Investment banks used to have the pick of the bunch when it came to PhD students with impeccable maths. These days, hedge funds and fund managers are treading on their turf.

“Fund managers are increasingly looking for quants to build algorithmic trading models,” says Joanna Cohen, a consultant at recruitment firm Huxley Associates in London. “They need people to build models predicting market behaviours.”

Quants are popular in the hedge fund industry, where global macro funds in particular rely on ‘black box’ trading models to dictate their investments. But quantitative skills are also increasingly sought after by traditional funds embracing active quantitative management, or ‘enhanced indexing,’ to boost returns.

The results are promising. For example, the quantitative fund manager Axa Rosenberg has seen assets under management rise from $10bn (€8.2bn) to more than $60bn in the past four years on the back of strong performance: its pooled funds investing in small-cap stocks in Asia, Europe, Japan are top performers. Similarly, the quasi-passive Barclays Global Investors European, delivered a 2.5% stock selection return for 2005, higher than that achieved by most active fund managers.

Fund managers’ appetite for quantitative skills is not restricted to algorithmic trading. Quants are also needed for risk management roles, says Scott Gerson, managing director of New York City search firm Focus Capital. “Funds with $100bn or $200bn under management need quant-focused staff who can come in and put a number on their risk,” he says.

Regulators driving European demand

Regulatory changes are adding impetus to quant recruitment in Europe. The new Europe-wide Ucits III rules, which are set to come into effect in February 2007, allow funds to offer a broader range of derivative products to retail investors.

At the same time, national regulatory changes are driving demand locally. John Jessen, managing director of Frankfurt-based search firm Smith & Jessen, says German fund managers’ demand for quantitative skills has increased significantly following the introduction of new regulations entitling German funds to invest in derivatives. “Everyone in the industry has been looking for quants and structurers with a good grasp of the derivatives space,” he says. “They are a very sought after commodity: there is an absolute shortage of talent.”

Guy de Brabois, a senior consultant in the banking division of Robert Walters in Paris, says a new requirement from the Autorité des Marchés Financiers, the French regulator, has boosted French funds’ appetite in the quant space. “Last year saw a new requirement that asset managers developed models to price collateralised debt obligations and credit default swaps,” he says. “Many firms then had to invest in the development of those models, either internally or externally, and they had to find the resource to do so.”

Maximillian Redolfi, a consultant at Michael Page in Milan, says demand for quants is also rising in Italy, albeit from a low level. “These roles come up only infrequently,” he says. “But we are seeing them a lot more often than before.”

Recruiters even point to more demand for quants in Switzlerland, where firms such as Pictet Asset Management have introduced enhanced indexing capabilities.

The good news for investment banks is that the quants favoured by fund managers are not necessarily identical to the quants they need to build complex derivatives pricing models. “Fund managers tend to have a different profile in mind when they hire,” says Gerson in New York. “They may not be looking for someone as purely quantitative as an investment bank – they’re not going for pure physicists, but a combination of an MBA, a math degree and accounting knowledge.”

Cohen at Huxley Associates says a similar distinction prevails in London. “Funds are not looking for PhDs in theoretical physics and applied mathematics, but for qualifications in economics or econometrics,” she says. “Whereas banks want pure quants to work on very complex mathematical structures, the kind of people fund managers hire tend to be better rounded individuals with greater awareness of what drives the markets.”

Pay: Poor on the Continent

Pay for fund management quants is predictably higher in New York and London than continental Europe.

Quants with five years’ experience working for Frankfurt fund managers can expect to earn between €100,000 (68,000) and €200,000 euros, bonus included, says Jessen of headhunters Smith & Jessen. De Brabois of recruiter Robert Walters says their Parisian counterparts can expect a maximum of €120,000 euros if they’re building trading models, and €108,000 euros if they’re working on risk management products.

This is low compared to the 200,000 to 250,000 that Cohen at Huxley Associates says is on offer for comparably experienced staff in the City of London, and the $200,000 to $400,000 that Scott Gerson at Focus Capital says is available on Wall Street. But it is significantly better than pay in Milan. Redolfi at Michael Page says Milanese quants command just €50,000 to €60,000 a year, plus a 20% bonus.