Compensation Structure At Quant VS Fundamental Funds

joppo's picture
Rank: Orangutan | 283

There was a similar post from 5 years ago but wanted to get some up to date responses

If we compare quant funds (including CTAs) to fundamental funds, how does compensation structure, as well as compensation potential, differ between these two groups?

Obviously, performance will make all the difference in year-to-year compensation. Even so, leaving performance aside, which of the two pay their employees more?

Provided you had the skills for both, would you rather be a Quant or Fundamental?

Comments (73)

Jan 19, 2020

I think the pay is similar to start off but fundamental and macro funds seem to pay significantly more over time, regardless of the fund performance. Quants usually have longer non-competes and may be denied access to code or other information. It's much easier to replace a quant who leaves or gets fired (once their code is written), compared to a fundamental analyst who is consistently good. In addition, quants in the US are often immigrants on H1B visas who can't easily leave. All this puts downward pressure on quant pay over time. The one exception to this is quant PMs and maybe senior analysts at platform funds, who do get paid well if they are successful.

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Jan 19, 2020

That's interesting. Sounds like a situation where the fundamental/macro folks are sort of being treated as though the fund's key asset is their brain (ie the asset travels with them if they leave), while the quant guys are being viewed as not quite that; i.e. if they leave at least some of the primary asset stays behind in the form of code.

If that's the case it would make sense for anyone with a new quant strategy to develop it outside the firm. So what happens when an employee of a quant fund thinks he's got something materially new and different? Does he go to his boss and say basically 'I need to leave unless you can allocate $x to this new strategy and give me a cut'?

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Most Helpful
Jan 20, 2020

You're right that the asset is the code. A revenue-generating quant fund employee will generally have a clause in their contract stating that any code developed during their time at the firm belongs to the firm, whether it was developed in the office or at home outside work hours. So for an analyst in the situation you described, it would be pretty unwise to say something along those lines to the boss, i.e. openly admit he will be using the same strategy if he leaves, if he wanted to avoid getting buried in legal action once he steps out the door (on a semi-related note this is why the whole Taylor storyline in Billions makes no sense and is pretty infuriating to watch).

In practice, quant funds realise that anything made after an employee leaves will be at least loosely based on their original work, so really the only way they can try to prevent theft of intellectual property is through the lengthy non-competes already mentioned. Since quant strategies naturally have a limited shelf life before their alpha source is eroded away, the fund just tries to keep the employee out of the game for as long as possible so that they'll have to come up with new stuff once they eventually start at their new gig.

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  • Analyst 3+ in HF - EquityHedge
Jan 20, 2020

why would you say quant PM and senior analysts at platforms have higher upside? I'm guessing this would generically be true for fundamental side as well. I guess it can be argued that its easier to start a quant book than a fundamental book.

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Jan 21, 2020

They don't necessarily have a higher upside, just are not subject to the same drawbacks as they would be in a typical single manager fund. Although I think quant strategies are generally better suited for platforms anyway and how their risk limits work.

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Jan 19, 2020

All else being equal, comp matters and there is the discrepancy noted above, but I'd think hard and do some due diligence on which is more interesting to you. You're highly unlikely to be good at something you don't find interesting.

Comp is a power distribution and you don't automatically get an 'average' experience just by signing up for one of the two career paths- you need to figure out which you have better odds at.

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Jan 19, 2020

Honestly quants can get the big pay when starting out but slows after $700k compared to the one at the value fund as his comp can become tied more to the performance and get a more guaranteed % of PnL. Quants unless they get PM like said in previous post usually get topped out.

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Jan 26, 2020

Why is it that QR's not have comp tied to PnL (or less so than their discretionary counterparts)?

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Jan 26, 2020

Usually they're part of a quant team that ISN'T apart of the PMs team. They just create and backtest algorithms and it would be up to the PM to implement what they made. IF they saw value in them, may not be true at every shop but it's enough shops doing this for comp to not really grow much after a $1M.

Quants have to make a choice stay where your making high six figures/ maybe just over $1M+ or try their odds elsewhere and try and negotiate it in their contracts.

Feb 7, 2020

quant is unfortunately a very generic word which can mean many things.

At a fund like citadel GQS, 2s, or worldquant, quants would typically be one person in a 50-100 man collaborative team. If you didn't create a signal, the firm assumes someone else on your team would have. So you're paid high salary + bonus with low chance of being fired, but you're not receiving a % either. The "PM" is really just a manager who directs research and is paid maybe 5-10x what his quants are paid.

At fundamental shops, quants will be treated like cost centers. Basically they do some extra analysis to support the fundamental PM but they don't make any important decisions, so again they aren't paid that well.

The final group of quants work in a pod at a MM like Millenium or BAS. They might have 3-5 signals which are aggregated into a 1-2 sharpe strategy, and are paid a cut of their PnL like any other PM group. You have a high chance of being fired, but high upside as well. For various reasons, this model has not proved as successful as the collaborative environment. It's a lot easier to find a hundred small alphas than to find 3-5 large alphas that can support a typical PM group.

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  • Analyst 3+ in HF - EquityHedge
Jan 20, 2020

Even at quant PM level its harder to scale. At a fundamental fund you can add an analyst to cover another subsector. But for quant PMs once you've implemented your own strategies its actually very difficult to find and hire senior quants that can add their strategies to your book.

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Jan 20, 2020

I don't think thats necessarily true. Quant strategies can be implemented to trade in global markets. A medium frequency quant PM can easily run 3-4 billion with just one analyst or do it alone , if he is ambitious unlike fundamental PMs who need to hire more analyst to cover more stocks.

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  • Analyst 3+ in HF - EquityHedge
Jan 20, 2020

You misunderstood what I meant by scaling. A quant PM can run 3-4B alone only if they actually already have enough alphas for that capacity. That's rarely the case. But even if a quant PM has 3-4B worth of strategies to go its much harder to add capcacity. In the fundamental case adding more analysts -> more coverage -> more capital deployed is much easier than finding alpha with good capacity and that's not correlated with existing stuff. You can either do that alone, which is very hard, or you hire senior quants that bring along strategies. The risk is that those strategies don't work as expected, decay, or the quant can't reliably produce new alphas.

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Jan 25, 2020

The main benefit for quant things is that since the strategies are systematic you can (hypothetically) set-and-forget (until the alpha has been squeezed out, which may take years) and move on to implementing the next one. The problem is, for most systematic trades (excluding the few firms out there using quant for long term investing), the horizons are small and the while the alpha can be consistent, it's also not likely to be insane for any individual trades. You're also exposed to a good amount of downside due to macro factors that may by chance impact open positions you have.

For fundamental guys, each and every trade requires research and legwork, there are likely fewer overall things active at once but depending what you're doing, the potential maximum can be crazy. Take for example: George Soros' bet against the pound, there's no way a quant fund strategies would have the potential to be committed to this heavily and come up with returns of this magnitude.

Quant portfolios end up with a bunch of independent strategies diversifying your overall performance, with the central limit theorem you have a high chance of making consistent profits. With fundamental guys, they're making less bets and thus may have to putt more behind each, it's a different structure and thus, the potential upside and downside are different. Please note these statements are all generalizations and exceptions aren't hard to find.

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  • Analyst 3+ in HF - EquityHedge
Jan 25, 2020

I have never seen a quant PM set and forget. Its true in fundamental you do deeper dives on individual names. But you still need to constantly monitor your strat. If an earnings date comes up do you still trade? If there's suddenly M&A activity what do you do for that name? If the strat stops working do you fiddle with it or is it dead? If you are trading multiple exchanges and timezones how do you make sure you're getting filled or the shorts that you want can be borrowed?

You've totally underestimated how much effort goes into monitoring and 'set-and-forget' doesn't exist. There's usually at least one person who is dedicated full time to make sure everything is running as expected, even if that means waking up in the middle of the night.

Also, the strats in a book take probably more work than a fundamental research dive. Its more appropriate to think of a collection of strats in the quants case and a collection of positions / individual bets in the fundamental case. For a quant you're mostly betting on a factor which is expressed as a set of weights on individual names.

Its hard to tell whether strats are independent. Correlations can change especially as you move into different market conditions. What you thought were all independent can quickly end up with a correlation close to 1 if there's a sharp market reversal.

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Jan 21, 2020

Many thanks for your answers all, seeing a different perspective has helped me think things over.

It has also been my impression that quants are particularly commoditized. If you have not been exposed to clients so that your name is linked to a strategy, you are at risk. The likelihood of getting fired goes up with your compensation.

I won't lie - this is disheartening. I know there is (obviously) a low probability of becoming extremely wealthy in any profession, but as someone who is significantly motivated by money, my biggest fear (besides failure) is pigeonholing myself somewhere where my ability to strive towards extreme wealth becomes diminished (like a hamster, running endlessly on a wheel). Hearing this information from guys in your positions, it really carries weight and cuts deep, lol.

What are the advantages of working in a quant fund? If value-oriented HF's were dying, as well as quant funds- if that's so, what careers are best to start to pursue?

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  • Analyst 3+ in HF - EquityHedge
Jan 21, 2020

I don't know why this is bad; your chance of becoming extremely wealthy is extremely low. In any profession. There is no easy path to riches. Also you don't say how much you'd be happy with. 500k? 1MM? 10MM?

Most analysts don't have clients. Even in a fundamental fund you don't have a lot of exposure to clients allocating money, only the PM does.

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Jan 21, 2020

I would be happy with >1MM.

To avoid making this vague and too hypothetical. Let's say you join a firm like Two Sigma or D.E Shaw as an analyst 1 or 2 years out of college. What is the "average" progression that people at one of those two firms can expect? What does compensation look 2/5/10 years down the line? Is pay significantly lower than that of someone who joins Blackstone or The Tiger Cub and becomes a senior managing director or PM 8-10 years after joining? After a few years as a Quant Researcher at one of the top Quant Funds, is it possible to become a Portfolio Manager? I would like to talk to clients/ people, because I'm pretty decent with people and I'm a strong communicator.

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  • Investment Manager in HF - Macro
Jan 21, 2020

I'm not really following, in all industries, careers, etc there isn't an "easy" road to getting very wealthy. HFs/PE/etc pay a lot but the jobs are also extremely competitive. All careers will have big upsides but for a select few, I'm not sure if you were thinking if you "checked the box" you would get rich.

Without even knowing how much you are looking for it is impossible to answer this question. I know people who are more "quants" (although that's not the term I would really use) and they make $2-3mm a year, and there is even more upside but again these are people closer to the top of what they do.

Also, I understand fear of complete failure in a way, but being afraid to fail is going to hold you back, as will chasing money without a passion, you won't be able to hang with the people who have a passion for what they are doing.

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  • Analyst 3+ in HF - EquityHedge
Jan 21, 2020

2-3MM would be a very successful quant PM at MM. Or very, very senior at a large fund.

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Jan 28, 2020
Investment Manager in HF - Macro:

I'm not really following, in all industries, careers, etc there isn't an "easy" road to getting very wealthy. HFs/PE/etc pay a lot but the jobs are also extremely competitive. All careers will have big upsides but for a select few, I'm not sure if you were thinking if you "checked the box" you would get rich.

Without even knowing how much you are looking for it is impossible to answer this question. I know people who are more "quants" (although that's not the term I would really use) and they make $2-3mm a year, and there is even more upside but again these are people closer to the top of what they do.

Also, I understand fear of complete failure in a way, but being afraid to fail is going to hold you back, as will chasing money without a passion, you won't be able to hang with the people who have a passion for what they are doing.

I would be happy with >1MM.

I am talkative, high energy, and thrive around people. I am strongly goal and problem solving oriented and have the ability to work extremely efficient on tight deadlines. I tend to focus on the big picture and I am able to think strategically and maintain their long-term focus. I value truthfulness, consistency and equality and think logically when making decisions. I am a passionate of Math and investing/ Finance and I would like to talk to smart people.

In spite of having a heavy STEM background, I'm pretty decent with people and I'm a strong communicator. Hence, I really want to take on some type of leadership position later in my career. Should I pursue an quant research career ? Would fundamental HF be a better fit? Why did you choose Macro?

Jan 22, 2020

I understand your feelings and for being honest about the money situation unless they view you as "gods gift to finance" no one will ever pay you more than you will. Read the new book about Jim Simons.

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Jan 24, 2020

Thanks for your reply.

I'll read the book. Jim Simons is the reason why I want to become a quant, not the money. I'd like to work there from a resources point of view, watched a Jim Simons speech and it inspired me.

It certainly is comforting to see how drastically quantitative funds have contributed to the efficiency of the markets. But as you said, It seems like there are some significant misconceptions about the potential of careers (sell-side and buy-side) within quantitative finance.
I'd be lying if I said I wasn't reconsidering my future after reading all of this. I guess I just have to work hard and search for opportunities wherever I can find them.

I am talkative, high energy, and thrive around people. I am strongly goal and problem solving oriented and have the ability to work extremely efficient on tight deadlines. I tend to focus on the big picture and I am able to think strategically and maintain their long-term focus. I value truthfulness, consistency and equality and think logically when making decisions. I am a passionate of Math and investing/ Finance and I would like to talk to smart people.

In spite of having a heavy STEM background, I'm pretty decent with people and I'm a strong communicator. Hence, I really want to take on some type of leadership position later in my career. Do you have any insight into how that could work out? Basically, what's the hierarchy like in the quant world? Should I pursue an quant research career ? Would PE or fundamental HF be a better fit?

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Jan 24, 2020

Try and get into a role that would lead to being a PM at a quant fund. Such as a research analyst under a PM generate alpha and run your own book. Also no one will ever pay you more than you'd pay yourself.

Reading that book it tells how when he started out he was obsessed with money and being his own boss and he grew into the man we see today. Being motivated by money isn't bad as long as you don't do anything for it.

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Jan 26, 2020

Does anyone see value in mixing fundamental and quantitative skillsets? Such as a fundamental guy being able to look at a company from a fundamental view point but back this up with nitty gritty analysis of alternative data sources? Reason I ask is I am a student now, with a good mix of strong STEM skillset and some IB internships and have heard mumblings of the holy grail being utilising quant strategies to predict long term returns. Anyone have any thoughts on this?

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  • Managing Director in VC
Jan 26, 2020

In my experience this fusion doesn't work that well in practice. This is due to technical and human factors.

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Jan 26, 2020

Do heavy stem backgrounds prove useful in the VC space? Do a lot of ex FAANG PM's make the jump to VC's? I would imagine so, providing early stage tech is your focus

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Jan 26, 2020

There's a whole field called "quantamental" that's much closer to fundamental than it is to quant. Fundamental analysts are already taking advantage of alternative data sources, but as far as a quant team would go that's just advisory work. Quant processes already take into account fundamental data.
I've heard people say quant can't easily be used for long term investing, but they provide no compelling arguments and honestly I think it wouldn't be that hard. I've recently read papers where systematic quant signals were used as a driver for PE investments at one firm and were used for risk management/allocation at a VC firm. I don't think it'll be long before we see more systematic long-term (we're already seeing it with all these 'passive beta' and 'smart beta' funds out there).

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  • Managing Director in VC
Jan 26, 2020
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Jan 26, 2020
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