Finance vs Quantitative Finance

Hello, I am interested in both traditional investing(fundamental/qualitative techniques) and quantitative investing. I have heard many people say that fundamental investing is going to die and that quants are going to take over, I wanted to know if you guys think this is true and if I should focus more on developing my quant skills because in the future there will be very less traditional investing jobs. I also wanted to know if the quantitative finance degree from stevens leads to great quant research jobs at hedge funds or if it would be better to double major in finance and comp sci from Rutgers, thanks.

 

This is the impression I got from the recruiting cycle, where I spoke to a bunch of quants across a lot of hedge funds. Anyone who has industry experience should please chime in if there are inaccuracies, I don’t want to leave false information up or give bad advice.

The majority of these jobs are taken by PhDs, because the degree is evidence that you can do good research. Many hedge funds do hire quants out of undergrad, but the impression I got was that it’s very clear that the undergrads they do hire for research roles could definitely go to a good graduate school if they wanted to, i.e. they have a lot of indicators that they could do quality research/were excellent problem solvers. This could be papers in good journals, high GPA in graduate courses, medals in IMO/IOI, good Putnam score etc.

So I don’t think getting a great quant research gig is particularly viable out of undergrad unless you’re quite a strong (maybe top 1/3? top 1/4?) CS or math student in Harvard/MIT/Princeton etc, or a superstar (top few) student in say a top 30 school for those majors. I’ve never heard of an undergrad quant finance major getting hired into a top quant research role, it’s rare even for most quant finance masters to place there - Princeton’s MFin is the most selective and likely has the best placement, but only a small fraction of their graduates go to hedge funds.

So, here’s what I’d recommend if you’re to try and maximize the chance of getting a great quant research job at a hedge fund out of undergrad:

Go to Rutgers. Major in computer science or math (the finance isn’t useless, but I don’t think it warrants the time sink of a major if you want to be a quant). Try hard to land an internship at a top tech company within your first two summers. Then you’d have a very good shot at a quant dev or research internship at a fund in your final summer, at which point you have a non negligible chance of landing a quant research gig when you graduate.

 

Do you think that eventually, quants are going to lead to the death of fundamental investing? I am also trying to get into Princeton where I plan to double major in finance and comp sci if I get in. I also want to major in finance even though it may be seen as useless for becoming a quant since I also like distressed investing and am not sure which path I want to take yet (quant or distressed).

 

Can't speak too much re Rutgers exit opps, but the concern that Quants are eating away fundamental is vastly overplayed...

I think both will continue to exist for at least the next 50 years. Frankly I'm more worried about quants competing all the "systematizable" alpha away from each other, and the bulk of the remaining excess return will come from fundamental managers who deal in things like special situations. It is very hard to do quant for events where there is no comparable history to train algos on, or to do things like activism. Case in point, Carl Icahn is not at risk of being competed away by CS PhDs at Two Sigma (imo). Of course, quantitative analysis can still be helpful in these contexts, and many fundamental firms will have a use for someone who understands quant techniques like data analysis/portfolio construction/risk management. Vice versa, there will be increasing demand from quant firms to hire fundamental folks to do things like understanding vol skew around events.

My advice is that if you really like statistics and mathematical modeling, do quant and run a fully systematic portfolio of 1000+ names. If you akin yourself a sniper who prefers to deep-dive on a few situations/names/trends with high conviction, then go for fundamental (such as distressed or activist). This concentration has under-appreciated benefits: conditional on a huge return on a large AUM base, it is more likely that the firm is fundamental and nailed a few bets. But regardless, it will be increasingly useful to have skills from both worlds.

 

This is definitely the main concern. Within the workflow of systematic/quant strategies, the lowest hanging fruit gets picked first and unless you're the fastest, it's not even worth to attempt that. A spreadsheet rank ordering equity fundamentals used to be sufficient for a basic systematic strategy but nowadays the number and complexity of steps required to construct a robust and profitable strategy continually increasing. Formulating strategies in whole or in-part based on academic papers leads to strategy crowding and even more elimination of alpha. As a whole, the quant side of the industry will need to move to be both leaner (fewer, highly-qualified entities) and more specialized (movement into alternative data and different types of investments).
There certainly is some element of systematic logic to many discretionary investment decisions, the alpha from these will definitely continue to be eaten away as the tendrils of quant more effectively cover different corners of each market. There are certainly plenty of things that discretionary managers do that quant cannot replicate (at least in the next few decades, barring any unexpected advances in AI before then). Each side of the buy side will end up more specialized and the current overlaps that exist will slowly disappear (if they don't, firms will pay the price).

 

Generally agreed, and your analysis of quants is spot on. Imo the range of strategies and approaches employed by quants is less broad than that of discretionary folks, though of course I can't properly speak for all quants since I don't know what exactly the folks at RenTech, PDT, etc are doing.

The discretionary approach of finding company/industry-specific idiosyncrasies that aren't back-testable or easily coded in a numeric format is more resilient to the technological march of progress. When I worked at a discretionary HF I got the sense that the management/PMs were not really worried about their edges disappearing quickly (validated by solid returns this year from Citadel, Millennium, P72, etc), and that there are a lot of opportunities for expansion (VC, growth, PE, SPACs, EM). Maybe they are sheep that don't see their impending slaughter coming, but I think their core logic makes sense. Whereas in quant land, the feeling I get is that the business gets monotonically harder and harder each year with no signs of slowing down.

My hope is that many quants will become more willing to take quantitatively-driven bets with no/limited backtests, but as far as I can tell this remains to be seen. Ofc if you know any quants that don't rely on "proper" statistical rigor and clean data sets, and instead try to incorporate a deep fundamental understanding of business models, management dynamics, and industry trends, please pm me! 

 

Seeing a lot of semi accurate information in this thread - prop shops such as Jane Street, Citadel Securities, Optiver, Five Rings, Hudson River Trading, IMC, SIG, DRW, Akuna, and so on absolutely do hire undergrads for Quant Trader positions (though it’s more rare to be hired for the QR role it can still happen at some shops like HRT who hire undergrads to the Algo Dev position which is essentially Quant Research)

Hedge fund quants are a different story and are mostly phds but Citadel, Two Sigma, and DE Shaw hire a few exceptional undergrad quants each year (firms like RenTech pretty much do not).

These positions pay very well (in the range of 225-400 year 1 at the shops mentioned). That being said, these are pretty technical positions and not so easy to land. Typical majors for students entering the industry out of undergrad include Math, Computer Science, and Stats (pretty much no one studies Finance, so something to keep in mind when you decide what to study at Rutgers).

The quant finance path is very different from the typical IB -> PE -> HF or IB -> HF when getting in on the fundamental side so it’s really hard to compare the two - one has a higher technical bar to entry but I’d say getting into either position is pretty challenging. I don’t think quant is necessarily eating away at fundamental performance (Tiger Cubs are doing fine) and at least for prop shops, market making is an entirely different strat.

 
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I think it becomes much easier to understand if we drop the unnecessary name inflation (with “Quant” added to all the roles).

Fundamentally at prop shops (applies to quant hedge funds too, but hedge funds differ in that there are fewer traders and the role is typically execution focused, with the alpha coming from researchers), there are 3 main roles - researchers, traders, and devs:

1) (Quant) Researchers: The ‘quants.’ These are typically PhDs or exceptional undergrads/masters, though some shops are more open to undergrads and some aren’t. Interviews are a mix of stats, linear regression, coding, and probability puzzles. This role doesn’t really work on market hours like a trader and is charged with coming up with strategies (‘signals’) and working on creating and coding the models that traders will use to trade live. Much more coding but if you like doing research and posing hypotheses/using the scientific method, plus prefer a slower pace than trading, QR is the way. If you have a successful model, you can expect to do very well. Less job stability and security than being a dev, but more than being a trader (very roughly). QRs are typically the lead at quant hedge funds and certain prop shops (Tower, HRT, even IMC to an extent bc of how systematic they are).

2) (Quant) Traders: Typically undergrad or master’s students. Also strong quantitatively, but not requiring the research background and rigor that QR requires. Typically need to be better at quick math and probability games interview wise, not much coding tested. Similar compensation wise to a researcher with a lot of variance (you will get compensated more if you have a stronger delta to results and this is more likely to happen at a trader led shop) plus the role can be pretty broad in how research heavy or trading heavy it leans. Live trading isn’t actually manually entering bids and asks but more like adjusting volatility curves on models live and responding to specific market situations/dynamics as they come up. Also you typically do a good amount of data science work in python (using pandas etc) and, if you desire, can do mostly research/projects depending on the firm you’re at. At Jane Street for example, traders do all desk specific research. Typically this role is the lead at prop shops (some that stand out as being pretty trader focused include Jane Street, Optiver, and SIG).

3) Devs (and Quant Devs): Some firms choose to delineate between developers and quant developers and some do not. Typically this role is gonna be standard software engineering interview wise, but maybe with some math/probability stuff thrown in. Devs at prop shops and hedge funds can expect to work on low latency C++ stuff, or make tools for traders / quants. Quant devs on research teams can sometimes implement strategies that researchers are working on. Still get compensated quite well (this year, Jane Street and HRT offered 375 year one to their devs, and Cit offered 380 as a return offer, though 150 of it is a signing bonus) and have much more stability to boot. Of course, this comes with less potential upside down the line.

 

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