Quant in rates modeling wanting some insight/advice about buy-side

So I work in a BB bank as a quant in its rates modeling team which is a part of quant research group. I intend to work in the buyside a fews years down the line, with ambitions like opening my own (quant?) fund later on in my career, being inspired by folks like Jaffray Woodriff, James Simons, etc.

However I don't really understand the buy side industry well. I know only some bits and pieces, like I'm acquainted with terms like HFT, relative value, statistical arbitrage, etc. but I haven't been able to form a good picture in my mind as to what this industry does and am not able to get an idea of which sub-area I would be interested in, in the long run.

(1) Can someone provide a broad overview of what different funds do, and what kind of knowledge or subject areas are relevant for whatever they do? Or at least point me towards sources that I can read which will help me get a clearer picture?

(2) Also, I see that quant funds hire PhDs as well as MFE/MFin graduates. Is there a difference in the kind of work that PhDs and MFEs would get, like MFEs wont be working on the same level of problems that PhDs would be working on ? Or its an even ground once you get hired and there is no difference in the kind of work they get?

(3) In the prop trading world, is it that firms like Optiver, etc don't hire you for the (quant) trader role once you are above a certain age? Is that a common practice across the industry?

(4) When you work as a quant in a quant hedge fund, are you limited to a certain set of strategies? Like for example, currently I am looking into two areas (a) HFT (b) relative value arbitrage strategies that employ a mix of quant and fundamentals. So for example, are these two areas very different in terms of the kind of skills you would need, or you could have a fund which for example employs HFT for relative value arb? ( I'm not sure if that even makes sense)

(5) What are some books or resources that I should read to understand quant buy side that will also help me narrow down the kind of strategies I would want to work with?

I would also love to answer questions about my own work if anyone has any. Thanks!

Comments (15)

 
Feb 22, 2020 - 11:38pm

I know what a hedge fund is. I understand the basic definitions of what a fund is, what different strategies they employ and so on. But I don't know the technicalities actually needed to start a fund from scratch.

I havent asked here "what is a hedge fund?".

 
  • Principal in HF - Event
Feb 22, 2020 - 12:41pm

If you want to leave for the buy side leave now. You're not learning anything that's going to help you there where you are now.

Based on a couple of years on sell side as a quant doing similar shit to what you're doing, followed by jumping to the buyside and a decade or so there at this point.

 
Feb 24, 2020 - 11:51pm

Could you expand a bit on what kind of funds are you talking about when you say SS quant work wont be relevant? Like for example would the work of an analyst at a fixed income relative value arb fund not have any overlap with the kind of work that a rates derivatives modeling quant does?

I guess I understand that funds which employ purely fundamental strategies would require the kind of finance theory I'm not getting exposed to here but like funds that employ a mix of both quantitative and fundamental; at least such funds would have an overlap with my current work I am guessing?

Also could you elaborate a bit on what kind of fund you work at and what strategy they employ? What skills and knowledge are important for you in your role and how are funds in your space doing in terms of performance ?

 
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  • Principal in HF - Event
Feb 25, 2020 - 5:13am

qwerty_mbb:

Could you expand a bit on what kind of funds are you talking about when you say SS quant work wont be relevant? Like for example would the work of an analyst at a fixed income relative value arb fund not have any overlap with the kind of work that a rates derivatives modeling quant does?

I guess I understand that funds which employ purely fundamental strategies would require the kind of finance theory I'm not getting exposed to here but like funds that employ a mix of both quantitative and fundamental; at least such funds would have an overlap with my current work I am guessing?

Also could you elaborate a bit on what kind of fund you work at and what strategy they employ? What skills and knowledge are important for you in your role and how are funds in your space doing in terms of performance ?

The relevance of work you've already done to the buy side will depend heavily on the type of strategy that the fund employs. What I'm saying is that a year or so of exposure on the sell side is going to give you almost everything you're ever going to get from your position. "A few years down the road" you're going to know very little of relevance that you don't already know, and are just going to he viewed by potential employers as more expensive, less flexible and with lower upside.

 
Feb 23, 2020 - 12:37pm

Try getting into HF where there have been SS quants. Think millennium or citadel for example. They want to trade rates exotics products.

IMO ( never worked on rates buyside), they want to provide tools to help assess RV and manage risk across crvs, currencies, and spreads.

Phd's are specialists, if the prob is in their ballpark, then why not use their training? Otherwise even game.

Some questions I have for you.

  1. What is your tech stack at the bank?
  2. What kind of work do you do now at banks? Maintaining Libraries, curve construction or researching pricing or trading strategies? How much coding vs analysis?
  3. On the rates trading side, I have seen a lot of departures and juniorization of the business. How has the QR team changed? ( less phds, more MFE's?) How often do people leave now? (80% of my intern class has left)
Array
 
Feb 24, 2020 - 11:45pm

1) tech stack: So our work utilizes the following applications:
(a) a python application that's slightly modified in terms of how you handle functions
(b) a trade booking application that FO probably uses in prod mode and we here use it in dev mode
(c) Quant Libraries through which trades get priced
(d) An application interface between the (b) and (a).

2) I am based not out of US/UK, so our QR team is in one of the offshore places but works very closely with the FO. I fought my way into this role and firm by cold calling and begging for an interview and then doing well in the interviews, so it wasnt really a mainstream path for me. So its not like I already had the required skills or knowledge, so for the initial few months they put me on simpler projects. I think thats how they work with new Analysts; ease them into the core work. Apart from programming and stats, a lot of derivative pricing theory and rates modeling theory is required in my job so they sort of gave us that breathing space to keep learning and upgrading skills at the same time. The kind of projects I've worked on till now have been re-review of couple of models for couple of exotic IR products. It involved changing the model quite a bit and implementing that change, testing it in terms of greeks stability and other parameters the bank thinks as important, and documentation.

There's a Physics PhD guy in our team who is really good at his job but I haven't seen even him work on curve construction or something similar yet. But let me speak to folks around and gauge what kinda work can we expect a few months down the line. Its a relatively new team so I guess they're trying to ease into more complex work with time.

What I do see here often is that our MD onshore probably has an idea of pricing strategy he wants to implement, and senior quants here work on implementing it in terms of the mathematics and programming involved in implementing it efficiently. So a lot of analysis does exist in that aspect; like how to implement it efficiently in the prod Quant Libraries and so on. But that would involve fair bit of coding too. Coding is the skeleton of this job I'd say.

So we are not a rates trading QR team per se, but rates modeling QR team, but I've heard that that might change in the near future and we might actually be getting work thats very relevant to rates traders' desk.

3) I see a lot of juniors in my team like analysts and associates. Associates are really good at their work from what I see. Very few seniors, and even on the onshore I don't see a lot of seniors so it probably tapers off a lot as you go up the pyramid. I did hear how a lot of seniors folks were let go before I had joined but they labelled it as a usual event since as you go up the pyramid it narrows and you need to let some people go.

About your suggestion:
So I don't necessarily want to get into a HF role which builds up on my current role if it narrows my options to managing risk. I wish to work where the most important stuff happens that is generating investment ideas and making subsequent bets/trades.

So I'm clueless about a few things:

(a) like do HFs make their main trades/bets on flow products and exotics are just to hedge these bets?

(b) Whatever I learn in rates derivatives modeling : no arbitrage derivative pricing, Interest rates modeling, computer science, statistics and probability, etc. - Is all of this relevant only to statistical/volatility arbitrage strategies on the buy side, and isn't relevant to say fixed income relative value ? Which could be because fixed income RV might be involving a lot of fundamental theory of finance which I don't get exposed to. Am i correct?

(c) Does HFT exist only for exchange traded products, or is it carried out for OTC (over the counter) traded products too ? Does HFT for exotic products make any sense?

(d) For funds that employ relative value strategies for example, do they have their own trading teams that execute these trades, and like use HFT to optimize trade execution? Also, if you join as an entry level analyst at such a fund, what kind of work are you exposed to and what is expected of you?

 
Feb 23, 2020 - 4:46pm

go search through forum posts these questions have all been asked and answered many times before. your lack of knowledge is going to hurt you in any interview or any conversation with a headhunter even.

 
Feb 25, 2020 - 1:21pm

i'm guessing you are perhaps located in the India or Budapest office (lots of quants in Budapest and India for some reason....i think they are cheaper than US quants).

Sellside banks use quants for pricing and portfolio modeling. They do this because customers force the banks to take positions as market makers, where the banks often cannot exit the position...and so they have to hedge with things that behave similarly.

Buyside firms don't have that problem....they can buy or sell just about whatever they want, within reason...and perhaps paying a wider bid/ask spread for the more exotic stuff.

The more exotic stuff (that requires quants to model) is more of an issue for the bank, because the bank generally doesn't want that risk...which is why they hedge. But often a perfect hedge does not exist....so the quants look for the best hedge available.

If you look at it from the buyside perspective....quants are more looking for ways to express an idea...and then the trader or PM calls a sellside bank and asks for a price on that structure. the bank then needs to be able to model the structure...and figure out how they would hedge this thing that has no direct hedge.

So, if you want to join the buyside, the major task is not knowing how to value some exotic structure....the hard thing is knowing "what exotic structure should i want to buy" and that is a different (but related) skillset vs what you are doing now. Coming up with the idea of what structure to buy, when the universe has unlimited options is a harder thing to do...requires creativity, and also the ability to picture where markets will be in the future..taking both time and the path of future prices into consideration. You are probably not learning how to predict the most likely path of future prices at time right now...because thats not necessary to figure out how to hedge....you are generally given a structure where somebody else made a prediction...and now you are asked "hedge this".

The original idea creation (with a track record of being right) is where the value lies on the buyside. The sellside wuant experience gives you a taste of structures that are available to buyside Portfolios...but you have not yet learned how to decide "what should i do now" because the world is always changing....history does not repeat.,..but it often rhymes, as they say.

All is not lost tho...you now need to find a way to explore the undiscovered country...which is a land filled with economics, market history, crowd theory, and all that fun market prediction stuff. Will take years to learn how to be that kind of PM (and be good at it). The best teachers are probably PMs on the buyside...so yes, ideally you go work for one and they teach you. Good luck finding that..

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