More than ever before, finance is a quantified world. Nearly all stock trading is now done by quantitative traders, or by the computer algorithms they’ve developed. On the buy-side, the world's largest hedge funds trade using systematic models, whilst the rise of passive indexing means that fewer investors are pinning their hopes on traditional stock pickers.
These trends are making some people very wealthy. At the top of the tree owner managers of large quantitative hedge funds like James Simons (Renaissance Technologies), Ray Dalio (Bridgewater), and the UK’s own David Harding (Winton) regularly hundreds of millions or even billions.
Sadly the same cannot be said for most quants, who have to toil in the trenches for relatively small pickings. Almost none will ever earn the seven or eight figure pay packets that senior traders and portfolio managers view as a just reward.
This disparity begins early in their career. Quants usually start as associates, like MBAs. This means that banks value MBAs - people who've taken a one year course that is not especially intellectually demanding - as equivalent to PhDs - people with doctoral degrees that require three years of original research. Quants are therefore undervalued from the start, and it gets worse. Initially, base salaries for quants are usually identical to those for juniors hired into pure front office roles like sales and trading. But within a couple of years, quants will usually be earning significantly lower bonuses, and being promoted more slowly.
Why does this happen? There are two reasons. Firstly, Quants are undervalued by the rest of the business. Secondly, they don’t complain about being underpaid.
Quants are considered dispensable, and easy to replace. When a trader or investment banker threatens to leave they will claim that they are irreplacable – who else has the same ability to predict the future when they trade, or plays golf regularly with the CEO of the banks largest client?
These attitudes may have been appropriate a couple of decades ago, but are now seriously old-fashioned. A quant can prove that their trading strategy is adding value, whilst there is increasing evidence that the human trader who uses gut-instinct has just been lucky. The CEO of a bank's largest client won’t care about personal relationships if they can trade more cheaply with another bank thanks to an innovative algorithimic trading engine, or if they can invest their surplus treasury funds at a higher interest rate because a quant has developed a new investment product.
Quants need to start asserting themselves. Of course this isn’t easy for the stereotypically socially awkward individuals who often fill these kinds of jobs. But remember, most firms will pay you the least amount possible unless you complain, which is why the more vocal and aggressive sales people and traders have usually earned more.
One reason why other front office staff have earned more in the past is that they’re more willing to move to different firms. Changing jobs to get a pay rise is often far easier than trying to persuade your boss you are worth more, even without the handsome golden hellos and multi year guaranteed bonuses of the past. You might be happy where you are, but an appreciation of your market value is a big help when negotiating salary increases or angling for a promotion.
Quants should also look beyond the financial sector to get an idea of what they could be paid elsewhere. Before 2008 banking was an attractive option for quants. Though relatively underpaid compared to their colleagues they were still earning more than was available elsewhere.
Nowadays, this isn't the case. Demand for technologically savvy researchers in the areas of machine learning and artificial intelligence is massive, and other industries are bidding frantically for talent; matching or exceeding the compensation of quants who currently work in banks.
Many of these jobs are also more interesting than working in finance. If anything quants should demand a hefty premium for having to work in a dull bank or hedge fund, when they could be having more fun elsewhere.
Robert Carver is a proudly assertive quant who has worked on the sell side - as a trader of exotic options - and on the buy side: he is a former head of fixed income at quantitative hedge fund AHL. Robert is the author of 'Systematic Trading' and 'Smart Portfolios'.