Hedge Fund Mathematics

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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 - 10:41pm

Thanks guys for the input! Really appreciate the help!

London BB ER 2nd year Research Associate
 
May 28, 2011 - 10:25am

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 - 9:26pm

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 - 9:28pm

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 - 9:32pm

I’m breaking my head trying to decide my major: Is pure math the best option to prepare for working for hedge funds? (Originally Posted: 10/12/2017)

Or is economics/finance/accounting better? Is pure math a useless degree as many people say? Or is it a very good one to work in Wall Street as other say? IM VEEEERY CONFUSED! Please help me

 
Best Response
Jun 2, 2011 - 9:37pm
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