UK
A surge in quantitative investing from the buy-side is driving an increase in technology spend for the sector and moving quant analysts’ roles into the front office.
Hedge funds and asset managers are increasingly turning to the quant approach in the face of unprecedented volatility in financial markets. This is fuelling appetite for new algorithms and the technology that can assist in the selection and creation of portfolios, according to a new report by consultancy Aite Group.
And this search for alpha is meaning the quant analysts, who would typically research theories and pass them on to portfolio managers and traders, are increasingly becoming a front office presence.
John Jay, an analyst at Aite Group, says: “Today’s quants are no longer development geek-types who remain hidden in the background. They are increasingly being pushed into the front office, taking the roles of traders and portfolio managers.”
And, as the quants’ roles evolve, a crop of technology vendors – such as 4th Story, ClariFI and QuantHouse – have sprung up to provide platforms for the buy-side.
Sang Lee, managing partner at Aite Group, tells us: “Still a lot of quants have developed their own platforms or applications, often on an ad hoc basis.” The new platforms are aimed at integrating these home-grown applications, he says.
Aite predicts that the market for these new alpha-generating platforms will reach $120m by 2010 – 10 times the amount spent on them in 2006.
True quants will never make it big in finance..you cant build a machine to predict “black swans”..its like goldman sachs quant fund which predicted the credit crunch was something like as probable as winning the lottery 10 times in a row! (complete bullsh!t) Any model that comprises of inputs that have ASSUMED distribution is liable to break (e.g. monte carlo) Think about it, where would the credit crunch rank in a distribution which is modelled on historical data. However, portfolio managers who used their common sense would have realised there was a bubble in the global housing markets before it burst (any many did including PMs at my firm). Like smart PMs who realised there is a commodity bubble at the moment (which has partly burst). This is the problems with quants, they tend to be high on mathematical ability but low on common sense (specifically common sense regarding economics and the world around them). Therefore true quants will never become great PMs because when sh!t hits the fan their models breakdown, whilst common sense PMs knows when trouble is around the corner through really understanding markets/economics, and therefore act proactively to limit/mitigate damage
I disagree.
Following on from that previous comment, you correctly identified that the Goldmans quant group isolated the potential risk of the credit crunch and as a result saved the bank hundreds of millions of dollars. You then went on to say that their high IQ and low EQ in times of trouble render them useless…i presume you see where my argument is going, the comparatively low IQ of the pm’s in many of the banks did as a result cost millions of dollars and thousands of jobs in our investment banks, so now who is laughing – the quant’s (especially those in Goldmans), who is now in the front office – the quant’s, and finally, who are now some of the most influential characters on the trade floor (especially on the algorithmic/systematic trading side, where the money is being made back) – the quant’s.
We are seeing some of the highest demand in years for specialist quantitative driven recruitment and as a result are helping realise the true value of quantitative modellers, researchers, traders and product specialists.
Good god, you ever thought the stock market was anything other than a load of spiv’s and wide boys. Ha Ha Ha.
In my experience, irrespective of your style/methodology the markets will always find a way to hurt you so risk management is arguably most important (and I’m no risk manager!!)
Risk/money management are paramount, no matter how fancy the systems/techniques are. They help the ease the pain of being hurt as mentioned above!
Ben please read my post again.
“Goldmans quant group isolated the potential risk of the credit crunch”, Goldman and Sachs group DID NOT identify this risk, their apha quant hedge fund believed the probability of credit crunch was almost impossible, BUT Goldman and Sachs prop traders SPOTTED the bubble and took a punt against the housing market. If that quant group had briefly looked in to finance history, they would realise crisis of such nature occur at least once a decade. For example have you heard of the tulip bulb bubble in holland in the 17th century.
Anyone who is brave enough can make as much as “good” quant funds in a bull market. The point is, when things goes wrong, quants are often found to be the worst performers
@fund99: this is total bullshit. I am sure many of your PMs have predicted the credit crunch – the whole market predicted a credit crunch, just nobody knew when.
The typical mindset of a trader / PM is a mean reverting process in the long term (if it’s down it’s gonna go up sometime) and a linear trend in the short term (it’s gone down for such a long term, this trend must hold just a little longer). Two absolutely trivial models, which can be much approved upon.
The disadvatage of models – I admit – is that they cannot talk themselved out of it when they are wrong and justify their actions in hindsight and put the blame on everyone else.
Let’s cut the nonsense and here is a definitive argument.
Jim Rosenberg, John Meriwhether, Nobel Laureates Myron Scholes, Bob Merton, plus PhD’s in maths and physics from Stanford etc. etc. A whole bunch of traders who decided their models were so good, they were infalliable. Russian bond crisis, everyone sold, their models said buy, they bought (what better time to buy?) couple of mths later, kaput, the entire fund went bust. So much for quantitative talent….if quants are know alls why did their models fail? Note these aren’t idiots, they are very smart people, so you can’t blame the practitioners, you have to agree the practioners trade was flawed to begin with.
Seocond argument: Warren Buffet has always ridiculed quants as not having any real understanding of the (economic) environment in which they are plying their trade. “Trading” by its very definition is nothing more than disguised ‘gambling’, calculated guesswork nothing more. ‘Investing’ is what Buffet did….he never used any PhD’s in maths and physics, no complicated quant models, just simple good ole common sense.
I rest my case.
agree with Warren Buffer..
Quote Steve99
“the whole market predicted the credit crunch, they just didnt know when”
Really??
Your comment illustrates you know absolutely nothing about finance..if everone knew about the credit crunch, then would everyone would still hold their ABS CDO bonds backed by US subprime before it collapsed? Your arguement completely contradicts itself and you probably don’t even know why. So let me answer my own rhetorical question: a situation where the market knew what they were holding, will drop by more than 50% but does not actively reprice the security, does not exist. Therefore the situation was that most people in the market did not know about the credit crunch and more specifically, quant models cannot even assign a probability to such an event and therefore by design excludes such possibility.
Please get yourself a bit more educated on finance before making sweeping statements “this is total rubbish”. I’m embarassed for you.
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quant approach is just a formalization of a manager’s belief – baking it in code, telling the manager really what he expects to see. quants (even “Portfolio Managers”) in our firm has no freedom whatsoever in what model to build, what factor to use to generate alpha…etc. They are told exactly what to build by the top dog.
And, really, these guys are just complete nerds and really this is not a compliment.
quants problem is, they really over complicate trading process with mathematics which don’t matter. This obscure real insight, this also slow down investment process