Quant hedge funds struggle to hold on to mathematical whizz kids
PhDs working in quantitative hedge funds are considering their career options. After a tough few years for such strategies, some hedge funds have rolled out redundancies, while the job market within the alternatives space has generally dampened for mathematical whizz kids.
Quantitative hedge fund strategies have lost money in four of the last five years, as computer-driven models have been thrown off by market movements that follow the tactics of central banks and populist politics.
These funds haven’t, however, been particularly keen to swing the axe – Winton Capital, for instance, insists it will continue to hire quants even after a difficult period, BlueCrest has been recruiting and Cantab Capital has kept headcount largely stable.
The exception is Man Group’s AHL fund. Since spinning out AHL as a separate entity in April, nearly 20 people have departed, according to the FCA register, and these are primarily quants.
Steffan Berridge, dimension portfolio manager, left in September and is now a quantitative strategist at Gareth Morgan Investments in New Zealand; Martin Layton, its head of strategic research in Oxford, was hired by Fulcrum Asset Management in August and Bruno Decourt, a quantitative portfolio manager, joined Citadel in the same month.
“There is still considerable appetite for quants in finance generally, but quant hedge funds have been doing poorly enough that they aren't where most quants are going,” says James Owen Weatherall, author of The Physics of Wall Street. “There are now a lot of funds competing with very similar strategies, and so it's increasingly difficult to be the most sophisticated trader in the market.”
Quants have, of course, long occupied positions in the financial sector, with hedge funds offering the potential for the highest rewards. Winton paid its employees an average of £262.5k last year, while this figure was £346.3k at Cantab. This year, hedge funds are increasing their bonus payments by 10-15%, according to research from headhunters Glocap, but quant funds are expected to pay less, says the firm's managing director, Anthony Keizer.
To suggest the quant model of investing is dead would be "akin to saying that since materials stocks are struggling, stock investing is broken," says John Fawcett, CEO of Quantopian, an online community for quants. "It's just silly."
Times are getting tougher, though, believes Michael Halls-Moore, a former hedge fund quant and founder of QuantStart: “Funds are now only looking for the best and brightest. This makes it difficult for them to find the right talent. With sustained underperformance comes reduced headcount and in order to find new sources of alpha, funds are only hiring top researchers.”
Outside of the pure computer-driven hedge funds, working in quant role has been a frustrating experience for many, competing against supposedly more dynamic portfolio managers in traditional investment roles, says Fawcett.
"They are treated as second-class geeks, and they watch traditional PMs move up the ranks and take home bigger pay cheques," he says.
New homes for quants
So, where are quants heading? Halls-Moore believes that those with experience and a solid track-record are still being offered new opportunities within quant hedge funds, particularly smaller start-ups which want seasoned professionals.
“Many are now striking out on their own, as it is becoming cheaper and easier in the sense of more sophisticated IT and research tools for a small group to quickly get to a point where they can manage money,” he adds.
One recent example is Richard Bateson, former dimension temp portfolio manager AHL, who has just launched London Quantitative Investments. Globally, there were 84 quant hedge funds launched so far this year, according to data provided by Preqin, compared to 95 in 2012.
"The traditional barriers to setting up your own fund are dropping every day as the tools of the trade (hosted computing, high quality data, open source statistics and machine learning libraries) drop into the retail pricing space," adds Fawcett.
Others are being recruited by hedge funds with a different approach, says Keizner: “One interesting development is the increase in ‘quantamental’ approaches - using quant screens to identify opportunities, but then relying on a human overlay before execution.”
Increasingly, though, believes Halls-Moore, they’re ditching the financial sector altogether: “There are quite a few quants leaving finance to head to the tech start-up scene in London, San Francisco and NYC, particularly in consumer/social start-ups that collect vast quantities of data and are unable to figure out how best to analyse it,” he says.
Perhaps worryingly for quant hedge funds, more mathematical and physics PhDs are bypassing finance altogether from the outset, with Keizner describing the boom in the tech industry as providing a “new outlet” for quants.