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. 061Explain two and twenty.Fund structure and economicsCorephone / first roundFund of funds

   Say this

   A 2 percent annual management fee on assets plus a 20 percent performance fee on profits. The management fee runs the business regardless of returns; the performance fee is the incentive, and it usually only applies above the high water mark and sometimes above a hurdle.

   Then walk it

   1. Work an example so the asymmetry is visible. On 1 billion of assets that earn 10 percent gross: the management fee is 20 million, the performance fee is 20 percent of the remaining 80, so 16 million. The investor keeps 64 million, or 6.4 percent net from a 10 percent gross return. Roughly a third of the gross return goes to fees.
   2. The management fee is on assets, so it scales with asset gathering rather than with performance. That is the structural conflict at the heart of the industry, and it is why capacity discipline is a genuine signal about a manager.
   3. The performance fee is an option, not a share. The manager participates in the upside and does not pay for the downside, which is why the high water mark exists as a partial fix.
   4. Two and twenty is no longer the standard. Large institutional mandates negotiate closer to 1 and a half and 15 to 20 with hurdles, while the very best capacity-constrained funds charge much more, occasionally 3 and 30 or higher.
   5. And the pass-through model at platforms is a different animal entirely: instead of a fixed management fee, the fund charges its actual operating costs to investors, which can land well above 2 percent, and then takes a performance fee on top.
   6. The honest limitation: the headline rate tells you very little. What matters is the expense load, whether there is a hurdle, whether the high water mark is real, how often fees crystallise, and whether the fee is charged on levered or unlevered assets.

   Where candidates lose it

   Reciting the percentages without doing the arithmetic. An interviewer wants to see that you understand how much of the gross return leaves the investor, and that the management fee creates an asset-gathering incentive. Also know that pass-through expenses have largely replaced the flat 2 at the big platforms.

   Expect next

   • What gross return do you need to deliver 8 percent net?
   • What is a high water mark?
   • Why would a fund charge 3 and 30?
2. 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?
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?
5. 066Explain a hurdle rate, a clawback and a crystallisation period to an investor.Fund structure and economicsHardtechnicalFund of funds

   Say this

   A hurdle is the return the fund must beat before any performance fee is earned. A clawback returns fees already paid if later losses show they were not deserved. A crystallisation period is how often the performance fee is locked in and taken. All three exist because the performance fee is an option and investors are trying to make it less of one.

   Then walk it

   1. Hurdle: typically cash, SOFR plus a spread, or a benchmark. With a 5 percent hurdle and a 12 percent return, the 20 percent fee applies to 7 points, not 12. Then ask whether it is a hard hurdle, fee on the excess only, or a soft hurdle, fee on everything once cleared. The difference is real money.
   2. Crystallisation: monthly, quarterly or annual. More frequent crystallisation favours the manager, because fees are locked in on a good quarter even if the year ends flat. Annual with a genuine high water mark is the investor-friendly standard.
   3. Worked example of why frequency matters: up 10 percent in the first half, down 10 percent in the second, roughly flat for the year. With quarterly crystallisation the manager has banked a performance fee on the first half. With annual, nothing is due.
   4. Clawback is more common in private funds than hedge funds, and it is the fix for that problem: fees paid on interim gains are returned if the final outcome does not support them, usually held in escrow.
   5. The equalisation problem sits behind all of it. Investors subscribing at different times have different high water marks, so funds either run separate series per subscription or use equalisation accounting with depreciation deposits. It is administratively ugly and it is why the administrator matters.
   6. The plain conclusion for an investor: the headline two and twenty tells you almost nothing. Hurdle type, crystallisation frequency, high water mark treatment and the expense load determine what you actually pay, and two funds with identical headline terms can differ by hundreds of basis points a year.

   Where candidates lose it

   Defining the three terms in isolation. The value of this answer is showing how they interact and which combinations transfer money to the manager. The hard-versus-soft hurdle distinction and the crystallisation frequency example are the two specifics that make it convincing.

   Expect next

   • Which is better for the investor, a hard or a soft hurdle?
   • Why is crystallisation frequency worth arguing over?
   • What is equalisation and why does it exist?

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.