Top hedge fund manager warns quant funds are becoming utilities

If you’re a quant who aspires to work on the buy-side today, you might be tempted by the big money on offer at big funds like Bridgewater or aspire to work for a niche fund like BlueCove. If so, you may want to move soon. One of the UK’s top quant fund managers says quant funds now have such high costs that they’re in danger of changing into utilities.

Speaking at today’s Quant Conference in London, Cantab founder and chief investment officer Ewan Kirk said it’s becoming very difficult to set up a new quant fund due to the elevated costs associated with the industry.

“One of the issues with quant trading is that there’s a certain irreducible size,” said Kirk. “You need to have your data centre…your back-up data centre, fast connections…” There’s also a need for, “smart programmers, quants, dev-ops people.” To succeed as a quant fund, it’s imperative to spend an “eye-wateringly large amount,” Kirk said: “It’s a big deal to get started.”

As costs rise, Kirk warned that smaller quant trading funds risk being squeezed out of business and large funds stand to get larger still. “It’s very hard to be a small quant firm,” he said. “You need to be a big quant firm and then you just need to start getting bigger and better to use more data.”

Kirk said that ultimately all quant funds stand to become like AQR Capital Management or bigger as they expand and compete to reduce marginal costs. “The end point of that [process] is AQR,” he said. “That’s all that’s left…and then AQR becomes a utility.”

Kirk confessed to being “deliberately provocative,” but his comments may not be entirely unreasonable. As we noted last month, spending on data and technology at hedge fund Qube Research and Technologies rose 30% in 2018 and pay for employees fell. The COO of a rival quant fund complained at the time that the cost of data was rising above the rate of inflation and squeezing profitability.

Kirk’s comments therefore sound a cautionary note for today’s young quants who imagine a rich landscape filled with future employment opportunities. Instead, there may only be a few generic players that pay less than the market and have a huge turnover of juniors (both accusations leveled, possibly unfairly, at AQR.)

Kirk also cast aspersions on the use of artificial intelligence (AI) by quant funds. AI is simply statistics, said Kirk. “The reality is not the hype,” he added, noting that AI isn’t useless but is more relevant to making film suggestions on Netflix than to selecting investments. “The joke in AI circles is that [useful] AI is always 20 years away,” Kirk concluded.  

Photo by Yana Krivobok on Unsplash

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