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. 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?
2. 063What is a pass-through expense model, and why have platforms moved to it?Fund structure and economicsIntermediatetechnicalMulti-manager platformsFund of funds

   Say this

   Instead of a fixed management fee, the fund charges investors its actual operating costs: PM and analyst compensation, data, technology, research, legal, travel. Platforms moved to it because the talent and infrastructure arms race made a fixed 2 percent uneconomic for the manager, and investors accepted it because the net returns were good enough.

   Then walk it

   1. What actually sits in it: pod team compensation including guarantees, market data and alternative data, expert networks, the risk and technology stack, execution infrastructure, legal and compliance, and office costs. At scale it has run anywhere from 3 to well over 7 percent of assets in bad years.
   2. The economic logic from the manager's side. Hiring a proven PM requires a guaranteed package, and if the fund pays that out of a fixed fee it bears the risk of the hire. Passing it through moves that risk to investors and lets the platform expand aggressively.
   3. Which is why the model and the arms race are the same phenomenon. Once one platform can bid for talent with investor money, everyone has to, and the cost base ratchets up.
   4. The investor's side is uncomfortable but rational. The cost is uncapped and disclosed after the fact, which is the opposite of a fixed fee, but the return streams have low correlation to everything else in their portfolio and they have been willing to pay for that.
   5. The consequence is that gross return requirements are high. Add pass-through costs of 5 percent to a 20 percent performance fee and the strategy has to generate a lot of gross alpha before an investor sees a good net number. That is the single best argument that the model has a capacity limit.
   6. The honest caveat: transparency varies, comparison across funds is difficult, and in a weak year the expense ratio does not fall while the return does. Investors have started to push back with expense caps and hybrid structures, which is worth mentioning because it is the live negotiation.

   Where candidates lose it

   Treating it as a technical fee detail. It is the central economic fact about the platform industry and it explains the talent market, the capacity debate and why net returns can disappoint when gross looks fine. Do the arithmetic on what gross return is needed, because that is the part that shows you understand the implication.

   Expect next

   • What gross return does a pass-through fund need to deliver 8 percent net?
   • Why do investors accept an uncapped expense?
   • Is the pod model at capacity because of fees?
3. 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?
4. 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?

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.