Quants: The new risk takers of finance
Via efincareers :
Quant traders working in investment banking are not happy. Squeezed by regulations that curb investment banks’ prop-trading activities and by cost-cutting that means that pre-crisis compensation packages have been consigned to history, job dissatisfaction is at an all-time low, according to industry observers.
Quantitative PhDs who would have usually gravitated towards high-paying roles in the financial sector are looking for alternative career paths, while those already working in banking are seeking to move on.
Where are they going? The obvious answer is to strike it out alone. The fact that 60 quant traders from Barclays’ Quants division are kick-starting their own hedge fund is part of a broader trend of Wall Street’s rocket scientists looking for riches in smaller operations. Mark Standish, the former co-head of capital markets at RBC, and Richard Tavoso, who oversaw global arbitrage and trading at the firm, are also starting Taursa Capital Partners.
“Startup costs for a quant manager or team to go independent are falling very rapidly,” says John Fawcett, founder and CEO of quant community Quantopian. “That decrease is driven by the rapid adoption of lower cost technology services and access to open-source analytics and computing packages. At the same time, quants have less compelling incentives at large banks.”
The Barclays and RBC traders had one thing in common, though – a strong and demonstrable track record, which would prove attractive to potential investors. Fawcett believes that aspiring quants straight out of university will also increasingly look to go it alone, using online portals (like Quantopian) to match quant talent with investors with a desire to gain exposure to these strategies.
“Historically, this group would be the most likely to pursue a standard investment banking career track – but today that talent is looking more and more favourably on Silicon Valley, and more critically at Wall Street,” he says. “They see peers with the same computer science degrees who go into the software/internet space taking big risks, being more entrepreneurial and enjoying a more independent lifestyle as a result. I think the next generation of quants is going to be even more influenced by these.”
This, of course, seems like a big risk for a quant with little or no financial services experience. However, this is not the only alternative career paths that quants are taking instead of going into the relative safety of a high-paying banking job.
“A lot of PhDs are taking jobs as quantitative researchers at large tech firms like Google and Amazon, and getting exposure to cool technologies that have yet to reach the financial sector,” says James Kennedy, head of the quant and trading practice at NJF Search. “They’re then moving to hedge funds to help them make the most of big data opportunities, and this switch usually means a lot more money.”
The key to making earning big bucks at a hedge fund is retaining control of your intellectual property – owning the algorithms and code is in line with the more entrepreneurial spirit of today’s quants, says Fawcett: “I think we will see quants start to push to retain more ownership over their own intellectual property and performance. At Quantopian we are betting on this trend to drive more demand for hosted backtesting and trading platforms.”
Alternative career options
The cost-cutting at investment banks is forcing quants out the industry and is acting as a “recruiting sergeant” for high frequency trading firms that are actively hiring, according to Jon Gilbert, head of the technology and quant practice at recruiters Astbury Marsden.
However, this isn’t the limit of career options. Hedge funds who employ high frequency trading strategies are also increasingly looking to hire quant traders to research, design and implement their own strategies for medium frequency trading strategies. This is providing an increasing number of employment opportunities for quants looking to leave banking, but who still fear striking out on their own, says Kennedy.
“Traders are particularly drawn to the smaller trading houses where they have greater freedom to develop their own trading strategies and quickly make a name for themselves,” adds Gilbert.
All of this is not to say that the investment banks don’t want to hire quants. The long-term future of quant traders in investment bank is increasingly shaky as firms are forced to retreat from prop trading activities, but banks are hiring in other areas, says Kennedy.
“We’re seeing a lot of roles for quants within the investment banks around model validation, largely as a result of regulations like the Comprehensive Capital Analysis Review (CCAR) and a lot of PhDs are moving into data scientist positions within financial services,” he says. “Ultimately, quants are not going to make the sort of money they made pre-2007, but the jobs in banking are still relatively well-paid.”