Hedge fund managers have been described as many things, both positive and negative, but essentially they are simply investment managers who try to earn a profit on their clients' money. While the highest-paid hedge fund managers can often have exorbitant salaries, many of the junior managers earn compensation more in line with much of the financial services industry overall.

Hedge Fund Definition

A hedge fund is an unregistered investment management company that typically uses advanced arbitrage and hedging techniques in an attempt to achieve superior investment results. Similar to a mutual fund, a hedge fund pools together money from many different investors and generally invests the funds on a collective basis. However, unlike a mutual fund, a hedge fund does not register with the Securities and Exchange Commission or any other U.S. regulator, and investment in the hedge fund is generally restricted to a limited number of wealthy, sophisticated investors.

Hedge Fund Fee Structure

Hedge funds generally charge investors two sets of fees. The first is an annual management fee that usually ranges from between 1 and 2 percent of an investor's assets in the fund. The second fee is a performance-based fee that charges the customer 20 percent of the fund's gains in a given year. For example, if a client invested $100,000 and the fund earned 40 percent in one year, the additional fee would be $8,000, or 20 percent of the investor's $40,000 gain.

Becoming a Hedge Fund Manager

Unless a manager is hired from an outside fund management company, he will begin his career as an analyst with the hedge fund. Analysts do a lot of the research, calculation and paperwork for the senior fund managers, who can then focus on market movements and overall fund strategies. In 2014, the average junior analyst with an MBA straight out of school earned between $90,000 and $120,000.

Average Hedge Fund Manager Salaries

As of 2013, a portfolio manager at a large fund would earn an average of $2.2 million per year, according to a report by CNBC. While hedge fund manager salaries may seem substantial, many managers work on an incentive basis and look forward to lucrative bonuses at the end of an investment year. These bonuses are generally tied to the performance of the overall fund in a given year.

Top Hedge Fund Manager Salaries

In 2013, the top four hedge fund managers each made over $2 billion, with the number one manager making $3.5 billion. The top six below them ranged from just under a billion to $600 million in one year.