Professionals that work at the confluence of finance, mathematics, and programming to devise trading strategies are known as financial engineers or “quants.” They build computer models and trading programs that are used to generate arbitrage profits or for risk mitigation. Generally, quants have advanced degrees in mathematics, physics, finance, economics or computer science and are proficient in programming languages such as C++. Most quants have Ph.D. degrees and unlike MBA candidates the pedigree of your university is less important than your skill sets.
Most financial engineers work in fixed income markets as structured finance analysts designing and trading complex structured mortgage and credit products like CDOs. These instruments were widely thought as a catalyst to the recent global financial crisis. In the ensuing recession and the hiring freeze, many fixed income quants were laid off. As scrutiny of risks in such complex financial products has grown, structured finance quants have found jobs in the risk management area of financial services firms. Other areas in fixed income markets that attract quants are volatility trading, modeling of term structure (i.e., interest rates) and fixed income arbitrage such as curve trading, basis trading, currency pairs trading, etc. These areas of fixed income financial engineering are hiring.
Proprietary trading and algorithmic trading in equities is another area where quants have historically dominated. These types of trading strategies involve advanced computer decision models which take market technicals into account. With the enactment of the Dodd-Frank Act which promulgated wide scale financial reforms, banks are not allowed to engage in proprietary trading. Another, area in quantitative equity strategies, involves high frequency trading, an area that is still hiring. High frequency trading platforms take advantage of latency in price discovery by executing trades in fractions of seconds ahead of other investors.
Equity derivatives is another area that is still going strong. The genesis of financial engineering can be traced to the pioneering work done in the early seventies by Robert Merton, Myron Scholes and Fischer Black (the first two won the 1997 Nobel prize in Economics) on option pricing theory. Since then the theory and practice of equity option valuation has come a long way. Trading of complex equity derivatives is based on the valuation and hedging models built by quants. French investment banks are the bastion of equity derivatives quants as graduates of the famous École Polytechnique (akin to the IITs) gravitate to financial engineering.
Compensation of quants varies quite a lot and depends largely on the team and individual performance – often measured by profit/loss. Other less important factors are experience and marketability of a specific quant. Most quants earn anywhere between $150K to $2 million. The median total compensation of an experienced quant working at a hedge fund is around $400K. A day in the life of a quant is very hectic and pressured. Most of her time is spent on modeling, coding, interacting with traders and following the markets.
Careers In Quantitative Finance
Head of Portfolio Risk and Derivatives. Vanguard