What is Quantitative Finance & Financial Engineering?
Quantitative finance is the use of advanced mathematical concepts in the field of finance. This includes concepts like linear algebra, probability theory, multivariate calculus, econometrics and advanced statistics, differential equations etc. These mathematical techniques may be used in investment banking or for hedging, risk management, trading, asset management and so on in order to achieve specific goals.
Financial engineering is essentially the same as quantitative finance, with one possible difference being that financial engineering is an applied discipline whereas quantitative finance can be both applied or just theoretical. Quantitative analysts or financial engineers working in finance are usually just called quants.
Computational finance is the use of computer science to solve quantitative problems in the field of finance. It can be a sub-discipline in its own right, although most quants or financial engineers write their own algorithms and code for the most part.
The job description for quants or financial engineers depends entirely on the division they’re working for. For example, a quant working for the trading desk would be performing different calculations than someone in risk management. The similarity between them exists in the sense that they all use complex mathematical models to perform their analysis.
Trading, Portfolio Management and Research
Trading is all about making a profit from buying and selling securities. Quants are involved in both frontline trading as well as portfolio management which is more about having a strategic overview of the entire portfolio rather than profiting from an individual security.
- Quants develop algorithms for arbitrage or high-frequency trading. This is a multi-part process where a unique trading strategy must first be conceptualized and then tested and implemented.
- Researching academic journals and bringing those concepts to life in simulated and eventually live trading environments.
- Quants can also be involved in front-end trades directly. This turns the job into a mix of trading and quantitative analysis.
- Portfolio management roles require looking at the correlation and relationships between hundreds of securities and dozens of asset classes. Things can get really complex here, with convoluted relationships between assets and thousands of dynamic variables.
- Quants have to manage all of this data, find ways to process it, analyze it, find any patterns and then use that information to benefit from it.
- Large banks often have dedicated teams working on specific research tasks. For example, there might be quants attached to macro trading, fixed income or derivatives and so on.
Quant developers are the professionals who are more focused on creating an efficient implementation of algorithmic trading strategies.
- This role is a mixture of software development with a bit of finance thrown in for good measure. However, the focus is mainly on the development side and you will spend the majority of your day coding and churning out production versions of algorithms in C++, Java, C# etc.
- Developers make complex models or software that utilize whatever algorithms other departments have come up with. The role is less research focused, but still complex enough to be a part of quantitative finance.
- High-frequency and electronic trading models can be quite complex and require intricate monitoring systems and rapid responses in case of any issues.
While risk management has always been important, it took over a new meaning after the 2008 crisis. Banks have realized how important risk management is and with assets being spread all over the world, risk management has become exponentially more involved.
Which is why quantitative analysts and financial engineers are increasingly in demand in the risk management departments of the world’s leading banks.
- Risk management includes performing risk analytics and risk management using intricate statistical models. There are dozens of different types of risks that are faced by financial institutions like credit risk, market risk, portfolio risk, liquidity risk etc., which have talked about in another article on financial risk management careers here.
- Model validation involves quants looking at existing or new models and testing them for robustness or accuracy.
- Quantitative Risk Management (QRM) principles require constant monitoring and tweaking on a global scale.
Qualifications and Skills
Unmatched quantitative skills – While almost all banking roles require some amount of quantitative skills, for the quants this needs to be just on a whole different level. The role is closer to research than it is to mainstream finance. This is why most quant roles in top firms are occupied by PhDs in physics, mathematics or equivalent.
You really have to be exceptional when it comes to statistics, calculus, probability theory and other mathematical concepts.
Programming Skills – Quants and financial engineers are expected to have high level programming skills. Some sort of experience with C++, Python, R, or MATLAB is almost mandatory. Even if you’re not in a development role, you would still need to be able to write code in order to perform quantitative analysis.
If you are in a development-oriented role, then programming and coding will be your bread-and-butter. First you must work on understanding the requirements of the traders. Then you test and deliver the product. Lastly, you must provide continuing support and monitor performance on a real-time basis.
Trading aptitude – If you are on the trading side, then you obviously need to possess the skills necessary to excel in a live trading environment. Have a look at the hedge fund guide to get an idea of what high-level trading is all about. Many quants work in the hedge fund industry and the line between a Quant and a trader can get rather blurred here.
Even if you are not making the trades directly, you can still be attached to the trading desk in order to provide live support to the sales and trading staff of the desk. This is especially true for complex derivative products.
Risk Management skills – Some quants work exclusively on risk management while others perform a more supportive role in order to manage and monitor risks. Either way, a deep understanding of risk management principles is considered essential.
Quantitative Risk Management (QRM) is a modern scientific approach to managing risk. QRM has been occupying a more central position in the risk management strategies of financial institutions as well as regulators.
As a quant, you might be responsible for quantitatively monitoring and managing the risk of your own firm or doing it on your client’s behalf. You will deal with concepts like VaR, CFaR, EaR and other such concepts on a daily basis.
Understanding asset classes and their relationships – Each asset class behaves uniquely and many of these influencing factors are correlated in some way. The complex relationship between different market securities, commodities, currencies, derivatives and so on have to be understood by the quants in order to develop models for effectively managing such portfolios.
How to Become a Quant
Quantitative analysts and financial engineers hail from a variety of backgrounds including science, academia, engineering, software development, finance and so on. This means that there is more than one way to get in and there is more than one role to perform.
The focus is more on your ability to solve complex problems using computational and mathematical concepts. If you can demonstrate that ability to your recruiters, then you’ve already won half the battle.
Quants are rare in the sense that academic qualifications have a relatively sizeable contribution to the overall quality of your CV compared to your work experience. For most other banking roles, you need to demonstrate some sort of relevant work experience. But for quant roles, you can just talk about your PhD dissertation and blow all the other career traders out of the water!
And unlike most other banking roles, it is also a lot easier to get into quantitative finance from non-financial roles. For example, if you have good, solid experience developing mathematical software applications, then you might be more desirable to the recruiters than another banker. Similarly, if you have been working as a researcher in some quant-heavy field, then you also might be highly desirable to many funds and institutions.
Academics and Certifications
Quants and financial engineers often have doctorates in subjects like mathematics, physics, computer science, economics or other quantitative fields. Some universities have created specialized Master’s in Financial Engineering (MFE) courses that are specifically designed for these roles. MFE Courses offered by Baruch College, UC Berkeley, Columbia University etc. are especially well known.
However, you don’t necessarily need one of these specialized MFE courses to be a quant or financial engineers. In addition to doctorates or MFE degrees, a master’s in finance, engineering or mathematics from an especially good university can be just as valuable. In fact, if you can demonstrate the necessary quantitative aptitude to the recruiters, you can mostly get away with cursory financial knowledge (as long as you can display your interest in learning it).
Expertise in programming languages like C++, Python, R, or MATLAB is almost always required. There are plenty of online courses available for you to get a basic grasp on these.
Quant Career Resources
Financial Engineers focus less on finance and more on programming, math and statistics. This list of resources is based on that consideration as well as recommendations from people in this field.
|Resource Type||Resource Provider||Learn More|
|Best Quant Certification||Quantitative Methods for Finance from the New York Institute of Finance||Check Course Details|
|Best Data/ Programming Certification||Data Analysis and Programming from the New York Institute of Finance||Check Course Details|
|Best Book (for interview prep)||Heard on The Street: Quantitative Questions from Wall Street Job Interviews||Check on Amazon|
|Professional Resume Writing Service||Resume Planet||Check Details|
Salary and Bonus
Quant salaries can be highly variable depending on whether you are part of a revenue generating desk or a cost center. If you are directly generating revenue, then you are treated as a front-end employee and your compensation is closely related to how much cash you are bringing in. But if you’re in development, risk management or support, then you are part of the middle/ back office and your bonus would likely reflect that.
Base salaries are usually between USD 150,000 to USD 200,000 for the first few years, with a variable component averaging around 50%-150% on top of that. The higher end of that spectrum is usually reserved for top end funds operating in cities like New York or London. Outside of these top funds, the numbers can be slightly lower but large asset management firms still should be able to more or less match this.
The total compensation is not at all bad for someone just starting out. But you have to consider the fact that this is after completing a masters or even a PhD which means you have spent a few extra years of your life just completing your education.
This is why being a quantitative analyst or financial engineer is ideal for a research oriented, math geek who would rather build complex models at her own pace instead of schmoozing clients all day long.
A Normal Day as a Quant
How your normal day goes depends on what your role is exactly.
Trading roles: You are essentially just another trader, but with a much bigger focus on quantitative analysis. Start your day just like any other trader by devouring financial newspapers and getting caught up with all material information related to companies or sectors that you or your clients are active in. If you’re a prop trader, then you try and make money for your own desk.
The day usually comes to an end as the markets close. After that you just have to complete some house cleaning activities like paperwork or regulatory reporting, and you are done for the day.
Development or support roles: Developers work on long-term projects and therefore have a lot of flexibility in terms of how they want to structure their days. There is usually no one breathing down your neck everyday as you only have to deliver milestones on specific dates. You would still have a lot of meetings with the front-end staff and middle office departments like compliance etc. in order to make sure that everybody’s on the same page.
Risk Management type roles: These guys fall somewhere in the middle in terms of daily activity. For example, you might have to actively monitor several risk metrices on a real time basis. While in the longer term, you would have to look at the overall direction and movement of your portfolio and the market as a whole.
Quants have a rather healthy work life balance. The typical day usually last from 8 AM to around 6 PM. The average workweek is around 50 to 60 hours with only rare spikes in case of some project deadline approaching or other such special circumstance.
- People who are on the trading desks tend to have more stressful days, but they usually don’t have to stick around after market hours or work on weekends.
- People working on the research and development side might have to spend long hours if a project deadline is approaching, but otherwise they tend to have quite some leeway since these are long-term projects.
- Risk management quants are somewhere in the middle as they have to actively monitor and report on various risk metrics.
Career Path and Progression
Quants are scientists, researchers and mathematicians at heart. This means that they prefer intellectual challenges and the world of high finance provides them with plenty of opportunities to do just that.
Hedge Funds and Asset Management
Investment management and trading is becoming increasingly computerized and it is the quants who are the brains behind all the algorithms that are deployed in algorithmic or high-frequency trading. More and more funds are moving towards an AI and machine-driven approach to trading and investment.
There are plenty of opportunities for capable quantitative analysts and financial engineers to move into a variety of different types of funds utilizing different strategies.
Moving to a different quant role
As explained in the sections above, quants and financial engineers can work on trading, portfolio management, risk management, development, support, research and many different areas. It’s possible to move between some of these and the financial incentive to do can be substantial.
You will likely have an edge when considering such a move, provided you can display extraordinary ability to handle the demands of the new role you are gunning for.
Fintech is a pretty broad term for whenever finance and technology intersect. There are dozens of fields within FinTech like RegTech, Blockchain, Cybersecurity etc. These fields are seeing rapid growth with hundreds of start-ups or established firms coming up with new and innovative products every year.
Quants have a combination of skills that makes them perfect for tackling financial problems using technology. I’ve covered many of the career opportunities in the FinTech sector in this article here.
Moving to BigTech
BigTech is a term used to define the technology behemoths like Google, Microsoft, Amazon etc. These companies are increasingly pushing into the financial services sector and that is a decent career option for quants who want to focus more on the technology side of things. These tech companies have a lot more technical expertise and a work environment that is better suited for tech types.
Another interesting consideration is that these firms usually have highly research-oriented skunkworks departments which operate a lot more dynamically than the quant roles at banks or asset management firms. So these tech companies might be a better fit for someone who just wants to experiment and come up with new ideas.
Academia or core industries
Quants often have doctorates or masters in physics, mathematics, economics or other quantitative fields. This means that they can always move into academia and share what they have learned with the next generation of financial engineers.
Moving into core industries is also possible as there always are high-paying research jobs available for PhDs in these quantitative feels.