Hedge Fund Mathematics

Cantab's picture
Rank: Chimp | 12

I'm currently working in ER but would like to move to HF as I feel that I have more interest in PM rather than research.

As some of my colleagues has commented and I have searched on WSO and find that various quant skills are a plus for HF. Coming from a Physics major, I have no problem with algebra or calculus. However, what "specific" mathematics are important to say a long/short equity or a market neutral HF, eg. hypothesis testing? normal distribution? probability? Regression? Non-linear equations or calculus?

Hedge Fund Math

The type of math you will regularly use, in Hedge Funds, depends heavily on what kind of fund you are dealing with.

User @DeepLearning - Hedge Fund - Equity Hedge - Quant agrees:

Depends on the type of hedge fund. Machine Learning, Statistics, Time Series, Markov Models are all used heavily. Also just straight up linear regressions with regularization, coefficient constraints, etc. is used heavily.

For quantitative hedge funds, good, useful and clean data is usually more powerful than having a more sophisticated model. While quantitative hedge funds do use a good amount of advanced mathematics, they spend probably more effort in data collection/cleaning.
If you are using a unique and useful data but only performing basic regression techniques, you are probably going to get better performance than a fund that is using non-unique (but still useful) data but using sophisticated models.

Many PhD mathematicians are surprised to find that they spend most of their time applying undergraduate mathematics in creative ways rather than using the full extent of their graduate math knowledge.

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Comments (19)

May 24, 2011

Probability, stochastic process, ordinary and partial diff equations, analysis. Etcetcetc. You want to be well versed in all aspects of math, maybe get a masters in financial math or financial engineering its up to you

May 24, 2011
YourWorstEnemy:

Probability, stochastic process, ordinary and partial diff equations, analysis. Etcetcetc. You want to be well versed in all aspects of math, maybe get a masters in financial math or financial engineering its up to you

Why awp thinks this is hilarious? Was it a joke and these things are not actually needed?

May 24, 2011

hilarious

May 24, 2011

Long/short isn't too quant, probably not even going into stochastics. As a physics major, you should be fine, just brush up on prob/stats.

May 24, 2011

Thanks guys for the input! Really appreciate the help!

London BB ER 2nd year Research Associate

May 28, 2011

Wouldn't this really depend on the strategy of the fund? I'm guessing most value investing funds for example simply rely on financial analysis, which is basic algebra at best. Renaissance technologies on the other hand probably has some serious mathematicians up in there.

Jun 2, 2011
Nyctola:

Wouldn't this really depend on the strategy of the fund? I'm guessing most value investing funds for example simply rely on financial analysis, which is basic algebra at best. Renaissance technologies on the other hand probably has some serious mathematicians up in there.

This.

--
"Those who say don't know, and those who know don't say."

Jun 2, 2011

You need to be able to solve 48/2(9+3).

Jun 2, 2011

Capital markets are full of data which attracts mathematicians. Specific mathematic areas that are popular in finance include:

Statistical Inference: what is the strength of the relationship that I am observing?
Bayesian Probability: given a set of priors, what is the likelihood of X happening?
Signal Processing
Linear Algebra and Regressions: Financial models are essentially multi-factor models.
Optimization: Portfolio construction and risk management

Financial Engineering is a huge academic and professional movement with nearly unlimited applications in financial markets. While having a PhD is a plus, there are certainly many, many jobs where a facility with math is beneficial/essential.

Let me know if you want more specifics.

-K

Jun 2, 2011

for a real answer to your question: basically none

Jun 2, 2011

I disagree. Lots of MSFE from Columbia and NYU are scattered all over NYC hedge funds. These are two years programs.

Jun 2, 2011

I dont believe you Kevin, your profile is not on the page anymore! I only believe Daniel and Ryan now. tzz

Jun 2, 2011

I think coupling pure math with econ/finance and possibly computer science minor is your best bet, or going somewhere with undergraduate financial engineering if you're SURE that's what you want to do.

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Jun 2, 2011
Jun 2, 2011

Math/CS with finance/accounting electives is ideal.

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Jun 2, 2011
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