HF exits from macro vol desks?
have a lot of time before SA recruiting, but my main goal is to end up at a Macro HF. How common are exits to Macro HFs from rates/FX vol desks? Are there many opportunities to go around, or is it a rarer exit? Also, how much time should you expect to sit on a desk before getting looks/interviews? Linkedin has some people after 2 years, but many more after 5-6.
What are the main funds recruiting from these desks? Assuming not the ones that take mostly undergrads (DESCO, Bridgewater, Bracebridge, etc.)
Do you know how much rates/fx vol traders at banks get paid? If it's a good desk and there's not much turnover, that is not a bad thing. If vol traders don't leave for another bank, they go to funds like Bluecrest, LMR, Rokos, and Brevan to trade the same thing.
But you can take more risk at HFs right? And have more flexibility in the products you trade/use a multi strategy approach? Also can’t you use strategies that aren’t beholden to a bank trading desk (like systematic strategies, or taking long directional positions)? I feel like the nature of the job is different if comp is similar.
It might sound obvious, but your mandate to trade at a bank varies significantly by bank. If the bank has a lot of flow, you generally have less flexibility in making money. You might be right that your mandate can be broader at a fund, but usually, people make the most money because they are a specialist, not a tourist in their asset class. At least at the junior level (before sub-pm/pm), I think comp at banks is generally competitive with less volatility and higher career visibility as you have regular promotion cycles. I also think it's pretty hard to trade as a market maker while expressing your views, so it could also be a good learning experience.
how do you view the outlook of FICC desks over the next 10-20 years. Obviously equities is quite smashed as discussed often on this site. FICC, as also often discussed, is more resistant to automation and the many banks still take prop and are the main players in the space (and your not competing w a warchest of PhDs for returns).
But recently Citi closed their FX desk, and many systematic shops (CitSec, two sigma) are entering the rates space. FICC trading is definitely not growing, but that’s true for all of finance as well. Obviously there is still money to be made in these industries in the LR even if comp isn’t pre GFC. Wouldn’t Macro HFs be more resistant to decay in FICC, because they can shift strategies (use new systematic strats then go directional during crazy macro regimes)?
A couple of things. I mean, I think bank rates trading has actually become more interesting because of automation because now you can't really make money by simply being a broker, and you make most of your money through RV if you aren't at the largest franchises.
Second, both market makers and funds suffer when it's a low-rate environment as the opportunity set shrinks, but at a bank, your comp is like selling a call option, so you have some downside protection.
Third, obviously, I think bank rates trading, at least for cash treasuries desks and so on, can be a bit more quantitatively rigorous, but this kind of job is integral to the plumbing of the financial systems and won't go away for a while. Citsec and so on are also market makers, and they recruit traders from banks, so I think it's basically just shifting parts of the fee pool to one market participant to another instead of those new entrants radically reinventing rates trading. Net the amount of opportunities in trading remains the same or has sort of expanded, it's just that banks are facing increasing competition, but so are legacy funds. So it's adapt or die.
A few comments/questions on each of these points:1.) FI RV definitely seems to be the dominant strategy today in non-macro years. Pretty sure every big "macro fund" today just runs FI RV then has big hitters come in for directional plays during favorable macro regime (Brevan I know basically hires a bunch of RV pms, then Alan Howard goes crazy in 2020 like regimes). My concern is: arent buyside firms better places for this because they can take on more tail risk? Again idk too much about how much prop banks can take post-Volcker, but how can they compete against buyside firms if flow gets automated away? In other words, what edge do banks have against the buyside after automation?
2.) Sellside looks good if central banks can land inflation like after GFC. However, I anticipate stagflation for the next 5-10 years, which makes an FI trading career appealing.
3.) One worry is that banks famously have pretty bad tech infrastructure compared to the market makers. That's the edge of the prop shops, and why they basically killed equities. What makes FI different? As long as there are old MDs who aren't willing to adapt to the times like a CitSec, which is a revolving door for talent. I agree that the opportunities haven't gone anywhere, just at different places. But ultimately starting on the sellside gives you a certain skillset that could become useless if banks are slow to adapt. At the end of the day, the prop shops/HFs historically adapt much faster than sell side.
1. Bank traders try to put the RV trades on before they become too crowded and offload risk to someone else. Sure, you can't take as many or as much outright directional risk, but those trades are very hard to get right and much lower sharpe.
2. If the high-interest rate regime persists, it would be good for both the sell-side and buy-side.
3. I think you are assuming that being more quant is always better, but this is not necessarily the case for rates. It's probably a product where it's good to have a baseline of analytics/ quantitative tools to assess opportunities, but most of the edge still comes from position sizing, intuition, and pattern recognition.
I wanted to clear up a few things that you seem to be misunderstanding.
Citsec is just another dealer in the FI market. They perform the same function as a bank trading desk without being housed in a bank holding company, and thus aren’t subject to Basel III regulations. One big risk to their business model is the possibility they could be declared a a “systemically important nonbank” which Dodd-Frank allows the US to do.
FI markets (talking bonds, swaps, etc.) will not become automated for a long time. It is a very high touch market, everything is traded OTC, and the volumes that go through on screens (what you could theoretically automate) are laughably small even 10 years after the invention of swap execution facilities.
The problem is that every single product is bespoke. It’s the exact opposite of a commodity - an infinitely customizable product. As long as market participants need to be able to quote a swap for any arbitrary date start and end date, forward or spot, you will need human judgement to price because our models are not good enough.
If it were possible to kill it using systematic methods (outside of listed futures), someone would already be doing it. Unless there’s a huge advancement in interpolation techniques (and there hasn’t been for 20 years), you’re fine. Data quality is also a much bigger issue than in listed markets, as everything is OTC, so there’s no possibility of constructing historical prices unless you already have it yourself.
Out of curiosity, how much does junior rates/FX vol traders get paid on average/median?
No interest in equity vol? Also a great seat.
tbh never considered equities because I love the top-down approach to thinking about macro products. I love how large macro events have such a large role in FICC trading strategies. My dream job as a kid was to become an economist, but I need to pay some bills. Again this is all preference i haven’t even started recruiting yet.
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Curious about the exit for macro HF from more linear macro desks like govies/swaps/STIR, any insights on these?
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