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Since hedge funds and a lot of trading jobs today are dominated by quants do the people with an econ/finance deree without or little programming knowledge have any potential in the HF/Trading industry?
A lot of long/short equity funds are also hiring quants from what i have been reading. Are the days where an Einhorn or an Ackman could make it big over?

I really need to make a decision whether I move in the PE or HF path. Looks like PE seems more welcoming. xD

Comments (135)

  • freemarketeer's picture

    knowledgeispower wrote:
    Since hedge funds and a lot of trading jobs today are dominated by quants do the people with an econ/finance deree without or little programming knowledge have any potential in the HF/Trading industry?
    A lot of long/short equity funds are also hiring quants from what i have been reading. Are the days where an Einhorn or an Ackman could make it big over?

    I really need to make a decision whether I move in the PE or HF path. Looks like PE seems more welcoming. xD

    Don't be so short-term focused. The quant field remains in growth mode while the other strategies have been stagnant/declining as they struggled with returns. There has been a shift recently (I think last year, a lot of quant funds underperformed), with value strategies getting much more attention. Funds allocation seems to follow a retrospective cycle, getting into whatever just had the best returns.

  • TraderDaily's picture

    Also remember that during the crash, tons of hedge funds failed using quant/automated strategies precisely because those strategies only work within certain preset parameters, but when a black swan event takes place you still need a human being to be able to navigate nasty waters.

  • IlliniProgrammer's picture

    Depends on whether you work for a Renaissance, Fortress, Citadel, or DE Shaw, or if you work for one of the more boutique funds.

    The large funds tend to be running stat arb and HFT, and yes that requires some programming skill and quant background.

    The smaller shops tend to involve MBAs randomly stepping out the room for a few minutes with their cell phones, and walking back in with a bizarre announcement on how some biotech stock is the next big hot ticket, buying, and watching the firm get FDA approval for something three days later.

    PE has another 5-10 years before this hits them too, but turnarounds really follow a pretty straightforward strategy- cut costs while preserving the effectiveness of R&D and the customer experience. This is something that, quite frankly, a quant with an engineering background should be doing- largely using machine learning algorithms- rather than an MBA trying to scrap out an L1 regression.

    The bottom line is that except in a few cases, computers are now better than humans at investing. The hedge funds have replicated the finance undergrad/MBA and made a bunch of copies of him, and that is doing a lot of the short-term trading now. There is still room for normal people, but probably not in the same traditional roles. Welcome to Skynet.

  • In reply to IlliniProgrammer
    knowledgeispower's picture

    Thanks for the input. I was wondering how long it would take for a person who cant write code at all to learn it up? I have a pretty strong math background. I still have 2 more yrs to graduate. Is it worth taking the effort to learn up programming or should I just stick to what I know and use it well?

  • In reply to IlliniProgrammer
    DBCooper's picture

    IlliniProgrammer wrote:
    Depends on whether you work for a Renaissance, Fortress, Citadel, or DE Shaw, or if you work for one of the more boutique funds.

    The large funds tend to be running stat arb and HFT, and yes that requires some programming skill and quant background.

    The smaller shops tend to involve MBAs randomly stepping out the room for a few minutes with their cell phones, and walking back in with a bizarre announcement on how some biotech stock is the next big hot ticket, buying, and watching the firm get FDA approval for something three days later.

    PE has another 5-10 years before this hits them too, but turnarounds really follow a pretty straightforward strategy- cut costs while preserving the effectiveness of R&D and the customer experience. This is something that, quite frankly, a quant with an engineering background should be doing- largely using machine learning algorithms- rather than an MBA trying to scrap out an L1 regression.

    The bottom line is that except in a few cases, computers are now better than humans at investing. The hedge funds have replicated the finance undergrad/MBA and made a bunch of copies of him, and that is doing a lot of the short-term trading now. There is still room for normal people, but probably not in the same traditional roles. Welcome to Skynet.

    I foresee a more quantitative focus in analyzing bigger data sets in PE. There are going to be more software vendors that offer business analytic software that utilizes machine learning. I doubt you will need to code C++; a user friendly GUI will likely make much of this type of analysis open to more people.

    Isn't that the idea behind software like Palantir - to make high level analysis simple and intuitive?

    Please don't quote Patrick Bateman.

  • In reply to IlliniProgrammer
    SirTradesaLot's picture

    IlliniProgrammer wrote:
    The smaller shops tend to involve MBAs randomly stepping out the room for a few minutes with their cell phones, and walking back in with a bizarre announcement on how some biotech stock is the next big hot ticket, buying, and watching the firm get FDA approval for something three days later.

    You're kidding, right? Right?

    adapt or die wrote:
    What would P.T. Barnum say about you?

    MY BLOG

  • In reply to IlliniProgrammer
    DontMakeMeShortYou's picture

    IlliniProgrammer wrote:
    Depends on whether you work for a Renaissance, Fortress, Citadel, or DE Shaw, or if you work for one of the more boutique funds.

    The large funds tend to be running stat arb and HFT, and yes that requires some programming skill and quant background.

    The smaller shops tend to involve MBAs randomly stepping out the room for a few minutes with their cell phones, and walking back in with a bizarre announcement on how some biotech stock is the next big hot ticket, buying, and watching the firm get FDA approval for something three days later.

    PE has another 5-10 years before this hits them too, but turnarounds really follow a pretty straightforward strategy- cut costs while preserving the effectiveness of R&D and the customer experience. This is something that, quite frankly, a quant with an engineering background should be doing- largely using machine learning algorithms- rather than an MBA trying to scrap out an L1 regression.

    The bottom line is that except in a few cases, computers are now better than humans at investing. The hedge funds have replicated the finance undergrad/MBA and made a bunch of copies of him, and that is doing a lot of the short-term trading now. There is still room for normal people, but probably not in the same traditional roles. Welcome to Skynet.

    You have great advice on saving money, but should probably stray from advising anyone on hedge funds, because you're spreading misinformation. Most small funds aren't the types of chop shops you described, nor do they necessarily hire MBAs. In fact, MBAs are typically looked down on at most HFs. Furthermore, most large shops aren't quant-focused. Even when it comes to "sophisticated" large shops, the hedging they do is actually rather simplistic.

    No, computers aren't better than humans at investing. They're better at scalping, but that's about it. Outside of a few exceptions, most quant funds do NOT succeed. Unfortunately, I can't provide data on the success rate of quants vs. human-managed shops, but suffice it to say that out of the top 25 performing funds each year, the vast majority tend to be human-controlled.

  • Ricqles's picture

    there are plenty of l/s equity/credit guys employing fundamental analysis to generate returns. I don't know what you are talking about in terms of those guys having no place in the hf world.

  • Schumpeter's picture

    knowledgeispower wrote:
    Since hedge funds and a lot of trading jobs today are dominated by quants do the people with an econ/finance deree without or little programming knowledge have any potential in the HF/Trading industry?
    A lot of long/short equity funds are also hiring quants from what i have been reading. Are the days where an Einhorn or an Ackman could make it big over?

    I really need to make a decision whether I move in the PE or HF path. Looks like PE seems more welcoming. xD

    Having quantitative skills is definitely useful (if not required), but don't drink too much of the quant kool aid...

    Computers are great at automating relatively simple tasks and executing them very quickly. That's basically what the high-frequency trading/statistical arbitrage firms do: they train software to do some simple arbitrage, using historical data.

    But software is completely useless when it comes to interpreting new and complex information. Yes, some long/short equity funds are indeed hiring quants to help the analysts crunch numbers. But it doesn't mean that quants are making the investment decisions.

  • jktecon's picture

    I really think the future is bright for a dynamic programmer/mathematician/econ&finance guy.

    Look, the fact is that technology appears to follow an exponential growth function and if you want to be in the most competitive field then guess what....you need to be competitive.

    Speaking as a math/econ&finance guy with only a small amount of programming guess what I'm doing now...Learning programming. It is a bit of an exaggeration to think that the world will go completely to straight HFT/Quant traders who have no knowledge of markets. I really think it is healthy arbitrage right now forcing markets to be much more accurate.

    How bullshit is it to hear a finance guy saying a price will go up because the company normally trades at some multiple of its ebitda...That shit is dead. Those people were idiots. I want to hear there is a 65% probability that the price goes up by 10-15% using current macro/industry/company metrics. a computer calculates all this in polynomial time (CS people can correct me if im wrong). And given that probability and our risk tolerance this is the amount that should be put into play to keep risk levels steady.

    Its a new time now, embrace the fact that the meritocracy of trading has become more efficient. Market corrections are faster and more accurate meaning the probability of huge swings should decline. All we have to worry about is the black swan events which should be more effectively modeled with jump diffusion models.

    Our economic models are converging to match the models that traders price with and risk levels are being calculated more effectively .Chances are we laugh at the days that we used to endure days of 3% swings in the s&p.

  • Schumpeter's picture

    Those two posts by IP and jktecon are the perfect, crystal-clear example of why smart analysts who look at the big picture will always be able to make money. Most nerds have so much hubris that they usually run full-speed into thick brick walls (do I really need to mention the gigantic failures of the smartest guys in the room again?)

  • DBCooper's picture

    No one answered my post. Why programming? I mean I certainly understand the applicability now and its use, but it is not a panacea for financial analysts. As data analysis evolves there will be more off the shelf tools to conduct high level analysis. It's like the early days of computers, why pull up a command prompt when you can click on an icon.

    With the exponential curve of technology...do you think a generalist who has taken some programming courses will be able to construct something useful? Best of breed programmers will focus on their niche and join their work together.

    It's like way back in the day when your barber was your surgeon/doctor...

    Please don't quote Patrick Bateman.

  • Schumpeter's picture

    Well, there's programming and programming. Knowing some VBA, or even some Python or R can be quite useful for many data analysis tasks, and it's not that hard.

    Knowing C++, advanced algorithms and the like is overkill for most people working in finance.

  • jktecon's picture

    Schumpeter seems to share my logic on the importance of programming for future business people. No one is saying you need to learn to program highly efficient algorithms in c++. And certainly no one called it a cure-all so IDK where you got those sentiments.

    I am advocating that you understand the way a computer operates. Most importantly no human being in the 21st century should be unaware of a basic do,while / for loop. Even if the computer becomes completely able to do what you want it to because of better operating systems you will likely still need these basic understandings.

    Knowledge of stacks, queues, lists, linked lists and the like will probably be reserved for hardened professionals as it is now, but as a society I do believe most people allow themselves to be handicapped by the computer.

    The shear fact that you think you are competing against arguably the greatest tool mankind has ever devised is a problem. Understand the machine and you will see its beauty, It is an efficient communicator. Needless to say a financial analyst who has abilities with VBA/excel is an asset.

    AND YOU WON'T KNOW WHAT YOU CAN DO UNTIL YOU TRY IT! We don't know what goes on in your office/what tools people use/how they look at it. Programming is not as hard as you are probably making it in your mind. The first 10 hours may be arduous but from there it becomes fun. Build slowly, it's like learning to write an essay, but keep this in mind. If you reach even a third grade literacy rate, you will be considered a genius.

  • IlliniProgrammer's picture

    Fair enough guys. That is my view of the role MBAs and the well connected but otherwise incompetent often play in hedge funds. At the larger funds there aren't that many MBAs, so the people claiming MBAs and ordinary people with good work ethics and some combination of eliteness and people skills are all over hedge funds must be at the smaller shops.

  • In reply to Schumpeter
    IlliniProgrammer's picture

    Schumpeter wrote:
    Well, there's programming and programming. Knowing some VBA, or even some Python or R can be quite useful for many data analysis tasks, and it's not that hard.

    Knowing C++, advanced algorithms and the like is overkill for most people working in finance.


    I disagree, somewhat. For a typical financier, even one at an investment bank, it's overkill to expect them to know algorithms perfectly.

    But the truth is that good algorithms can be worth millions in finance and on the buy side that gets reflected a bit better.

  • In reply to Schumpeter
    knowledgeispower's picture

    Thanks for the input. So now the question is, if someone does not have a programing backgroud does he have to go for an MFE maybe? Or all he needs to do is lern up enough programming (self taught?) to understand what the "quant" in his firm doing or saying to him?

  • knowledgeispower's picture

    *learn
    *is doing

  • jktecon's picture

    An MFE would be complete overkill and you most likely don't have the background if you are making these kinds of arguments, so it would not be worth it. Learn programming on your own.

    First look at some cool initial programs that people have done that inspire you. Figure out easy problems you have that you think a computer could help you with (e.g. solutions of linear equations, checking dv01 calculations, value of a company using different ratios and keeping other things constant). Everything I listed there can be done with fairly straightforward algorithms that you could probably learn in the next 24 hours.

    Look for inspiration first. You don't have to take our word for how useful programming is. Once you have the inspiration you are well on the road to becoming a programmer.

  • jktecon's picture

    Oh and congratulations on looking into becoming a 21st century businessman.

  • In reply to jktecon
    knowledgeispower's picture

    Haha.Thanks for the advice :)

    And btw is programming going to be a prerequisite for an entry even in a long/short equity fund in the years to come? Or going by the glut of MFE grads will people with a Graham/Buffet style approach have an edge?

    Noob question, I know. But I need as much iinput as I can. Thanks.

  • In reply to IlliniProgrammer
    Gray Fox's picture

    IlliniProgrammer wrote:
    Depends on whether you work for a Renaissance, Fortress, Citadel, or DE Shaw, or if you work for one of the more boutique funds.

    The large funds tend to be running stat arb and HFT, and yes that requires some programming skill and quant background.

    The smaller shops tend to involve MBAs randomly stepping out the room for a few minutes with their cell phones, and walking back in with a bizarre announcement on how some biotech stock is the next big hot ticket, buying, and watching the firm get FDA approval for something three days later.

    PE has another 5-10 years before this hits them too, but turnarounds really follow a pretty straightforward strategy- cut costs while preserving the effectiveness of R&D and the customer experience. This is something that, quite frankly, a quant with an engineering background should be doing- largely using machine learning algorithms- rather than an MBA trying to scrap out an L1 regression.

    The bottom line is that except in a few cases, computers are now better than humans at investing. The hedge funds have replicated the finance undergrad/MBA and made a bunch of copies of him, and that is doing a lot of the short-term trading now. There is still room for normal people, but probably not in the same traditional roles. Welcome to Skynet.

    I have said almost nothing negative on these forums for over two years now but this is just ridiculous. Your holier than thou rants about drinking PBR on the PATH train, living in a Jersey City apartment, and one day living off 40k a year on a farm in Iowa are probably a good counterbalance to the college kids who think Wall Street really is just dressing fancy, cocaine, and blow jobs from hookers in limousines. At the same time, finding some kind of superiority in the fact your wallet could turn a lump of coal into a Tiffany diamond is annoying, and the fact that you are in a MSF program makes you feel like you have a better understanding of allocating capital than people who have 50+ year track records doing things a "traditional way" is blatant narcissism.

    There are lots of ways to make money. I acknowledge that the people at RenTech are brilliant, and they deserve to charge exorbitant fees. Despite this, I would trust my capital to Klarman, Einhorn, or Buffet in a heartbeat over any quant fund. The guys at LTCM were the absolute best, multiple Nobel prize winners, the supposed best risk management in the business, etc. Baupost and Berkshire and may never have years where they are up 50% going forward, but barring a nuclear disaster I'm positive I'll never wake up one morning and see BRK quoted at 0, or that Seth Klarman will have to write a letter to his investors saying that he blew up. Finance at the end of the day boils down into two really simple things, buying a piece of something or loaning money, with an incredible amount of human, industry specific, and macroeconomic factors converging. There are many attributes and risks that can't be modeled. How would you model the fact that Aubrey McLendon is a scumbag who secretly had favorable financing terms to invest in the very best wells after initial output data was collected but not yet published? How would you model that Lehman's disclosures and footnotes were shadier than financial statements of a Camden pawn shop? How does a computer recognize that a business has incredible pricing power because the customer base has a largely intangible attachment?

    Do you really think that an engineer with degrees in Math/CS/Physics etc could a better private equity operator than Schwarzman or Kravis? Buying a controlling stake in companies often requires having to deal with executives that are very strong-willed and resistant to change. Is the quant super hero going to soothe the ego of the CEO, negotiate with the labor union, identify which customers to target, which ones to abandon, work with bankers to sell the thing in 5 years, etc. I'll bet every nickel I have that PE will not be dismantled and replaced by a bunch of guys with quant backgrounds. It is an incredibly people intensive business. I'd fucking love to hear some quant guy tell Carl Icahn he could do a better job of turning around a business than him. The guy probably can't even spell heteroskedasticity, but he was up 35% in 2011 and over 20% last year (these are off the top of my head and I was out awhile tonight).

    Regarding hedge funds, there are room for quant guys and traditional shops that care about things like quality of management and their incentives, the moat of the business model, pricing power, and a logical explanation for favorable industry economics. If you think that "traditional" hedge funds operate base on the material taught in MBA classes you are sorely mistaken. I've never built a dividend discount model, calculated an F score, utilized Treynor-Black or Black Litterman, modeled an efficient frontier etc in my time at a hedge fund.

    I hope you find a job you really like after grad school and make a ton of money figuring out how to use computers to predict the prices of esoteric financial instruments. You are 100%, unequivocally wrong in your quoted assessment though.

  • jktecon's picture

    You have to find an edge. We are telling you to use the most useful tool in finance outside your brain (aka the computer) to help you in that endgame goal.

    The good MFE grads will find their edge, the bad ones will be glorified IT professionals at best. The good finance guy who knows some econ math and programming will be an asset when he has ideas. The bad finance guy who went to school still thinking that Rambo is the quintessential trading personality will probably be a bank teller (or an investment banker if he went to harvard...same difference).

    My opinion is that there is no way that an educated businessman ever evaluates the guy who can program (even if slightly inferior otherwise but quite close in terms of education and work ethic) lower than a straight finance jock. You still need personality though so don't ever think that programming is now the end all. I and most other people here, I believe, are advocating a balance. Learn to speak, how to make friends, a decent amount of math, some programming, the finance and the economics, and learn how to lose but still keep the determination to be a winner.

    The 21st century businessman...He's like everything else in this new renaissance, look at the old, learn from it but do not complacently try to fit the old mold...your goal is to look like you've broken it completely while still actually adhering to its core doctrines(they haven't changed throughout human history).

  • In reply to Gray Fox
    knowledgeispower's picture

    Gray Fox wrote:
    IlliniProgrammer wrote:
    Depends on whether you work for a Renaissance, Fortress, Citadel, or DE Shaw, or if you work for one of the more boutique funds.

    The large funds tend to be running stat arb and HFT, and yes that requires some programming skill and quant background.

    The smaller shops tend to involve MBAs randomly stepping out the room for a few minutes with their cell phones, and walking back in with a bizarre announcement on how some biotech stock is the next big hot ticket, buying, and watching the firm get FDA approval for something three days later.

    PE has another 5-10 years before this hits them too, but turnarounds really follow a pretty straightforward strategy- cut costs while preserving the effectiveness of R&D and the customer experience. This is something that, quite frankly, a quant with an engineering background should be doing- largely using machine learning algorithms- rather than an MBA trying to scrap out an L1 regression.

    The bottom line is that except in a few cases, computers are now better than humans at investing. The hedge funds have replicated the finance undergrad/MBA and made a bunch of copies of him, and that is doing a lot of the short-term trading now. There is still room for normal people, but probably not in the same traditional roles. Welcome to Skynet.

    I have said almost nothing negative on these forums for over two years now but this is just ridiculous. Your holier than thou rants about drinking PBR on the PATH train, living in a Jersey City apartment, and one day living off 40k a year on a farm in Iowa are probably a good counterbalance to the college kids who think Wall Street really is just dressing fancy, cocaine, and blow jobs from hookers in limousines. At the same time, finding some kind of superiority in the fact your wallet could turn a lump of coal into a Tiffany diamond is annoying, and the fact that you are in a MSF program makes you feel like you have a better understanding of allocating capital than people who have 50+ year track records doing things a "traditional way" is blatant narcissism.

    There are lots of ways to make money. I acknowledge that the people at RenTech are brilliant, and they deserve to charge exorbitant fees. Despite this, I would trust my capital to Klarman, Einhorn, or Buffet in a heartbeat over any quant fund. The guys at LTCM were the absolute best, multiple Nobel prize winners, the supposed best risk management in the business, etc. Baupost and Berkshire and may never have years where they are up 50% going forward, but barring a nuclear disaster I'm positive I'll never wake up one morning and see BRK quoted at 0, or that Seth Klarman will have to write a letter to his investors saying that he blew up. Finance at the end of the day boils down into two really simple things, buying a piece of something or loaning money, with an incredible amount of human, industry specific, and macroeconomic factors converging. There are many attributes and risks that can't be modeled. How would you model the fact that Aubrey McLendon is a scumbag who secretly had favorable financing terms to invest in the very best wells after initial output data was collected but not yet published? How would you model that Lehman's disclosures and footnotes were shadier than financial statements of a Camden pawn shop? How does a computer recognize that a business has incredible pricing power because the customer base has a largely intangible attachment?

    Do you really think that an engineer with degrees in Math/CS/Physics etc could a better private equity operator than Schwarzman or Kravis? Buying a controlling stake in companies often requires having to deal with executives that are very strong-willed and resistant to change. Is the quant super hero going to soothe the ego of the CEO, negotiate with the labor union, identify which customers to target, which ones to abandon, work with bankers to sell the thing in 5 years, etc. I'll bet every nickel I have that PE will not be dismantled and replaced by a bunch of guys with quant backgrounds. It is an incredibly people intensive business. I'd fucking love to hear some quant guy tell Carl Icahn he could do a better job of turning around a business than him. The guy probably can't even spell heteroskedasticity, but he was up 35% in 2011 and over 20% last year (these are off the top of my head and I was out awhile tonight).

    Regarding hedge funds, there are room for quant guys and traditional shops that care about things like quality of management and their incentives, the moat of the business model, pricing power, and a logical explanation for favorable industry economics. If you think that "traditional" hedge funds operate base on the material taught in MBA classes you are sorely mistaken. I've never built a dividend discount model, calculated an F score, utilized Treynor-Black or Black Litterman, modeled an efficient frontier etc in my time at a hedge fund.

    I hope you find a job you really like after grad school and make a ton of money figuring out how to use computers to predict the prices of esoteric financial instruments. You are 100%, unequivocally wrong in your quoted assessment though.

    \\

    What a beauty.

  • John Daggett's picture

    Look to global macro or activist HFs.

  • In reply to Gray Fox
    TraderDaily's picture

    Gray Fox wrote:
    IlliniProgrammer wrote:
    Depends on whether you work for a Renaissance, Fortress, Citadel, or DE Shaw, or if you work for one of the more boutique funds.

    The large funds tend to be running stat arb and HFT, and yes that requires some programming skill and quant background.

    The smaller shops tend to involve MBAs randomly stepping out the room for a few minutes with their cell phones, and walking back in with a bizarre announcement on how some biotech stock is the next big hot ticket, buying, and watching the firm get FDA approval for something three days later.

    PE has another 5-10 years before this hits them too, but turnarounds really follow a pretty straightforward strategy- cut costs while preserving the effectiveness of R&D and the customer experience. This is something that, quite frankly, a quant with an engineering background should be doing- largely using machine learning algorithms- rather than an MBA trying to scrap out an L1 regression.

    The bottom line is that except in a few cases, computers are now better than humans at investing. The hedge funds have replicated the finance undergrad/MBA and made a bunch of copies of him, and that is doing a lot of the short-term trading now. There is still room for normal people, but probably not in the same traditional roles. Welcome to Skynet.

    I have said almost nothing negative on these forums for over two years now but this is just ridiculous. Your holier than thou rants about drinking PBR on the PATH train, living in a Jersey City apartment, and one day living off 40k a year on a farm in Iowa are probably a good counterbalance to the college kids who think Wall Street really is just dressing fancy, cocaine, and blow jobs from hookers in limousines. At the same time, finding some kind of superiority in the fact your wallet could turn a lump of coal into a Tiffany diamond is annoying, and the fact that you are in a MSF program makes you feel like you have a better understanding of allocating capital than people who have 50+ year track records doing things a "traditional way" is blatant narcissism.

    There are lots of ways to make money. I acknowledge that the people at RenTech are brilliant, and they deserve to charge exorbitant fees. Despite this, I would trust my capital to Klarman, Einhorn, or Buffet in a heartbeat over any quant fund. The guys at LTCM were the absolute best, multiple Nobel prize winners, the supposed best risk management in the business, etc. Baupost and Berkshire and may never have years where they are up 50% going forward, but barring a nuclear disaster I'm positive I'll never wake up one morning and see BRK quoted at 0, or that Seth Klarman will have to write a letter to his investors saying that he blew up. Finance at the end of the day boils down into two really simple things, buying a piece of something or loaning money, with an incredible amount of human, industry specific, and macroeconomic factors converging. There are many attributes and risks that can't be modeled. How would you model the fact that Aubrey McLendon is a scumbag who secretly had favorable financing terms to invest in the very best wells after initial output data was collected but not yet published? How would you model that Lehman's disclosures and footnotes were shadier than financial statements of a Camden pawn shop? How does a computer recognize that a business has incredible pricing power because the customer base has a largely intangible attachment?

    Do you really think that an engineer with degrees in Math/CS/Physics etc could a better private equity operator than Schwarzman or Kravis? Buying a controlling stake in companies often requires having to deal with executives that are very strong-willed and resistant to change. Is the quant super hero going to soothe the ego of the CEO, negotiate with the labor union, identify which customers to target, which ones to abandon, work with bankers to sell the thing in 5 years, etc. I'll bet every nickel I have that PE will not be dismantled and replaced by a bunch of guys with quant backgrounds. It is an incredibly people intensive business. I'd fucking love to hear some quant guy tell Carl Icahn he could do a better job of turning around a business than him. The guy probably can't even spell heteroskedasticity, but he was up 35% in 2011 and over 20% last year (these are off the top of my head and I was out awhile tonight).

    Regarding hedge funds, there are room for quant guys and traditional shops that care about things like quality of management and their incentives, the moat of the business model, pricing power, and a logical explanation for favorable industry economics. If you think that "traditional" hedge funds operate base on the material taught in MBA classes you are sorely mistaken. I've never built a dividend discount model, calculated an F score, utilized Treynor-Black or Black Litterman, modeled an efficient frontier etc in my time at a hedge fund.

    I hope you find a job you really like after grad school and make a ton of money figuring out how to use computers to predict the prices of esoteric financial instruments. You are 100%, unequivocally wrong in your quoted assessment though.

    Brilliant post!!! +SB!!!

  • In reply to SirTradesaLot
    IlliniProgrammer's picture

    SirTradesaLot wrote:
    IlliniProgrammer wrote:
    The large funds tend to be running stat arb and HFT, and yes that requires some programming skill and quant background.

    Most of these funds are not stat arb or HFT funds.
    http://www.thehedgefundjournal.com/sites/default/f...
    Bridgewater, JPAM, GSAM, DE Shaw, Citadel, RennTech all have large stat arb groups. And twenty years ago the rankings were completely dominated by more traditional hedge funds.

    I'm not saying they've completely taken over the AUM yet, but you can see the trend.

  • IlliniProgrammer's picture

    Quote:
    Do you really think that an engineer with degrees in Math/CS/Physics etc could a better private equity operator than Schwarzman or Kravis?

    Do you think electronic execution can really beat a brilliant floor broker?

    People believe what they want to believe, and it's tough to believe that the machines are better at making decisions than humans when it comes to finance. We've had a lot of advances in machine learning over the past couple years. It's also a lot more cost effective because machines don't need bonuses or salaries for that matter.

    Oh well, I caught more flack two years ago for saying that the trend was probably going to be the same or lower comps and fewer people employed in banking and that there was nothing wrong with saving $20 on a pair of jeans by walking 500 feet. Nobody wanted to believe that comps would continue to remain lower than 2007/2008, but look what happened. Of course, this is a decade-long trend, not a two year trend.

  • jktecon's picture

    IP please give up. People want to remain idiots and the people who choose to embrace the math/CS while building on everything else will simply crush these fools.

    Gray Fox's argument was reducio ad absurdum. The amount of leverage LTCM was operating with, was crazy. It doesn't matter who you are if you play by that style then crazy things can happen.

    All the people you listed are old as fuck, I hope you realize. Everyone who is coming into the industry now will be competing with all around businessmen who do know the math and programming on top of understanding EBITDA and P/E. You think you're still in a world where quants hold physics PHD's. You're not, and I can guarantee you that if you hold this hard line mindset of quant vs. businessman you will be the loser.

  • In reply to IlliniProgrammer
    Schumpeter's picture

    IlliniProgrammer wrote:

    People believe what they want to believe, and it's tough to believe that the machines are better at making decisions than humans when it comes to finance. We've had a lot of advances in machine learning over the past couple years. It's also a lot more cost effective because machines don't need bonuses or salaries for that matter.

    Machine learning is OK if you have lots of historical data and don't expect too many structural breaks. So, yes, it's great for some forms of arbitrage like statistical arbitrage. But it will not replace human investors anytime soon...

    History repeats itself. In the eighties you could hear the praise for expert systems, how they were going to replace doctors, etc. Same hype about neural networks.

    It's funny how some engineers are pretty smart but completely disregard the tremendous power of the human brain compared to the machine.

  • In reply to IlliniProgrammer
    Schumpeter's picture

    IlliniProgrammer wrote:
    I'm not saying they've completely taken over the AUM yet, but you can see the trend.

    Yet?!? Where do you think this trend is going to stop, exactly?

    I'd like to see a market where everyone is doing statistical arbitrage...

  • In reply to Schumpeter
    IlliniProgrammer's picture

    Schumpeter wrote:

    It's funny how some engineers are pretty smart but completely disregard the tremendous power of the human brain compared to the machine.

    You have a good point. However, the human brain doesn't scale well and is very expensive.

    Many of the far-out predictions made in 1980 about machine learning- facial recognition, driverless cars, research assistance (IBM Watson)- have all come true. Heck, if you have an IPhone, you've met Siri. This stuff was science fiction just fifteen years ago, but it's true today because of better algorithms and better computing infrastructure.

    It isn't implausible to have machine learning replace human beings for medium term (two weeks to six months) trading strategies.

  • jktecon's picture

    And quantum computing will be real in the next 15 years, so I suggest you befriend these computers before they start telling you how to live your life.

    And I would argue that most computer engineers/physicists/psychologists in the field of machine learning/cognition/neural networks are some of the men who respect the human mind to the utmost. Think about the real goal of machine learning/AI....It's to model the human thought process. How do you do that? By understanding the human mind. How can you say these people don't appreciate it when that is what they spend their time analyzing and attempting to mimic.

    We all recognize the complexity of the brain, I'm under the impression it will never be fully understood under a logical premise. An agent under the logic of a system can not truly understand or appreciate the system since his logic will always become cyclic. This doesn't take away from the fact, however, that a person who knows how to use a computer is by all means superior to a man who does not.

    A neanderthal who could use fire was more likely to survive than one who could not.

    TLDR;to quote Beyonce:I'm a survivor, I ain't gone give up, I ain't gon' stop up, keep on surviving

  • In reply to jktecon
    tiger2012's picture

    jktecon wrote:
    IP please give up. People want to remain idiots and the people who choose to embrace the math/CS while building on everything else will simply crush these fools.

    Gray Fox's argument was reducio ad absurdum. The amount of leverage LTCM was operating with, was crazy. It doesn't matter who you are if you play by that style then crazy things can happen.

    All the people you listed are old as fuck, I hope you realize. Everyone who is coming into the industry now will be competing with all around businessmen who do know the math and programming on top of understanding EBITDA and P/E. You think you're still in a world where quants hold physics PHD's. You're not, and I can guarantee you that if you hold this hard line mindset of quant vs. businessman you will be the loser.

    Run some money first then come back and talk. Respect your elders.

  • In reply to tiger2012
    IlliniProgrammer's picture

    tiger2012 wrote:

    Run some money first then come back and talk. Respect your elders.


    How old are you?

  • In reply to IlliniProgrammer
    tiger2012's picture

    IlliniProgrammer wrote:
    tiger2012 wrote:

    Run some money first then come back and talk. Respect your elders.


    How old are you?

    Old enough to know there is no point in bashing legendary investors. They got there for a reason. This kid doesn't seem to understand the breadth of room for different strategies in the market.

  • In reply to tiger2012
    IlliniProgrammer's picture

    tiger2012 wrote:

    Old enough to know there is no point in bashing legendary investors. They got there for a reason. This kid doesn't seem to understand the breadth of room for different strategies in the market.


    Since you dodged my question, I'm guessing you're still in college. Weren't you looking for a job at a hedge fund?

    I'm old enough to know that strategies and regimes change.

    I'm still old enough to remember the CME when there were actual traders on the floor filling out paper tickets. Those people now no longer work as traders at least on the floor of the CME.

    Nowadays, most short-term trading decisions in the most liquid markets are made by algorithm. And the holding periods for these algorithms has gotten increasingly longer.

    The advantage of age is experience, but the disadvantage of age is that you get set in your ways and you make the assumption that things that worked twenty years ago still work.

    It's not going to happen overnight, but eventually, liquid investments will be managed by algorithm. It's a natural consequence of HFT.

    I don't think anyone is bashing legendary investors, but it is important to note that their story won't necessarily repeat. In fact, I am arguing that it probably won't. What worked in 1983 won't necessarily work in 2013 and what works today may not work in 2020.

  • Kenny_Powers_CFA's picture

    IlliniProgrammer, your initial comment leads me to believe you don't have a very accurate understanding of the breakdown of the hedge fund universe in terms of strategy or AUM. Your cherry-picked selection of major funds includes only one (Renaissance) that's exclusively quant-driven, and at least one that is absolutely NOT materially quant-focused (Fortress). DE Shaw and Citadel have significant non-quant, discretionary fundamental-driven businesses.

    There have been many great comebacks throughout history. Jesus was dead but then came back as an all-powerful God-Zombie.

  • In reply to IlliniProgrammer
    tiger2012's picture

    IlliniProgrammer wrote:
    tiger2012 wrote:

    Old enough to know there is no point in bashing legendary investors. They got there for a reason. This kid doesn't seem to understand the breadth of room for different strategies in the market.


    Since you dodged my question, I'm guessing you're still in college. Weren't you looking for a job at a hedge fund?

    I'm old enough to know that strategies and regimes change.

    I'm still old enough to remember the CME when there were actual traders on the floor filling out paper tickets. Those people now no longer work as traders at least on the floor of the CME.

    Nowadays, most short-term trading decisions in the most liquid markets are made by algorithm. And the holding periods for these algorithms has gotten increasingly longer.

    The advantage of age is experience, but the disadvantage of age is that you get set in your ways and you make the assumption that things that worked twenty years ago still work.

    It's not going to happen overnight, but eventually, liquid investments will be managed by algorithm. It's a natural consequence of HFT.

    I don't think anyone is bashing legendary investors, but it is important to note that their story won't necessarily repeat. In fact, I am arguing that it probably won't. What worked in 1983 won't necessarily work in 2013 and what works today may not work in 2020.

    I'm a couple years out of school working as a research associate. Yes I was/am/are/always looking to go buy side depending on it being a good shop/opportunity.

    No doubt algos are great for liquidity, short-term periods, and even long-term periods. But there will always be a lot of $ if not majority of $ run on fundamentals. Algos at the end of the day are just extensions of people.

    When algos can sniff through an 8-K and put it together that one of the major holders is a forced seller bc they are ceo of another publicly traded company that is getting hammered by einhorn, then i'll be impressed. That should be enough info for a human to figure out what I'm talking about.

  • tiger2012's picture

    IlliniProgrammer, would love to be back in college. Real life's a bitch.

  • tempaccount's picture

    lol at the quant trolls. Nice Friday entertainment.

    Just because a company is listed and has a price history doesn't mean an algorithm can determine its value. All the data you can input - financial statements, past prices, news reports, etc. aren't always reliable. There will always be a role for judgement in capital allocation. Arbitrageurs sometimes forget why the securities they're trading exist in the first place, to allocate capital to productive uses. As Schumpeter points out it would be impossible to have a market composed entirely of HFT. Can't happen. Won't happen. Someone has to actually invest.

  • SirTradesaLot's picture

    IP -- you realize that if everyone uses algos, they will cease to be effective because they generally interpret data and patterns in a similar manner and are prone to the same types of problems. The good algos are supposed to be taking advantage of human biases...if humans aren't there, they'll have to take advantage of the biases of other computers. Not so hot.

    What's funny is that everyone is prone to supporting whatever it is they're good at, whether it's quant or fundamental (it's human nature to have a self-serving bias). The reason I think GrayFox got a bunch of SBs and you got a bunch of MS is that he at least has some respect for the other side of the coin and you have none, even for guys that have been 100X more successful than you could even dream of. There are lots of ways to make money.

    Also, private equity (and especially venture capital) are the least likely areas to be 'quantified'. I don't know where you're going with that one.

    adapt or die wrote:
    What would P.T. Barnum say about you?

    MY BLOG

  • wallstreetballa's picture

    Love the debate and how certain some of the fundamental guys are in their abilities to "analyze" a company.

    Shows me the narrow mindedness from both the value investors and quants on this forum

  • In reply to SirTradesaLot
    jktecon's picture

    SirTradesaLot wrote:
    IP -- you realize that if everyone uses algos, they will cease to be effective because they generally interpret data and patterns in a similar manner and are prone to the same types of problems. The good algos are supposed to be taking advantage of human biases...if humans aren't there, they'll have to take advantage of the biases of other computers. Not so hot.

    What's funny is that everyone is prone to supporting whatever it is they're good at, whether it's quant or fundamental (it's human nature to have a self-serving bias). The reason I think GrayFox got a bunch of SBs and you got a bunch of MS is that he at least has some respect for the other side of the coin and you have none, even for guys that have been 100X more successful than you could even dream of. There are lots of ways to make money.

    Also, private equity (and especially venture capital) are the least likely areas to be 'quantified'. I don't know where you're going with that one.

    I want everyone to use the same algorithms/equations, this will stabilize markets. Volatility is always inefficiency, any decent economist knows this.

    Gray Fox got a bunch of SB's because there are so many retards who still think basic fundamental analysis is all you need for a future in profiting from these markets.

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