As financial securities become increasingly complex, demand has grown steadily for people who not only understand the complex mathematical models that price these securities, but who are able enhance them to generate profits and reduce risk. These individuals are known as quantitative analysts, or simply "quants."
Due to the challenging nature of the work - a blend of mathematics, finance and computer skills - quants are in great demand and able to command very high salaries. In this article we'll learn what they do, where they work, how much they earn, what knowledge is required and whether this may be the career for you.
What They Do
Quantitative analysts design and implement complex models that allow financial firms to price and trade securities. They are employed primarily by investment banks and hedge funds, but sometimes also by commercial banks, insurance companies and management consultancies, in addition to financial software and information providers.
Quants that work directly with traders, providing them with pricing or trading tools, are often referred to as "front office" quants. In the "back office," quants will validate the models, conduct research and create new strategies. For banks and insurance companies, the work is focused more on risk management rather than trading strategies. Front office positions are typically more stressful and demanding, but are better compensated.
Demand for quants is high and driven by multiple trends:
- Rapid growth of hedge funds and automated trading systems
- Increasing complexity of both liquid and illiquid securities
- Need to give traders, accountants and sales reps access to pricing and risk models
- Ongoing search for market-neutral investment strategies.
Where They Work
Quantitative analysis positions are found almost exclusively in major financial centers with trading operations. In the United States, this would be New York and Chicago and also areas where hedge funds cluster, such as Boston and Stamford. Across the Atlantic, London dominates, and in Asia many quants are working in Hong Kong, Singapore, Tokyo and Sydney, among other regional financial centers.
Despite the heavy concentration in those cities, quants are found all over the world - after all, many global firms analyze and/or trade complex securities, creating demand for the quant's brainpower and abilities. But the problem a quant working in Houston or San Francisco faces is that changing employers will most likely mean changing cities, whereas a quant working in Manhattan should be able to interview for and find a job within a mile or two of their previous one.
What They Earn
Compensation in the field of finance tends to be very high, and quantitative analysis follows this trend. It is not uncommon to find positions with posted salaries of $250,000 or more and with bonuses, $500,000+ is achievable. As with most careers, the key to landing the high-paying jobs is a resume filled with experience, including well-known employers, and reliance on both recruiting firms and professional networking for opportunities.
The highest-paid positions are with hedge funds or other trading firms, and part of the compensation is dependent upon the earnings of the firm, also known as the P&L (profit and loss). At the other end of the pay scale, an entry-level quant position may earn only $125,000 or $150,000, but this type of position provides a fast learning curve and plenty of room for future growth in both responsibilities and salary.
Also, some of the lower-paid quant positions are more likely to be primarily quant developers, which is more of a software-development position in which the individual is not required to have as much math and finance expertise. An excellent quant developer could certainly earn $250,000, but that's about as high as the compensation package generally will go.
Despite the high pay level, some quants do complain that they are "second-class citizens" on Wall Street and don't earn the multimillion-dollar salaries that top hedge fund managers or investment bankers do. As one can see, financial success is always relative.
What They Know
Many financial securities, such as options and convertibles, are easy to understand conceptually, but are very difficult to model precisely. Because of this hidden complexity, the skills most valued in a quant are those related to mathematics and computation rather than finance. It is a quant's ability to structure a complex problem that makes them valuable, not their specific knowledge of a company or market.
A quant should understand the following mathematical concepts:
- Calculus (including differential, integral and stochastic)
- Linear algebra and differential equations
- Probability and statistics
Key financial topics include:
Software skills are also critical to job performance. C++ is typically used for high-frequency trading applications, and offline statistical analysis would be performed in Matlab, SAS, S-PLUS/R or a similar package. Pricing knowledge may also be embedded in trading tools created with Java, .NET or VBA, and are often integrated with Excel. Monte Carlo techniques are essential.
Education and Certifications
Most firms look for at least a Master's degree or preferably a PhD in a "quantitative" subject, such as Mathematics, Economics, Finance or Statistics. Master's degrees in Financial Engineering or Computational Finance are also effective entry points for quant careers. Generally, an MBA is not enough by itself to obtain a quant position, unless the applicant also has a very strong mathematical or computational skill set in addition to some solid experience in the real world.
While most financial certifications, such as a CFA, likely wouldn't add much value to a prospective quant's resume, one that may is the Certificate in Quantitative Finance, or CQF. This six-month intensive program can be attended part-time in New York or London, or via distance learning globally.
The Right Career?
Clearly, "the right stuff" is required to be a quantitative analyst. It requires both the intellectual ability to master complex and abstract mathematical domains and a willingness to tackle challenges that can seem insurmountable, all under considerable pressure. It is something that only a select few are capable of.
But that also doesn't mean that everyone who has the ability to be a quant should become one. The financial problems faced are very abstract and narrow - quants don't read annual reports, meet with management, visit operations, talk to shareholders, etc. Most of their time is spent working with computer code and numbers on a screen.
Individuals with strong analytical skills are valuable in many different areas of finance, such as economic and financial analysis, for example. Having to compete against the best and brightest quants every single day may not be the quickest path through the ranks, especially for those with broader skills and interests and a desire to manage.
Another issue is that many PhD quants that come from academic environments find that they miss the research environment. Instead of being able to study a problem for several months, solutions have to be found in days or hours. This usually precludes making any breakthroughs in the field. Still, success in quantitative analysis is largely due to knowledge, talent, merit and dedication, rather than the ability to sell, network or play politics, and the individuals who work in the field are there because they can do the job well. Many find that type of environment remarkably refreshing.