Next Generation Quants
The past several years brought serious challenges to quantitative modelers. In August 2007, a number of quantitative funds sustained sudden, large losses. In the 2008 credit crisis, complex instruments created with quantitative methods were blamed for bringing down parts of the financial sector. Mathematical risk management techniques were seen as having failed to indicate the true hazards of mortgage-backed securities, credit default swaps and a variety of complicated financial arrangements.
Nevertheless, quantitative approaches are seen as holding great promise for the future. Investors continue to pursue quantitative managers and managers look for up-and-coming quants.
We thought it would be interesting to get a sense of what the current environment means for the young men and women who will be building the new models and risk controls. Carnegie Mellon University's quantitative finance masters program graciously allowed us access during a recruitment event in New York. The following report by Chidem Kurdas is based on interviews with program administrators and students.
Financial engineering requires a combination of skills. Mathematics may be the basis but is insufficient in itself. You need to know finance to apply mathematical methods to markets, statistics to process market data and programming to code computer models.
Carnegie Mellon's Masters of Science degree in computational finance is a joint venture between the university's mathematics department, statistics department, business school and a management school strong on information technology. Started in 1994, the joint program was the first of its kind and is still widely regarded as one of the very best training camps for financial engineers.
"Our curriculum is custom tailored, combining stochastic processes and statistical analysis with finance to find solutions to the challenges faced by the increasingly complex financial services industry," says program executive director Richard Bryant.
The Pittsburg-based university has a satellite "campus" in a building right off Wall Street. A large number of the New York students have jobs and pursue a computational finance degree part time. The program is intense and takes three semesters full time, six semesters part time (table 1). Students typically do a summer internship after the first year, come back for the fall term and graduate in December. There were approximately 200 students in Fall 2009; there are fewer now because the previous cohort graduated.
Advanced Derivative Modeling
"It works so well because it is a joint venture between four colleges, giving us a great balance between the math, statistics, computer science and finance disciplines," says Diffy Paljevic, director of the program in New York. Many students come from technical fields like engineering and science (table 2). Quite a few have a graduate degree already and many have work experience.
Their comments suggest that they've identified and focused on certain problems in markets. Asked what they're learnt in the program, they identify the pricing of securities - a major issue for structured instruments - as the main area of learning. How to price securities was very challenging under certain market conditions, says one young gentleman.
He and others bring up the need to understand why models fail. The program teaches you how to come up with different kinds of models and be aware of their shortcomings, he says, emphasizing that "Models have flaws." That's a topic that became urgent for quantitative fund managers and risk officers after recent years' experience.
Some students want to get into derivatives trading while others prefer to focus on risk management. They talk about Monte Carlo simulations and derivatives modeling. On the whole, they're optimistic about the current environment and the new skills they're acquiring. "There are always up and down cycles," says one. "Right now is a good time to get in and go with the up cycle."
They like the program's alumni network and its flexibility. "If you want to do something, you can," says a young woman. "The program pushes you to be self-driven."
Notable interests outside finance are ping-pong and poker-the facilities, open 24 hours, include a recreation room with a much-used ping-pong table and a set-up for playing cards. That's for clearing the mind for work. White boards filled with intricate formulas are much in evidence. There's even a white board that can be connected to a computer to save or print the work. Cornell University also has a quantitative finance program in the same building.
Banks, asset management companies and large hedge funds like Citadel Group recruit from the group. Goldman Sachs and other investment banks were interviewing at the March recruitment event.
"We have deep and long-standing relationships with the banks and trading firms," says Sondi Pripstein, associate director at the business school's career opportunities center. "Last year was tough, though we still did well. We are seeing strong demand for quants this year."
Almost all the students do internships and 50% get a full-time job offer from the employer they interned with.
About two-thirds of the students are not US citizens and of those around two-thirds are from Asia. The largest group of Asian students are from China. "There are a lot of applicants from China,"; Mr. Bryant says. "The ones we admit have incredibly strong training."
He's noticed an interesting trend. Five years ago, all the Chinese students wanted to stay in the US. Now, some see better opportunities in Hong Kong, Shanghai and Singapore. Their skills are in high demand in Asia and they can get serious responsibilities earlier than they could get in the US or Europe.
Asian students say they're pretty mobile and would not mind working in different places before heading back home. Eventually, though, they expect to go back. Some have already worked for Asian banks and are familiar with Asian markets. One recent graduate preferred an offer from a US bank for a job in Hong Kong instead of a position in NY.
Indian students, another large group, sound very excited about the financial industry in their country. "There is a lot of opportunity in India," says one.
Interestingly, we encountered an example of quantitative research in China when we spoke to Brad Paskewitz for Founders Q&A. Besides managing Paskewitz Asset Management, a systematic managed futures shop in New Jersey, USA, he has a team of quants and programmers in Beijing and Zhengzhou, China.
His chief financial officer, Diana King, is Chinese. Recently the Chinese group has been busy developing and testing algorithms for a new trading program Mr. Paskewitz expects to start soon.