Quantitative analysts, or “quants” as they are referred to in the industry, are the brains behind complex hedge funds and the smooth talking managers who run them. Their main responsibility is to create complex trading strategies to work in securities markets around the globe. Since hedge funds may invest in anything and everything through an array of unique and unconventional strategies, quants are relied upon to scour opportunities in the market using quantitative analysis with the help of intricate software. Quantitative hedge funds try to come up with a breakthrough strategy that hasn’t been used before to try to entice investors with something “new.
Quantitative analysts use their extensive math skills to develop software that analyzes statistical models for computerized financial trading strategies. Most quant hedge funds aim to be market-neutral by balancing both short and long positions. Global macro hedge funds are known for employing quantitative analysis to locate discrepancies in prices around the globe and capitalizing on them. The funds make their money when those prices return to normal.
As a quant, basic duties include:
- Conceive new trading ideas
- Partake in extensive research projects
- Find ways to reduce transaction costs and increase profitability
- Locate discrepancies in pricings throughout the market
- Develop software that locates price anomalies within the market
- Prepare written reports with supporting statistics to senior level management
No matter how good the quants are however, it is still up to the Portfolio Manager to call the shots on the actual trades. If the PM chooses to use high amounts of leverage while making risky bets, the hedge fund may still experience losses, no matter how good the quant is. That is why we saw many quant funds experience declines last year. The use of leverage magnifies even the smallest of losses, so even a fund “uncorrelated to the market” is still affected by market circumstances. Others explain the recent losses experienced by quant funds in another way. The sheer popularity of them makes for dozens of funds chasing the same dream, and using the same strategies thus reducing returns and raising risk.
Quants generally are the former straight A student who excels in math, computer science and engineering. They usually hold a PhD in Finance or Quantitative Mathematics. They have a vast understanding of statistics and calculus and can apply those theories to solve practical modeling and application problems. They are able to work independently but will also correspond on a daily basis with managers, clients, trader, IT personnel and other various groups. Junior quants may start off at around $80K, while more experienced Senior Quants can make upwards of $500K depending on the strategy and how successful it is.