Is the era of Quant Finance over?

After recent losses suffered by Quantitative Hedge funds (like: Goldman Sachs Global Alpha and many others) some people wonder, if the era of quantitative finance is over. The quantitative funds are not considered to be money making perpetuum mobile any more. Number of people finally realized that it is impossible to make 20% profit every year without bearing any significant risk. This will now directly translate into the money inflow into quantitative funds in the years to come. This inflow will of course be much lower than what was observed before the credit crunch, so there would be definitely much less career opportunities in the quantitative finance field. I expect that demand for quants will be very low for at least 2 or 3 years. However, at the same time the supply of quants is very strong. In recent years almost every university started its financial maths or financial engineering program. The number of people, who will be graduating from quantitative programs goes now into tens of thousands every year, so you can imagine that it will be very hard to find a decent jobs in QF (and of course salaries will go down as well).

So, what can you do to improve your chances for employment if you are studying at a one of numerous MFE programs? First, work on your soft skills. In the current job market, not only you need to be able to solve Black-Scholes model, but you need to know what is happening in the macroeconomics for example. Second, work on your programming skills. In current market, IT skills is the asset that can find you a job. There are much more places in the banks for Quantitative Developers than just for Quants. Third, be open to other opportunities. Your quantitative skills will be useful not only in the investment banking. You can find that the work for the startups or other smaller companies may be very interesting (and even more rewarding that the work for investment banks).

As usual if you have comments or you would like to express your opinion, I invite you to the "Careers in Business Forum at forum.examhub.org".

Which parts of the market are still alive?

If you are brave you may still fight for the job even in this very bad environment. What you need to know at this stage is which parts of the markets are not dead. Surprisingly there are some areas which are still hiring and these are:

- Risk management (FRM type of jobs)
- Distressed debt (MBA) *
- Equity underwriting (MBA)
- Emerging markets IBD (MBA)

Unfortunately the competition for these few spots is very intense. There is a number of people, who were fired recently, and they want to find their way back to investment banking.

* - If you know French or German or Polish and you would like to work for a small and presigous Distressed Debt fund - please let me know (with CV): phdstudent2007@gmail.com

Results of seventh survey

When the situation improves?

I think that's the question a number of people is asking right now. The mood in Investment Banking is very poor, and that translates directly into lack of employment opportunities... The sad truth is: the banks are not hiring.

In the worst situations are people, who quite recently invested in their education, and now are not able to find a job (example from Investment Banking Forum - please gives your thoughts on the forum). In many cases with debts and some other obligations, these people may be forced to look for employment in sectors other than finance. (An interesting article from Journal of Finance about the impact of the crisis on the lifes of MBA students - really worth reading at least the introduction)

The most important question right now is how long will the bad mood last. I asked this question to a head-hunter who is a friend of mine (cheers Craig!) and who forecasted the downturn at a time, when everyone else was certain that the markets would always grow. Now, he thinks that by the end of the summer the banks will finish writing-off the credit mess. He thinks that by the end of the year (Dec 2008) there will be some capacity in the banks to create new teams. He claims that the general revival will come in the first half of 2009.
I think that he may be right - he is really a great mind and knows the industry inside-out.

Now the question is "what to do during the slowdown"? I wrote about it before in my previous post: "slowdown a good time for education". I still think that each of us should spend the time most productively to polish and improve his or her CV. Doing a financial certificate seems to be a perfect idea. However, if you are forced to get a source of income changing an industry may be inevitable.

Results of sixth survey

CFA or MBA (or both)?

Number of readers of my blog ask me whether it is a good time now to start CFA or MBA degree. In this post I will discuss pros and cons of starting any degree program at the moment.
As you know markets are stagnant now, there is informal hiring freeze and in fact short-term prospects are really bad. No one knows when markets will be back to previous state again. It maybe a year or even three. This timing is the biggest risk for your decision whether to move into further education or not.
If the markets rebound quickly, its pretty save to start let say 1-year MBA. When you finish your degree you will be in a good position to get on board in major investment bank. On the other hand if you decide to quit your current job and start your MBA now and if the markets are stagnant when you graduate you may be really unhappy that you did it.
So the solution is as follows: If you really believe that the downturn will be short go for good MBA program (you even still have time to apply). If your expectations render to be correct you will be in perfect position to accelerate you career when the markets rebound (this time with MBA). If you think that downturn will be longer, or you really don’t know think rather about CFA that will allow you to improve your qualifications while still on the job. In comparison to MBA CFA is much more flexible and much more cost-efficient, but you must remember that finishing CFA is minimum 2,5 year now.

Results of fifth survey

Slowdown - a good time for education

It seems it will take a while for the financial markets to get back to a healthy state. Currently, the banks have decreased their recruitment efforts significantly. It appears that getting IBank job may be a very difficult task at the moment. Probably this is good time now to go back to school. Doing additional certificate or degree, when the market is stagnant, may be an extremely good investment. Not only will you get a powerful credential when the market is back to healthy state again, but also you will NOT lose too many opportunities. The alternative cost of studying is now smaller than usual.
The big question is, however, how long will the current crisis last. If it is short, you’d rather not start PhD program for example. You don’t want to be stuck preparing your dissertation when the market is booming and all your friends are making big bucks.
If I were to guess I would say that it will take about 2 years for the financial job market to be hot again. This indicates that CFA or MBA may be good options. If you can’t afford halting your current job than go for CFA (or CAIA or CQF), otherwise think about the MBA. With additional credentials, when the market is booming again, you will be in much better position to advance your career.

Results of fourth survey

Sankaty Advisors vs DEShaw - MBA vs PhD Hedge Fund

Recently, I had an nice opportunity to attend company presentations of Sankaty Advisors (which is part of famous Bain Capital) and DE Shaw. These two companies are considered to be best Hedge Funds in their classes. Sankaty Advisors has very fundamental oriented investment strategy, whereas DE Shaw is considered to be purely quantitatively driven. Both companies generated superior returns in recent years.
I am writing about these hedge funds just to show how different opportunities Hedge Fund industry offers. Comparison of the profiles of these two companies shows that there is place in HF industry for both business major students with MBAs or CFAs (Sankaty Advisors) and also for those who have scientific background like PhD (DEShaw).
Sankaty Advisors invests in leveraged loans, high-yield bonds, distressed/stressed debt, mezzanine debt, structured products and selected equities. Sankaty Advisors puts great emphasis on fundamental analysis. They claim they always need to understand the business of any company they are investing in. If you would like to work in this firm, MBA or CFA would be highly beneficial.
DEShaw is mainly statistical arbitrage fund, so great deal of transactions is automated. Computers using sophisticated trading models are speculating on various markets and are exploiting subtle mispricings. Your mathematical background may be very useful in the process of preparing this models.
As the example of these companies show, hedge fund industry is not a solid entity. There is a number of different opportunities you may pursue if you want to work there and each of these opportunities may be prestigious and rewarding.

If I were to decide between these companies I would have a great problem. Both seem to be really nice. The presentations were on comparable level. However, I believe what I would learn in Sankaty Advisors would be more transferable. I could learn a lot about the business and "fundamental oriented investing" and then apply this knowledge somewhere else later. The same with DEShaw would not be that easy. There are not so many places in which you can use cutting edge quantitative skills. Maybe some statistical arbitrage desks of Investment Banks, but still the market is not that big for that. So, I claim that in fact Sankaty Advisors is a safer option for those willing to go for Hedge Fund industry.

If you know something more about various hedge fund please write about this in comments to this post.