stale; the timeline is long and legally uncertain, often 18 months or more; and the supply of opportunities is entirely cyclical, which is why a distressed fund can wait years with dry powder. Oaktree's own framing about the primacy of risk control rather than return maximisation is exactly the right register for this desk.

   Where candidates lose it

   Describing it as high-yield investing with more risk. It is a different discipline: recovery analysis and legal process rather than spread and coupon. If you cannot say the word fulcrum and sketch the waterfall, you have not answered a distressed interviewer's question, and at a firm with a documented risk-first philosophy you should also say what could go wrong before being asked.

   Expect next

   • What is the fulcrum security and how would you find it?
   • How do you value a company in bankruptcy?
   • What is the difference between trading distressed and loan-to-own?

   Reported by candidates at Oaktree Capital Management (Risk, Los Angeles, 2022). Source: Wall Street Oasis.

3. 058What is the difference between credit and equity investments?Distressed and creditIntermediatetechnicalKKRDistressed Debt · New York · 2025

   Say this

   Credit has a capped upside and a contractual claim; equity has unlimited upside and no claim at all. That changes the question you ask. In equity you underwrite how good it can get; in credit you underwrite how bad it can get and still get paid.

   Then walk it

   1. The payoff shape drives everything. A bond at par returns the coupon if things go well and nothing extra if they go brilliantly. So credit work is asymmetric downside analysis: the base case is already known, and your job is to price the tail.
   2. Which makes the analytical emphasis different. Equity cares about growth, TAM, reinvestment and multiple expansion. Credit cares about free cash flow versus fixed charges, the maturity wall, covenant headroom, liquidity, and asset coverage in a liquidation.
   3. Credit also has documents and equity does not. Covenants, collateral, guarantees, restricted payment baskets and intercreditor terms are enforceable rights. A credit investor with a blocking position can shape outcomes that an equity holder can only watch.
   4. Priority is the other structural difference. In a downside scenario credit gets paid first and can end up owning the business, which is why distressed credit is the one place where credit investors capture equity-like returns.
   5. Metrics I would actually use: for credit, net leverage, interest coverage, fixed charge cover, free cash flow after capex and interest, and the maturity schedule. For equity, return on incremental capital, growth durability and free cash flow per share.
   6. The honest overlap to name: at a distressed price, credit is an equity investment wearing a bond's clothing, and at a stretched leverage level, equity is a call option on the enterprise. The frameworks converge in the extremes, which is exactly why a credit solutions group inside a firm like KKR sits next to the private equity team rather than away from it.

   Where candidates lose it

   Answering only with 'debt is safer'. The distinctive content is capped upside, contractual rights and priority, plus the different metric set. If you are interviewing for a credit seat, make sure you can name covenants and fixed charge coverage, and say what actually attracts you to a capped-upside payoff.

   Expect next

   • Why would you choose an asset class with capped upside?
   • What covenants would you want in a loan to a cyclical business?
   • When does credit analysis become equity analysis?

   Reported by candidates at KKR (Distressed Debt, New York, 2025). Source: Wall Street Oasis.

4. 062What is a high water mark, and why does it matter to the manager?Fund structure and economicsIntermediatetechnicalFund of funds

   Say this

   It is the highest NAV an investor's capital has previously reached, and the manager earns no performance fee until the fund climbs back above it. It matters because it turns a drawdown into a direct hit on the manager's revenue for years, not just for one bad quarter.

   Then walk it

   1. Mechanically it is per investor and per subscription, not per fund. Someone who invested at the peak and someone who invested at the trough have different high water marks, which is why the accounting is done in series or with equalisation.
   2. Worked example: the fund falls 20 percent, then rises 15 percent. The investor is still below where they started, so no performance fee is earned even though the manager had a good year. They need roughly 25 percent to get back to the mark.
   3. The business consequence is severe. A fund deep below its high water mark is running on management fee alone, so it cannot pay the team, and the good people leave. That is why funds close after a bad year instead of grinding back, and investors should read a fund closure as an economic decision, not a confession.
   4. It also creates a live incentive problem. A manager far below the mark has an option that is deep out of the money, and the rational move for the option is more volatility. Investors watch for exactly that behaviour after a bad drawdown.
   5. Partial fixes exist. Some funds offer a reduced fee below the mark to keep the team funded, some use modified marks that reset over time, and a few reset after a set period, which investors dislike for obvious reasons.
   6. Related mechanics worth naming: a hurdle rate means the fee only applies above a threshold such as cash or a benchmark, and crystallisation frequency determines how often fees lock in. Annual crystallisation with a genuine high water mark is the investor-friendly version.

   Where candidates lose it

   Describing it as a nice investor protection and stopping. The interesting content is what it does to the manager's behaviour and business: staff retention, fund closures, and the incentive to take more risk when the fee option is far out of the money. Also note it is per investor, which candidates almost always miss.

   Expect next

   • What is the incentive problem for a manager far below the mark?
   • What is a hurdle rate?
   • Why do funds close rather than trade back to the mark?
5. 064Explain lock-ups, gates and redemption notice, and why a fund needs them.Fund structure and economicsIntermediatetechnicalFund of funds

   Say this

   They are the tools that match the liquidity the fund offers investors to the liquidity of what it owns. A lock-up is a period you cannot redeem at all, notice is how far ahead you must tell them, and a gate caps how much can leave at once. Without them a liquid promise on an illiquid book forces fire sales.

   Then walk it

   1. Typical terms on a liquid equity fund: monthly or quarterly liquidity, 30 to 90 days notice, maybe a one-year soft lock with a 2 to 5 percent early redemption fee that is usually paid to the remaining investors rather than the manager.
   2. Less liquid strategies ask for more: a two or three year hard lock for distressed or structured credit, annual liquidity, and longer notice. That is appropriate, not predatory, when the assets take that long to realise.
   3. A gate caps redemptions, either at the fund level, say 20 percent of NAV per quarter, or investor level, so each holder can only take a fraction of their stake at a time. It exists so that early redeemers do not force the sale of the most liquid assets and leave the stayers with the illiquid residue.
   4. That last point is the real principle: the terms protect remaining investors from each other, not just the manager from investors. Redemption is a first-mover advantage problem, exactly like a bank run.
   5. 2008 is the reference. Funds that had offered monthly liquidity on illiquid books either gated, side-pocketed or sold their best assets to raise cash. Investors learned to read the liquidity terms as carefully as the strategy description.
   6. The abuse to name, because it shows judgement: a manager who gates a genuinely liquid book to preserve fee income is a governance failure. So the real test is whether the liquidity terms match the asset liquidity. A mismatch in either direction is the warning sign.

   Where candidates lose it

   Defining the three terms and stopping, or framing them as manager-friendly restrictions. The insight is the liquidity mismatch and the first-mover problem among investors. And the diligence question is not whether a fund has gates, it is whether its terms match what it owns.

   Expect next

   • How would you test whether the terms match the assets?
   • What is an early redemption fee and who receives it?
   • What happened to funds that had gates in 2008?
6. 065What is a side pocket, and when is it used?Fund structure and economicsIntermediatetechnicalFund of fundsDistressed debt

   Say this

   A side pocket is a separate share class holding illiquid or hard-to-value positions, carved out of the main fund so that redemptions can be paid from the liquid book without touching them. Investors in the pocket at the time of the carve-out keep their share and get paid when those assets are realised.

   Then walk it

   1. The legitimate use case: a liquid fund ends up owning something genuinely illiquid, a private stake from a restructuring, a litigation claim, a stub security with no market. Side-pocketing it stops a redeeming investor from getting paid out at a mark nobody can verify.
   2. Mechanically it becomes a separate series. Existing investors are allocated their pro rata share, new investors do not participate, and the pocket is not redeemable. It is valued periodically and distributed as the assets realise.
   3. Fee treatment is the thing to ask about. The investor-friendly version charges a management fee on the side pocket at cost and only crystallises the performance fee on actual realisation. The unfriendly version charges performance fees on unrealised marks the manager sets themselves.
   4. It also solves a fairness problem in both directions. Without it, either the redeemer is overpaid on a stale mark at the expense of the stayers, or underpaid because the fund had to dump liquid assets.
   5. The abuse is well documented. 2008 saw funds move impaired assets into side pockets, which converted a temporary liquidity problem into a permanent one for investors, and some marks proved to be fiction. That is why LPs now negotiate hard caps on what percentage of the fund can be side-pocketed.
   6. So in diligence I would ask three things: the cap as a percentage of NAV, who values the pocket and whether the auditor signs the mark, and the manager's actual history of using them. A fund with a repeated pattern of side-pocketing losers is telling you something.

   Where candidates lose it

   Explaining the mechanics and missing the governance question. Every serious investor's question about side pockets is about who marks them and how fees are charged on unrealised value. Also make the fairness point in both directions; candidates usually only see that it protects the manager.

   Expect next

   • Who should value a side-pocketed asset?
   • How would you cap this in the fund documents?
   • What is the difference between a side pocket and a gate?
7. 068What makes up a NAV?Financing, NAV and operationsIntermediatetechnicalMan GroupEquity Hedge · Boston · 2019

   Say this

   Total assets at fair value, minus total liabilities, divided by units outstanding. On a hedge fund the interesting parts are all in the details: how positions are priced, and everything that sits in liabilities, which includes the short book, the financing and the accrued fees.

   Then walk it

   1. Assets: long positions at fair value, cash and cash equivalents, margin and collateral posted at the prime broker, receivables from unsettled trades, dividends and interest receivable, and the positive mark-to-market on derivatives.
   2. Liabilities, which is where hedge funds differ from a mutual fund: the market value of short positions, margin loans and repo borrowings, negative derivative marks, payables on unsettled trades, dividends payable on shorts, accrued borrow fees, plus accrued management and performance fees and fund expenses.
   3. So the accruals are a real part of the number. An accrued performance fee is a liability that reduces NAV even though it has not been paid, which is why NAV can be quoted gross and net of fees and the difference matters.
   4. Pricing policy is the substance of the answer. Exchange-traded positions at the official close, over-the-counter instruments from broker quotes or a model, and illiquid positions by a documented valuation policy. The hierarchy is level one, two and three, and the percentage in each tells you how much of the NAV is opinion.
   5. Governance is the other half. An independent administrator strikes the NAV, the prime broker's records are reconciled against it, a pricing committee approves level three marks, and the auditor tests them annually. The manager should not be the sole source of a price.
   6. One practical detail worth having: NAV is usually struck monthly for subscriptions and redemptions but estimated daily for risk, and the two can differ. Investors transact on the official NAV, so the gap between the daily estimate and the final struck number is itself a control worth monitoring.

   Where candidates lose it

   Giving the mutual fund answer, assets minus liabilities, and missing that the short book and the financing sit in liabilities. Also missing the accrued performance fee. The question in a hedge fund interview is really about pricing policy and who strikes the number, so say level one, two and three, and say the administrator's role.

   Expect next

   • Who should strike the NAV and why not the manager?
   • How would you value a level three position?
   • What is the difference between gross and net NAV?

   Reported by candidates at Man Group (Equity Hedge, Boston, 2019). Source: Wall Street Oasis.

8. 069What does a prime broker actually do for a hedge fund?Financing, NAV and operationsIntermediatetechnicalPrime brokerageLong-short equity

   Say this

   It is the fund's financing and operations counterparty. It lends against the long book, sources stock to borrow for the shorts, clears and settles trades, holds custody, provides consolidated reporting and margin calculation, and often introduces the fund to investors. Without a prime broker a long-short fund cannot function.

   Then walk it

   1. Financing first, because that is the core service. The PB extends margin against the long portfolio and rehypothecates the collateral, which is how a fund gets to 3 or 4 times gross on its equity.
   2. Securities lending second. The PB locates borrow for shorts and sets the fee, and that pricing power is a real cost line for the fund. Access to hard-to-borrow names is one of the main reasons funds pay up for a top-tier prime.
   3. Then operations: clearing, settlement, custody, corporate actions, stock loan administration, portfolio reporting, and the risk and margin system the fund reconciles to daily.
   4. Then the relationship services: capital introduction to allocators, research access, and sometimes seed or working capital. Cap intro is a genuine reason emerging managers choose a particular prime.
   5. Multi-priming is standard for anything of size, and the reason is the lesson of 2008. Lehman's prime brokerage clients found their assets frozen in administration and their rehypothecated collateral entangled in the estate. So funds now split balances across two or three primes and negotiate asset protection and segregation terms.
   6. The dependency to name honestly: the PB sets your margin terms and can change them. A prime that raises haircuts in a stress event forces you to delever exactly when you least want to, which is how a financing relationship becomes the real source of risk. Archegos is the recent illustration from the other side of the same relationship.

   Where candidates lose it

   Listing services without naming the dependency. The interesting part of prime brokerage is that the fund's leverage, borrow and continued operation all sit with a counterparty whose terms can change. Mention multi-priming and the Lehman lesson; that is what separates an operational answer from a brochure.

   Expect next

   • Why would a fund use more than one prime broker?
   • What is rehypothecation and why did it matter in 2008?
   • What happens if your prime raises your haircuts overnight?
9. 072What is the difference between holding a position in cash equity and through a swap?Financing, NAV and operationsIntermediatetechnicalLong-short equityPrime brokerage

   Say this

   Cash equity means you own the shares. A total return swap gives you the same economic exposure without owning them: the counterparty holds the stock and pays you the return, you pay a financing spread. The economics are similar, the ownership, disclosure, financing and counterparty risk are not.

   Then walk it

   1. Mechanically, the swap pays you price return plus dividends and you pay a floating rate plus a spread, against posted collateral. Your exposure is the full notional while your outlay is the margin, which is where the leverage comes from.
   2. Reasons funds use swaps: access to markets where direct ownership is restricted or operationally painful, notably parts of Asia and specifically the foreign investor route into some Indian instruments; simpler shorting because the borrow is embedded in the counterparty's book; and a single financing relationship across many positions.
   3. Disclosure is the big structural difference and the one interviewers probe. Economic exposure through a swap has historically not triggered the same beneficial ownership disclosure as shares, which is how large positions can be built quietly. Rules have tightened after several incidents, but the asymmetry is the reason the instrument is popular for stake-building.
   4. You also give up the shareholder rights. No vote, no ability to engage, no standing in a restructuring. For an activist or an event-driven investor that can matter more than the financing saving.
   5. Counterparty risk replaces settlement simplicity. If the dealer fails you are an unsecured creditor for the mark-to-market above your collateral, so you care about the dealer's credit and about netting agreements.
   6. Archegos is the case study that ties it together: enormous swap-based exposure spread across several dealers, each of whom could not see the whole position, with margin that proved thin. The lesson is that swap leverage plus fragmented dealer visibility hides concentration from everyone including the dealers.

   Where candidates lose it

   Saying they are economically identical and stopping. The differences that matter in practice are disclosure, voting rights, counterparty exposure and how the margin is set. Naming the Archegos dynamic shows you understand why regulators now care, rather than just how the instrument is priced.

   Expect next

   • Why would you use a swap rather than buying the stock?
   • What is the counterparty risk on a swap, exactly?
   • Why do swaps matter for stake-building disclosure?
10. 080What are the assumptions of linear regression?Quant and systematicIntermediatetechnicalSCSquarepoint CapitalHedge Fund · Montreal · 2024

    Say this

    Linearity in the parameters, exogenous errors with zero conditional mean, no perfect multicollinearity, homoscedastic and uncorrelated errors, and for exact small-sample inference, normally distributed errors. The first two give you unbiasedness; the rest are about whether your standard errors mean anything.

    Then walk it

    1. Separate the tiers, because that is what distinguishes someone who has used regression from someone who memorised a list. Linearity and exogeneity are needed for the coefficients to be unbiased. Homoscedasticity and no autocorrelation are needed for the usual standard errors to be correct. Normality is only needed for exact t and F inference in small samples.
    2. So a violation of homoscedasticity does not bias your beta, it biases your confidence in it. That distinction matters enormously in practice: you can still use the estimate, you just cannot trust the t-statistic.
    3. In financial time series the assumptions that actually break are autocorrelation and heteroscedasticity, because volatility clusters and returns overlap. The standard fixes are Newey-West or White standard errors, and clustered errors in panel data.
    4. Endogeneity is the serious one. If a regressor is correlated with the error, the coefficient is biased and no standard error fix helps. In finance this usually arises from omitted variables or from a feedback loop where price affects the supposed predictor.
    5. Multicollinearity does not bias anything, it just inflates variances, so coefficients become unstable and flip sign between samples. That is very common with factor exposures, and the tell is a large R-squared with no individually significant coefficient.
    6. Practical additions I would name: outliers dominate least squares because it minimises squared errors, so winsorise or use robust regression; and out-of-sample performance matters more than any in-sample diagnostic, because for a trading signal I care about prediction, not about the p-value.

    Where candidates lose it

    Reciting the list without saying what each assumption buys you. Tiering them into unbiasedness versus valid inference is the differentiator. Also, do not claim normality of the dependent variable is required; it is normality of the errors, and only for small-sample inference.

    Expect next

    • Which assumption is most often violated in financial data, and what do you do about it?
    • What is the consequence of multicollinearity?
    • How would you detect endogeneity?

    Reported by candidates at Squarepoint Capital (Hedge Fund, Montreal, 2024). Source: Wall Street Oasis.

Firm tags come from public, anonymous candidate reports on Wall Street Oasis: strong signal, not sworn testimony. Firms are named as the places a question was reported, not as partners of Fin Maverick. Answers are written for this page to show how to think out loud; they are not scripts to recite.