How Good of an Investor/Port Manager Can One Be Without Quant Skills?

Hi,

So I was just curious, since a lot of the trading/investing these days is more quantitative than in past generations, just how good of an investor can one be without possessing very good math skills (i.e. at least a math major UG level)? Can people with minimal (i.e. typical finance degree math skills where one needs to take basic calculus and maybe a bit extra stat) still be successful in today's environment, or does one basically need to make fouriers transform or whatever other theoretical math more quant-oriented degrees require to be a competent portfolio manager?

 

Many value investors do not have exceptional quantitative backgrounds. Some don't even have finance backgrounds (David Einhorn was a political science major).

There have been many great comebacks throughout history. Jesus was dead but then came back as an all-powerful God-Zombie.
 
Kenny_Powers_CFA:
Many value investors do not have exceptional quantitative backgrounds. Some don't even have finance backgrounds (David Einhorn was a political science major).

Einhorn was a PoliSci major, but the reason he went to DLJ was because he didn't get in to any of the top econ PhD programmes, so I don't think it's right to say he has no quant skills.

 
drexelalum11:
Kenny_Powers_CFA:
Many value investors do not have exceptional quantitative backgrounds. Some don't even have finance backgrounds (David Einhorn was a political science major).

Einhorn was a PoliSci major, but the reason he went to DLJ was because he didn't get in to any of the top econ PhD programmes, so I don't think it's right to say he has no quant skills.

Erm, if he DIDN'T get into those programs, and DIDN'T go get his PhD, I think we can assume that he's a smart guy with whatever formal "quant" training comes with a poli sci degree, which is to say probably calc and some stats.

There have been many great comebacks throughout history. Jesus was dead but then came back as an all-powerful God-Zombie.
 

every field is getting more quantitative, but especially finance and macroeconomics. if you were really dedicated to being a competent PM, you would acquire the skills required not to be at a comparative disadvantage.

i wouldn't say you need to be at math/stats/physics postgrad level, but you should be above UG finance level. i would say get as close to econ phd level as you can. also you should learn to do mental arithmetic, R and matlab.

either that or you can hope you're the next Soros and can trade on whether your back is in pain or not.

 
LLcoolJ:
every field is getting more quantitative, but especially finance and macroeconomics. if you were really dedicated to being a competent PM, you would acquire the skills required not to be at a comparative disadvantage.

i wouldn't say you need to be at math/stats/physics postgrad level, but you should be above UG finance level. i would say get as close to econ phd level as you can. also you should learn to do mental arithmetic, R and matlab.

either that or you can hope you're the next Soros and can trade on whether your back is in pain or not.

What?

I think Kenny and Illini are more on point with this one--it's heavily dependent on product you're working with and strategy. Generalizations are never your friend.

 
KarateBoy:
Econ Phd? Why?

I'm not so sure getting the PhD is sound advice. I dropped out of an Econ PhD program, so I actually know what is studied there. First of all, most Econ PhDs don't study finance, and don't learn much financial economics in the first place. Second, those that do, don't really know anything about "real world" finance, in my opinion. Academic finance and practical finance are often very different things, and knowing one might not help you with the other (in fact, knowing one might hurt you in the other).

 

Ehh, LLcoolJ has a bit of a point too. Forty years ago, T-Bond traders operated off of an old fashioned spreadsheet detailing values for maturities with 3.5% rates, 4% rates, and 4.5% rates. Commodities was a very very simple game 40 years ago as well.

Over a long period of time, the market gets more quantitative. But there is no reason to suggest that OP will get completely forced out of the market in the next 20 years because he lacks quantitative skill.

 
IlliniProgrammer:
Over a long period of time, the market gets more quantitative. But there is no reason to suggest that OP will get completely forced out of the market in the next 20 years because he lacks quantitative skill.

I second this - but I would be a little more refined/specific in how one chooses to build an arsenal to be successful in a given asset class/market.

OP asks "is it worth it to become a quant" to become a successful investor?

There is no magic black hand that moves security prices. Markets go up because of buyers and down because of sellers. Rigorous study of the introspection of the buyers getting long and those selling or getting short is crucial. One should pay attention to the most prevalent methodologies driving the participants' analysis. That's all one should care about when building her/his analytical arsenal in a role that rewards alpha generation.

Will I build a distressed portfolio using Markowitz/Covariance Optimization? No. Why? Because that will not be a successful endeavour when one considers how the overwhelming majority of distressed participants put on risk.

 
DurbanDiMangus:
OP asks "is it worth it to become a quant" to become a successful investor?

There is no magic black hand that moves security prices. Markets go up because of buyers and down because of sellers. Rigorous study of the introspection of the buyers getting long and those selling or getting short is crucial. One should pay attention to the most prevalent methodologies driving the participants' analysis. That's all one should care about when building her/his analytical arsenal in a role that rewards alpha generation.

Related to this, while it's true that the level of quantitative analysis that goes into finance is greater than it was 40 years ago, for every advance in finance "technology" there's also an advance in general technology that helps people with a given level of acumen keep up. IlliniProgrammer cited the old yield tables people used to use to manually price bonds. 40 years ago, no one had Black-Scholes (38 years young baby!) but no one had excel, Chrystal Ball, or EDGAR either.

There have been many great comebacks throughout history. Jesus was dead but then came back as an all-powerful God-Zombie.
 

my comments blow refer more to marco/fixed income, i don't know much about equities.

'm not saying you should get an economics PHD, i'm saying your quantitative skills should be as close to that level as you can get it. an econ phd level skill set puts you nowhere near the level of a quant - a phd in statistics requires far higher level of math.

why?

mathematics turns qualitative analysis into a set of consistent abstract principles that can be tested against the real world via data. it forces you to confront the reality on whether your ideas and insights can generate alpha. now there are plenty of issues with mathematical modeling, but its the most powerful tools we currently have. and its the only toolkit that is getting increasingly more powerful over time.

every day people are figuring out how to quantify more investment-related factors, everyday more data (both in terms of quantity and quality) is become available to analyze, everyday new technology makes our ability to compare our ideas to the data more powerful.

mathematics is an increasing important tool for every trade, but especially finance. we have reached a level of sophistication where a literary style of exposition simply cannot accurately communicate all we know about economics. read: http://www.slate.com/?id=1911&

"There are important ideas in both fields that can be expressed in plain English, and there are plenty of fools doing fancy mathematical models. But there are also important ideas that are crystal clear if you can stand algebra, and very difficult to grasp if you can't. International trade in particular happens to be a subject in which a page or two of algebra and diagrams is worth 10 volumes of mere words. That is why it is the particular subfield of economics in which the views of those who understand the subject and those who do not diverge most sharply."

making money in the markets is very hard as it is. purposely putting yourself a disadvantage by being stuck with a pre-Paul Samuelson analytical toolkit suggests to me that you don't actually want to become a portfolio manager. in all seriousness, financial journalism might be the career you are actually after.

 

Okay in my opinion the price of a stock and its 20 day moving average is the same on my screen as it is on Goldman's. They can have all the Quant traders and electrical engineers and as of right now 76% of equity trades are algos (black box) but I could care less. Most of those guys are just looking to pick up small pennies per trade and they are making 16 million trades a milli second.

To me the Algo's are almost identical and I just can't see how one algo trading strategy is different from another except in minute details or small variables. The Algo's are going to cause a lot more problems in the market then they solve.

I would venture to say that most of the best trading HF's are not terribly algo centric. Corriente Advisors, Hayman Capital, Soros fund management. Sure do most of those firms use computers to trade? absolutely but they are not a Renassaince Technologies. They are more macro themed or trend following/technicals etc.

The one who does not fall, does not stand up
 
ProdigyOfZen:
Okay in my opinion the price of a stock and its 20 day moving average is the same on my screen as it is on Goldman's. They can have all the Quant traders and electrical engineers and as of right now 76% of equity trades are algos (black box) but I could care less. Most of those guys are just looking to pick up small pennies per trade and they are making 16 million trades a milli second.

To me the Algo's are almost identical and I just can't see how one algo trading strategy is different from another except in minute details or small variables. The Algo's are going to cause a lot more problems in the market then they solve.

I would venture to say that most of the best trading HF's are not terribly algo centric. Corriente Advisors, Hayman Capital, Soros fund management. Sure do most of those firms use computers to trade? absolutely but they are not a Renassaince Technologies. They are more macro themed or trend following/technicals etc.

Actually lots of quant funds are intended to be very similar to value investors, and do mechanically what Ben Graham did by hand decades ago. There are all sorts of quant funds, so you can't simplify them as "looking to pick up small pennies per trade." This was why the quant funds hit such major problems during the crisis, because their positions were so concentrated and they all tried to exit at the same time from what were supposedly liquid investments.

 
drexelalum11:
ProdigyOfZen:
Okay in my opinion the price of a stock and its 20 day moving average is the same on my screen as it is on Goldman's. They can have all the Quant traders and electrical engineers and as of right now 76% of equity trades are algos (black box) but I could care less. Most of those guys are just looking to pick up small pennies per trade and they are making 16 million trades a milli second.

To me the Algo's are almost identical and I just can't see how one algo trading strategy is different from another except in minute details or small variables. The Algo's are going to cause a lot more problems in the market then they solve.

I would venture to say that most of the best trading HF's are not terribly algo centric. Corriente Advisors, Hayman Capital, Soros fund management. Sure do most of those firms use computers to trade? absolutely but they are not a Renassaince Technologies. They are more macro themed or trend following/technicals etc.

Actually lots of quant funds are intended to be very similar to value investors, and do mechanically what Ben Graham did by hand decades ago. There are all sorts of quant funds, so you can't simplify them as "looking to pick up small pennies per trade." This was why the quant funds hit such major problems during the crisis, because their positions were so concentrated and they all tried to exit at the same time from what were supposedly liquid investments.

Drexel, I didnt intend for my post to sound like I was advocating fundamental graham dodd investment style. In fact I would be totally opposite of that. The market is made up of you and I and every other person who buys/sells on a daily basis (see everyone). So therefore the market to me is more psychological than anything else. This is why the Program traders are doomed to fail.

They cannot account for the human element whereas some macro managers aka George Soros can and do account for the human element. Unforunately science/programming tries to break down everything into numbers where some things just can't be broken down that way.

The one who does not fall, does not stand up
 

I'm never against learning something new but going down the quant route feels like you're competing against the RTs of the world.

I'm not going to win that race, I'd rather find a competition with as few competitors as possible.

In other words, improving your quant skills does not sound like the best "bang for the buck" when it comes to time allocation.

As Buffett says, "I'd rather be approximately right than precisely wrong"

Follow me on Twitter: https://twitter.com/_KarateBoy_
 
KarateBoy:
I'm never against learning something new but going down the quant route feels like you're competing against the RTs of the world.

I'm not going to win that race, I'd rather find a competition with as few competitors as possible.

In other words, improving your quant skills does not sound like the best "bang for the buck" when it comes to time allocation.

As Buffett says, "I'd rather be approximately right than precisely wrong"

That's one way to see it, but you can interpret Buffett's quote completely differently (not that I particularly care what that man says). It's much easier to be "approximately" good at something than "precisely" perfect at it, and the marginal cost of the former is much less. So, picking up a basic understanding of a quant toolkit can be useful. Now, does that mean you need to be able to program an algorithm? Of course not. But you can probably benefit more from taking a day to learn the basics of quantitative finance then you will by reading another biography of Buffett, as much folksy wisdom as it might contain.

 

I don't think that's what he meant at all. The quote is from his explanation of why he sold options during the crisis: he bet that the quants and their models are wrong. More importantly, it's not possible to be "perfectly" right.

Either either interpretations tells me, as I said in my prior post, that the "bang for the buck" of becoming a quant at this point is not worth it.

Nonetheless, let's not change this to a Buffett thread.

Follow me on Twitter: https://twitter.com/_KarateBoy_
 
KarateBoy:
I don't think that's what he meant at all. The quote is from his explanation of why he sold options during the crisis: he bet that the quants and their models are wrong. More importantly, it's not possible to be "perfectly" right.

Either either interpretations tells me, as I said in my prior post, that the "bang for the buck" of becoming a quant at this point is not worth it.

Nonetheless, let's not change this to a Buffett thread.

My point wasn't that you should become a quant. It's that the marginal benefit of gaining basic quant skills is greater than the marginal benefit of gaining advanced skills in another part of investing, ceteris paribus.

 

I understand your point and I am respectfully disagreeing with it.

To use a simpler analogy: if your ROIC doesn't exceed your WACC, you're destroying value (even if EPS growth is positive). So, I think the cost of learning these complex skills doesn't justify the return and you're wasting your time (NOT doing something beneficial).

Follow me on Twitter: https://twitter.com/_KarateBoy_
 

Agree with Durban-Everyone's got their style but if you can't at least understand the language other types of investors are speaking you're doing yourself a disservice.

There have been many great comebacks throughout history. Jesus was dead but then came back as an all-powerful God-Zombie.
 

i'm not talking about quants/stat arb/black box trading. once again, i'm not saying get an statistics phd and learn C++. i'm saying get your math quantitative toolkit as advanced as you can bear, and learn R and Matlab.

i'm saying the language of finance and economics is now MATH. in order to understand the fundamentals of macroeconomics, you need to "speak" math. the game has changed since the days of Buffet and Soros.

as for talk about "time allocation" - you're a student. you should be busting your ass learning. far too many students value their time far too highly. as for talking about not wanting to compete with rentech, guess what, you need to compete with them whether you like it or not.

you guys should read Moneyball (http://en.wikipedia.org/wiki/Moneyball) to understand the kind of structural changes going on in every industry, but especially highly results-driven ones like finance.

 
drexelalum11:
Is there really anyone commenting on this thread who hasn't read Moneyball?

Oh come on Moneyball? I jus looked at your link, aside from the Pitchers for the A's who generally due well mainly because of their ballpark the hitters never did ANYTHING that wasnt directly related to steroids.

Moneyball should be renamed SteroidBall then you would have an accurate description of sabermetrics and the A's in the 80s,90s and early 2000s. When Jason Giambi left he had one good year then sucked. Eric Chavez had what 2 good years for the As then left and sucked. None of the other hitters panned out.

I dont think you can use sabermetics for hitting or in otherwords it is not as effective in hitting compared to pitching.

Also Lewis is a charlatan with a lot of the propaganda he writes.

The one who does not fall, does not stand up
 

Dudes - again - depends what asset class you would like to dedicate yourself to. Basic quantitative methods are important to have meaningful discourse with your head of risk management about macro hedges and portfolio risk, crucial as you rise to PMish roles. Try and get out there and meet people, try to understand how they originate and execute trades... Big buyers and Smart money move market makers' markets higher, big sellers move markets lower. How the biggest AUM and high-return players originate and execute ideas is important to understand. Don't try to pursue having a wider skillset for the sake of it - but having a more RELEVANT skillset is crucial.

Skillset relevance is understood by getting out and meeting people managing money in your specific style/asset-class. It's not imitation - it is understanding market participants, whether friends or foes... analogous to going out and watching an away team to study them before the game...

 

Absolutely product and strategy dependent. There are certain products where all the quant skills won't make a dent (distressed) and certain areas where having quant skills is important (say credit-equity arb).

There will always be a place for qualitative investors as there will be a place for quantitative investors. The very structure of markets guarantees this because you need heterogeneous strategies in order to fairly price securities. If everyone is using quant strategies then alpha will be squeezed out in particular securities/product verticals while your qualitative investor will be able to take advantage of this discrepancy. Vice versa is also true.

To see academic work of heterogenous markets applied to high-frequency situations read this: http://www.olsen.ch/fileadmin/Publications/Book/hffbookchapter12.pdf

The core concept applies across all timeframes.

At the end of the day, to remain competitive in the marketplace you should be familiar with it all. This is a competitive industry and my contacts who are very successful constantly learn and improve their game. If you lack quant skills, pick it up by studying some simple factor models (look at work done by Fama, Assness). You can find papers on SSRN or the Dimensional Fund Advisors website. They are simple to understand but are important to understand (in fact Assness ported many of those ideas to GSAM and to AQR). You can also get layman's explanation of quant techniques used in finance online (check out Wilmott, Nuclearphynanace etc).

 

back to the issue at hand:

I personally come from a quant background, and I can assuredly say that you do not need to have elite quant skills to become successful PM. While yes, in general, quantitative skills are now more prized in finance than they were a few generations ago, it will not make or break your success as a PM. The way to get around this is to just hire the best quant guy possible to explain to you what black magic he is working, and to take or leave his advice. Some of the PMs on my team come from heavy quant backgrounds, some come from something that is more traditional, and they are all very good at what they do. The point of strategy and asset class dependency is also valid. The goal is not to chase what asset class that is hot and tailor your style and skillset to that (very few places can afford to do that), but just focus on beating people in your space for the long run. If you don't have quantitative skills, you have every fundamental/event-driven guy in the world to compete with, which is not a great proposition either.

I think the best term I heard used by a PM was that he was 'agnostic' towards certain styles.

However, for understanding some of the more exotic risks and ways to hedge them, quantitative skills are nice. Do you need to know how to price a vol of vol swap? Not necessarily, but understanding why you would want to have one in your portfolio is pretty important too.

 
syntheticshit:
back to the issue at hand:

I personally come from a quant background, and I can assuredly say that you do not need to have elite quant skills to become successful PM. While yes, in general, quantitative skills are now more prized in finance than they were a few generations ago, it will not make or break your success as a PM. The way to get around this is to just hire the best quant guy possible to explain to you what black magic he is working, and to take or leave his advice. Some of the PMs on my team come from heavy quant backgrounds, some come from something that is more traditional, and they are all very good at what they do. The point of strategy and asset class dependency is also valid. The goal is not to chase what asset class that is hot and tailor your style and skillset to that (very few places can afford to do that), but just focus on beating people in your space for the long run. If you don't have quantitative skills, you have every fundamental/event-driven guy in the world to compete with, which is not a great proposition either.

I think the best term I heard used by a PM was that he was 'agnostic' towards certain styles.

However, for understanding some of the more exotic risks and ways to hedge them, quantitative skills are nice. Do you need to know how to price a vol of vol swap? Not necessarily, but understanding why you would want to have one in your portfolio is pretty important too.

very well said... so there is not a need for me to say it.

Please don't make me talk to you like an asshole...
 
Best Response

I am a portfolio manager at a macro fund and my "math skills" stop at UG level probability and stats. I can also program a bit in VBA. So basically my math skills are zero. Getting a PhD in Economics is not nearly neccesary to be a PM...you would be better served using that time actually being involved in markets and getting an understanding of how they work. Where I work we have PhDs and they usually have a hard time breaking through the analyst level because they dont understand the actual products we trade. I have spent my whole life on bond trading desks so things that come as second nature to me sound like a foreign language to these guys. Learning how to trade, finance, and manage leveraged positions in global interest rate markets is not something that is offered at any PhD program I have heard of.

 
Bondarb:
Learning how to trade, finance, and manage leveraged positions in global interest rate markets is not something that is offered at any PhD program I have heard of.

Why isn't this offered? Theoretically, you could almost perfectly simulate that with help from Bloomberg, and there are clearly more people who want to be investors than get the BB S&T jobs they need to teach them these skills (for a variety of reasons, many having to do with the unique culture and environment). ROI would be substantially higher than the masters in finance degrees where they teach you how to capm, lease capitalization, and black/scholes for a year.

 
monkeyc:
Bondarb:
Learning how to trade, finance, and manage leveraged positions in global interest rate markets is not something that is offered at any PhD program I have heard of.

Why isn't this offered? Theoretically, you could almost perfectly simulate that with help from Bloomberg, and there are clearly more people who want to be investors than get the BB S&T jobs they need to teach them these skills (for a variety of reasons, many having to do with the unique culture and environment). ROI would be substantially higher than the masters in finance degrees where they teach you how to capm, lease capitalization, and black/scholes for a year.

because nobody who actually knows what they are doing would want to work at a university and teach the course. It is the instructors which are limited, not the student demand.

 

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