What Are Quants and What Do They Do?
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You might have heard the term “quant” thrown around from time to time if you pay any attention to stocks, shares, hedge funds, or general Wall Street affairs. But do you know what, or perhaps more appropriately, “who” quants are? Well, it’s time to start taking a look, as not only will need to get to grips with some basic terms if you’re going to start engaging with any of the aforementioned activities, but quants could actually make you a whole lot of money when you do start to test the waters! So, here’s everything that you could possibly need to know about “quants”!
What Does “Quant” Stand For?
“Quant” is short for “quantitative analyst.” These are individuals who combine knowledge in the fields of maths, finance, and computer sciences, in order to understand the mind-boggling mathematical models that price financial securities (tradable financial assets). Their role can also be pushed further, as increased demand has resulted in people looking not only for individuals who can understand the mathematical models, but also individuals who can enhance these models in order to produce significant profits with lower risks.
When Might You Need to Work With a Quant?
Quants are, as we just mentioned, in relatively high demand, so their services can often come hand in hand with a pretty high price tag. They are generally employed by investment banks, commercial banks, insurance companies, management consultancies, and software and information providers the world over. Trends have seen the majority of them focus a lot of their time and effort on rapid growth and automated trading systems, liquid and illiquid securities, and market-neutral investments. However, if you are not involved in any of these areas of business, you are most likely to engage with a quant through hedge fund investments. Hedge funds are a collaborative form of investment, where you and various others will pool together money which can then be invested in areas that show promise of high returns. Alternatively, you may work alongside a quant if you simply require advice in regards to pricing or trading tools or they may even carry out a little risk management analysis for you. They will help you to achieve your investment goals by conducting research, validating new models, and creating new strategies to see your investments bring back as much profit as possible.
Alternatives to a Quant
Not everyone will be able to afford to collaborate with a quant whenever they wish. As they can make you such high returns, they will generally charge a large amount for their services, and you can often see quant positions advertised with salaries reaching hundreds of thousands a year. You may also want to understand their role more thoroughly in order to get a better idea of what they’re doing and to form a judgment on their decisions yourself. So, if you don’t have a whole lot of cash to offer, you might have to consider an alternative. One is to build up your knowledge in the area and use the same algorithmic trading software that professional quants make use of. This will help you to backtest, optimize, and execute multi-asset trading strategies in the same way that these individuals would. Here are a few areas that you might want to focus on studying to make a success of this!
Computer Competency
First things first, any quant needs to be proficient with a computer. You will have to be able to employ software skills for all sorts of programmes to make the most of any investment. This includes trading applications and offline statistical analysis performed by Matlab, SAS, or S-PLUS/R. The more you know about these programmes, the easier your job will be.
Finances
In order to play the role of a quant yourself, you will also need to fully understand financial securities. A financial security is a “fungible” (or interchangeable), negotiable financial instrument. It will hold some kind of monetary value (though this fluctuates depending on the type of security you’re engaging with). It will also represent an ownership position in a publicly-traded corporation (for example, a stock), a creditor relationship with a corporation or governmental body, or rights to ownership presented by an option. Now, once you’ve wrapped your head around this, you may believe that many financial securities are simple and will be easy to model. However, this isn’t always true. Some are complex and will take a while to structure, so patience is a virtue! A good knowledge of the market and individual companies is beneficial but not necessarily essential.
Mathematics
Now, this is where a quant gains the big bucks: their mathematical knowledge. This is what separates them from others and makes them more valuable, as they will be able to apply theories such as calculus (differential, integral, and stochastic), linear algebra, differential equations, and probability and statistics to:
- Equity and interest rate derivatives (including exotics)
- Credit-risk products
- Portfolio theory
- Specialist products
As you can see, quants are an essential part of financial affairs for people operating in all sorts of sectors of the marketplace. Not only do they combine a surprising number of skills to complete their jobs to the utmost of their potential performance, but many have years’ worth of experience to bring to the table too. Now, they’re going to come hand in hand with a high budget when they are so in demand from huge investors and companies, but there are certain ways that you can pull together a few of their skills to try out their role for yourself if you find that a good quality quantitative analyst is a little out of your budget. As long as you know what they do and what they can be employed to do, you’re one step ahead of the game the next time the subject comes up in conversation or the next time you’re looking for a financial area to get involved in! Hopefully, the above information has helped you in your journey in some way or another and can be put to some good use in the near future.
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