Compensation Structure at Quant VS Fundamental Money Managers

QGKZ's picture
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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?

Comments (23)

Dec 20, 2015

Overall, comp is probably about the same at the large funds-- at least that's my guess.

The culture in quant land looks a bit more like the NSA, while it's more like pro football at the fundamental shops.

There are huge economies of scale in the quant land that work in favor of your fund... but work against you if you ever want to set up your own shop. We spend a lot more on data feeds and spend less money on labor and time with the firms we cover.

If you are gunning for the top end of the distribution on outcomes, there is more upside at a fundamental firm. That might change in 10 years, but right now the current economics of quant funds lend themselves to oligopolies. And there's nothing wrong with being a senior manager or eventually CEO at Ford, but you strike me as a guy who wouldn't settle for six or seven figures.

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Dec 20, 2015
undefined:

Overall, comp is probably about the same at the large funds-- at least that's my guess.

The culture in quant land looks a bit more like the NSA, while it's more like pro football at the fundamental shops.

There are huge economies of scale in the quant land that work in favor of your fund... but work against you if you ever want to set up your own shop. We spend a lot more on data feeds and spend less money on labor and time with the firms we cover.

If you are gunning for the top end of the distribution on outcomes, there is more upside at a fundamental firm. That might change in 10 years, but right now the current economics of quant funds lend themselves to oligopolies. And there's nothing wrong with being a senior manager or eventually CEO at Ford, but you strike me as a guy who wouldn't settle for six or seven figures.

Excellent insight, as always.

Dec 24, 2015

Just wanted to follow up on this comment. I'll be joining a large quant fund in a quantitative investing role, but am wondering if in the long term, it might be more better to work my way into a fundamental shop at some point. I have generally heard this is very hard to do, since these are two completely different styles of investing.

Dec 24, 2015
shortmyshit:

Just wanted to follow up on this comment. I'll be joining a large quant fund in a quantitative investing role, but am wondering if in the long term, it might be more better to work my way into a fundamental shop at some point. I have generally heard this is very hard to do, since these are two completely different styles of investing.

I think there's a better approach than what you propose.

At a large multistrategy fund, there's often a lot of cross-pollination between the two groups. Our fundamental guys use quants to manage risk, and our quant fund often shares data and ideas with the fundamental managers. Obviously everyone has their silos and their proprietary IP to an extent, but there's a lot of places where the synergies outweigh the cost of sharing.

If you wanted to do it, your best bet would be moving internally at a multistrategy fund. Two of the names you mentioned (DE Shaw and Citadel) have both a quant arm and a fundamental arm. Bridgewater, BlackRock, and AQR would be a few other examples of places where you could also make the jump internally.

But unless you're really passionate about fundamental investing, why not just stay on the quant side? If you use the extra money you'll make on average over the fundamental route to buy Powerball tickets, the distribution of outcomes will stochastically dominate this inefficient strategy of spending 2-3 years trying to move to the fundamental side when you've already broken in on the quant side. Not to mention the fact that being on a quant team or being a quant PM is a lot less stress than the fundamental equivalent. When TSHTF, it's a lot easier to have come up with a general strategy idea that has worked in the past but is doing poorly right now than it is to defend a call on a stock that is tanking IMO.

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Jan 4, 2016

Thanks for the elaborative response!

Follow up question here: how does the typical pay structure compare to that of a trader at quant/fundamental HF?

Jan 4, 2016
feiran:

Thanks for the elaborative response!

Follow up question here: how does the typical pay structure compare to that of a trader at quant/fundamental HF?

It's probably similar for all rank and file employees.

It will depend on the group, but a quant working on a quant portfolio will have a shot at becoming a PM one day.

Our head trader chooses to live in one city and maintain a condo in another while he flies back and forth every week, mind you. He does very well too and is in some ways our fund's COO. An excellent trader will do better than a very good quant, but again on quant portfolios, an excellent quant has a heavier upper tail than an excellent trader.

(These rules might change on other teams where the buy/sell decisions are made by humans)

In other words, if you're great at execution, be a trader. If you're a creative type who's good at math by an engineer's standards and also good at building frameworks and models, be a quant. If you're good at both, quants tend to like their jobs more, but there are more barriers to entry on raw intellect and creativity and it is not as sexy.

Traders usually have quants working for them. A quant portfolio is the one weird place in finance where it is sort of reversed. So don't get any strange ideas about opportunities and outcomes in finance generally from our specific niche.

Best Response
Dec 26, 2015

One last point is that the quant vs. fundamental decision really boils down to a personality question.

If you could feel totally at home on the math team, join a quant portfolio.

If you could feel totally at home on the football team or hockey team, join a fundamental portfolio.

This is not about who you want to be- this is about who you really are at heart. You can be a quant and an athlete- or a fundamental guy and a total nerd. But when it comes to what you are doing 50 hours a week (60-70 on the fundamental side)-- make sure you are at home with the culture. At the end of the day both roles are front office and all that matters is the sharpe ratio. What is going to make your career more sustainable and create more upside is working with people you like working with and having a job that fits you. For instance, I don't enjoy working with mean people- and there are a lot of parts of finance that have those people. I would do better financially working as a manager at Chipotle than working in many other parts of finance, even though the unconditional income distributions are different.

This is one of the reasons I am not a huge fan of these FO->FO job switch questions without getting a sense of the motivations behind switching. Don't leave one industry for another just because the income distribution is a little different. What matters is the income distribution conditioned on what work environment you work best in. (Not to mention stuff like free time, family, and your hazard rate for a heart attack)

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Dec 24, 2015

Thanks for the insight. That makes a lot of sense.

Dec 25, 2015
IlliniProgrammer:

One last point is that the quant vs. fundamental decision really boils down to a personality question.

If you could feel totally at home on the math team, join a quant portfolio.

If you could feel totally at home on the football team or hockey team, join a fundamental portfolio.

This is not about who you want to be- this is about who you really are at heart. You can be a quant and an athlete- or a fundamental guy and a total nerd. But when it comes to what you are doing 50 hours a week (60-70 on the fundamental side)-- make sure you are at home with the culture. At the end of the day both roles are front office and all that matters is the sharpe ratio. What is going to make your career more sustainable and create more upside is working with people you like working with and having a job that fits you. For instance, I don't enjoy working with people with mean people- and there are a lot of parts of finance that have those people. I would do better financially working as a manager at Chipotle than working in many other parts of finance, even though the unconditional income distributions are different.

This is one of the reasons I am not a huge fan of these FO->FO job switch questions without getting a sense of the motivations behind switching. Don't leave one industry for another just because the income distribution is a little different. What matters is the income distribution conditioned on what work environment you work best in. (Not to mention stuff like free time, family, and your hazard rate for a heart attack)

Killing it with the substantive posts, as per usual.

Jan 4, 2016

Step one: be one of the 15 undergrads (or 50 graduate students) out of 20,000 applicants who lands at one of these funds.

Step two: come up with some sort of amazing strategy or trading idea. And it has to make money when it hits the market.

Step three: come up with 10-15 more of these over a few years.

Step four: take 3 AM phone calls when these things break (which happens all the time.

Step five: strategies decay. Come up with more replacements.

Step six: come up with more ideas to replace those strategies.

Step six: ????

Step seven: Profit. After ten years, take your winnings and buy a 600 square foot condo in Manhattan. Or pay off your student loans. Maybe you'll have enough left over for a rusty Honda parking space. I have never met someone within five years of me who became a billionaire as a quant. (Maybe a millionaire, but that didn't happen overnight, and a million bucks buys you a fifth floor studio walkup on 11th Ave)

If you want a healthy relationship with work- if you enjoy creating stuff- if you know you're worth six figures but probably not seven, this is the industry for you. If you want to be a billionaire, you have a better shot in banking.

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Jan 5, 2016
IlliniProgrammer:

Step one: be one of the 15 undergrads (or 50 graduate students) out of 20,000 applicants who lands at one of these funds.

Step two: come up with some sort of amazing strategy or trading idea. And it has to make money when it hits the market.

Step three: come up with 10-15 more of these over a few years.

Step four: take 3 AM phone calls when these things break (which happens all the time.

Step five: strategies decay. Come up with more replacements.

Step six: come up with more ideas to replace those strategies.

Step six: ????

Step seven: Profit. After ten years, take your winnings and buy a 600 square foot condo in Manhattan. Or pay off your student loans. Maybe you'll have enough left over for a rusty Honda parking space. I have never met someone within five years of me who became a billionaire as a quant. (Maybe a millionaire, but that didn't happen overnight, and a million bucks buys you a fifth floor studio walkup on 11th Ave)

If you want a healthy relationship with work- if you enjoy creating stuff- if you know you're worth six figures but probably not seven, this is the industry for you. If you want to be a billionaire, you have a better shot in banking.

I don't think there are any billionaire bankers besides a couple of long-time CEOs of BB banks (L. Blankfein). Even then, they are billionaires because their stock-based compensation appreciated significantly over their long tenure.

The sell-side definitely isn't where you want to be if you want to be a billionaire. Although I'm an absolute plebeian compared to you, I think you are underselling quants on the buy-side when you compare their potential wealth generation to bankers.

Also, I think we'd both agree that having the skill-set of a quant is a significantly superior long-term investment within the finance industry than being your typical fundamental finance major.

Jan 5, 2016

Correction: I know of a lot of billionaire ex-bankers. I know of a lot of bankers following that same route.

I know of only one or two billionaire ex-quants and I don't think the same story can be reproduced for people my age or younger. The markets just aren't that inefficient. (Management still is)

That said this is a perfectly good upper middle class/ poor rich person job. If you want to work in finance, if you like working with nice people, if you like creating stuff and discovering things about the market, this is a great place to work. If you want a nice house in the suburbs, this job will pay for that. But if you want some get rich quick scheme, you might be better off joining Amway, and you're certainly better off joining GS IBD.

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Jan 5, 2016
IlliniProgrammer:

Correction: I know of a lot of billionaire ex-bankers. I know of a lot of bankers following that same route.

I know of only one or two billionaire ex-quants and I don't think the same story can be reproduced for people my age or younger. The markets just aren't that inefficient. (Management still is)

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 a guy in your position, it really carries weight and cuts deep, lol.

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Jan 5, 2016

How is the market efficient if you're saying by getting into banking you have a good chance of achieving something that is so statistically improbable that it shouldn't even be discussed?

Jan 5, 2016
Predilection:

How is the market efficient if you're saying by getting into banking you have a good chance of achieving something that is so statistically improbable that it shouldn't even be discussed?

He never said you have a 'good' chance. He's simply saying that your chances are higher. Overall, your chances, as you said, are still insignificant.

Jan 5, 2016

I don't want to kill your dreams, but there's only so much inefficiency in the market. Only so much inefficiency in management for that matter. The ultimate purpose of the financial sector seems to be to drive efficiency- the efficient allocation of capital (ER, QR, S&T, certainly AM) and to some extent the efficient management of businesses (IBD/PE).

It's good that you are pursuing value by creating stuff. I think the key is to figure out how to make the economic pie bigger for everyone and take a small slice of it. And I think technical skills give you the ability to do that.

Also I am probably not as rich or well paid as what people think. If anyone out there has the ability and desire to pay me what everyone thinks I earn, I'm listening, lol! But seriously 99% of quants earn six figures, not seven.

The real question isn't where the wheel stops- it's how to keep the hamster running. Actually I'd frame this more as a marathon than as a hamster wheel. A career is a 40 year marathon. You can start at a walk, a jog, a run or a sprint. That doesn't mean you'll hit year 10 going at the same speed. It may be faster or slower. Liking the people you work with, having a boss and a work environment that aren't soul crushing, having a job that doesn't make the world a worse place- these are all things that give you more energy to keep going. So choose your "marathon" carefully. The quant marathon is a great race for people looking to finish in ~3.5-4 hours at a nice walk/jog pace and it isn't soul crushing. It is less brutal and competitive, but you're also not going to set a world record in it. The banker marathon runs quicker, but the runners are a little more cutthroat.

Pick the race that you can finish without having a heart attack or slowing down too much in.

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Jan 5, 2016
IlliniProgrammer:

I don't want to kill your dreams, but there's only so much inefficiency in the market. Only so much inefficiency in management for that matter. The ultimate purpose of the financial sector seems to be to drive efficiency- the efficient allocation of capital (ER, QR, S&T, certainly AM) and to some extent the efficient management of businesses (IBD/PE).

It's good that you are pursuing value by creating stuff. I think the key is to figure out how to make the economic pie bigger for everyone and take a small slice of it. And I think technical skills give you the ability to do that.

Also I am probably not as rich or well paid as what people think. If anyone out there has the ability and desire to pay me what everyone thinks I earn, I'm listening, lol! But seriously 99% of quants earn six figures, not seven.

The real question isn't where the wheel stops- it's how to keep the hamster running. Actually I'd frame this more as a marathon than as a hamster wheel. A career is a 40 year marathon. You can start at a walk, a jog, a run or a sprint. That doesn't mean you'll hit year 10 going at the same speed. It may be faster or slower. Liking the people you work with, having a boss and a work environment that aren't soul crushing, having a job that doesn't make the world a worse place- these are all things that give you more energy to keep going. So choose your "marathon" carefully. The quant marathon is a great race for people looking to finish in ~3.5-4 hours at a nice walk/jog pace and it isn't soul crushing. It is less brutal and competitive, but you're also not going to set a world record in it. The banker marathon runs quicker, but the runners are a little more cutthroat.

Pick the race that you can finish without having a heart attack or slowing down too much in.

As always, your posts are highly enlightening. I can't disagree with anything you've said.

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.

Jan 5, 2016
QGKZ:

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.

Changing peoples' outlooks is healthy, but can I change peoples' philosophy?

The key to enjoying life- to having fulfillment and well-being - isn't about having what you want. It's about earning enough to be comfortable and wanting what you have.

So keep your hopes and expectations modest- but your ambition to create stuff big- and you will always be pleasantly surprised.

How is the market efficient if you're saying by getting into banking you have a good chance of achieving something that is so statistically improbable that it shouldn't even be discussed?

You're not looking at a stationary distribution. There was a very heavy upper tail 40 years ago in trading and the quant space. Today, that upper tail probably does not exist.

If markets were perfectly efficient, nobody in finance would have a job. We are paid to make them more efficient. But markets are less inefficient than they were 20 years ago when spreads were 25 cents on stocks, "discount" brokerages charged $40/trade, and cost-efficient "no-load" mutual funds carrying 1.5%/year in expenses were considered cheap.

Simply put, finance's share of the investment pie has gotten smaller relative to capital... And there's also a very good argument that capital is also going to see lower returns... now that capital is abundant and there are fewer opportunities to put it to use.

I hate to be a downer here. So let me end with this thought. If you are graduating college today, you're graduating into a much cooler world than it was ten years ago. Programmers averaged a starting salary of $40K/year in 2006; engineers were similar. I was ecstatic to get $60K+ a huge bonus at Lehman. There has been some inflation but it hasn't been as crazy as the wage increases seen. Your life is markedly better today and it will likely keep getting better. But focus on a reasonably achievable section of the distribution- not the tails.

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Jun 19, 2016

You are mixing quants here right?
Surely the quants that do not bear risk do not make seven figures. No one is going to pay you that much as a risk/pricing quant.
On the other hand, any successful quant at quant hedge funds can easily make 7 figures, and they can even become partners, or launch their own fund.

The vast majority of bankers do no launch successful companies. They mostly go for some research role at buyside (again, not better paid than an average hedge fund quant) or go for the corp dev route at large companies. Only a very tiny proportion of them become CFO, and extremely rarely CEO.

Jun 19, 2016
Ftm:

You are mixing quants here right?Surely the quants that do not bear risk do not make seven figures. No one is going to pay you that much as a risk/pricing quant.On the other hand, any successful quant at quant hedge funds can easily make 7 figures, and they can even become partners, or launch their own fund.

The vast majority of bankers do no launch successful companies. They mostly go for some research role at buyside (again, not better paid than an average hedge fund quant) or go for the corp dev route at large companies. Only a very tiny proportion of them become CFO, and extremely rarely CEO.

This thread pertains to the buy side. We are not discussing the compensation of sell side risk management quants.

Jan 5, 2016

By making the financial and business world efficient, aren't you just reallocating wealth without creating it?

Jan 5, 2016
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Jun 19, 2016