As financial securities become increasingly complex, demand has grown steadily for professionals who not only understand the complex mathematical models that price these securities, but who are able to enhance them to generate profits and reduce risk. These individuals are known as quantitative analysts, or simply "quants," or even the colloquially affectionate "quant geeks."
Because of the challenging nature of the work—which needs to blend mathematics, finance, and computer skills effectively—quant analysts 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 Do Quantitative Analysts 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 validate the models, conduct research, and create new trading strategies. For banks and insurance companies, the work is focused more on risk management than trading strategies. Front-office positions are typically more stressful and demanding but are better compensated.
The high demand for quants is driven by multiple trends:
- The rapid growth of hedge funds and automated trading systems
- The increasing complexity of both liquid and illiquid securities
- The need to give traders, accountants and sales reps access to pricing and risk models
- The ongoing search for market-neutral investment strategies.
What does a Quantitative Analyst Do?
Where Do Quant Analysts Work?
Quantitative analyst positions are found almost exclusively in major financial centers with trading operations. In the United States, that would be New York and Chicago, and areas where hedge funds tend to cluster, such as Boston, Massachusetts and Stamford, Connecticut. Across the Atlantic, London dominates; 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, which creates demand for the quant's brainpower and abilities. But the problem that a quant working in Houston or San Francisco faces is that changing employers most likely would 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 Do Quants 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 when you add in bonuses, a quant likely could earn $500,000+ per year. As with most careers, the key to landing the high-paying jobs is a resume filled with experience, including with well-known employers, as well as reliance on recruiting firms and professional networking for opportunities.
The highest-paid positions are with hedge funds or other trading firms, and part of the compensation depends on the firm's earnings, also known as the profit and loss (P&L). 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 likely would be primarily quant developers, which is more of a software-development position where the individual is not required to have as much math and financial expertise. An excellent quant developer could certainly earn $250,000, but that's about as high as the compensation package generally would 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 command. As you can see, financial success is always relative.
Quants Skills and Education
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:
- Portfolio theory
- Equity and interest rate derivatives, including exotics
- Credit-risk products
Some quants will specialize in specific products, such as commodities, foreign exchange (Forex) or asset-backed securities.
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 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. A majority of the work is also realized in Python, as scripting-type languages are good for running lots of data and multiple scenarios.
Education and Certifications
Most firms look for at least a master's degree or preferably a Ph.D. 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 the Chartered Financial Analyst (CFA) designation likely wouldn't add much value to a prospective quant's resume, one that may is the Certificate in Quantitative Finance (CQF)—which you may earn globally via distance learning in a six-month intensive program.
The Right Career for You?
Clearly, you need to have "the right stuff" 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 while under considerable pressure—which only a select few can do.
But that also doesn't mean that everyone who has the ability to be a quant should become one. The financial problems that quants face are very abstract and narrow. Unlike fundamental or qualitative analysts, quants don't read annual reports, meet with management, visit operations, prepare roadshows, or talk to shareholders. 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 career issue to consider is that many Ph.D. quants that come from academic environments find that they miss the research environment. Instead of being able to study a problem for several months, when supporting a trading desk you need to find solutions in days or hours. This usually precludes making any breakthroughs in the field.
Success in quantitative analysis is largely based on knowledge, talent, merit, and dedication instead of the ability to sell, network or play politics. The quants who work in the field are there because they can do the job well—an environment that many find remarkably refreshing.