10 Things That Worry Quants

Tyler Durden's picture

Fundamentally oriented investors tend to think that quants, like blondes, have all the fun. As ConvergEx's Nick Colas notes - it all looks like easy money - scalping trades with lightning fast computers, front running news with preferential access to press releases, or managing leveraged portfolios with thousands of small but profitable positions – but quants face their own significant challenges. Finding common rule sets that work in a wide array of stocks is not easy, and markets adapt quickly to close opportunities that seem historically profitable - the number of potential signals is seemingly endless; and regulators are now aware of quantitative investing and, in some cases, don't like what they see. Here are 10 reasons why why "it's not easy being a quant."

In summary, Colas points out, the fundamental/quant investor divide is a case of “The grass is always greener on the other side of the fence.”

Via ConvergEx's Nick Colas,

Have you ever had one of those dreams where you are out in public and suddenly realize you’ve forgotten to put on your pants?  Everyone is staring at you, and for a while you just wonder why.  Do you look especially attractive today?  No, that can’t be it; some people are laughing at you.  Then you realize: no pants!  General embarrassment ensues.  And then, hopefully, you wake up.

I had an analog experience today while presenting at a conference entitled “Quantitative Investing with News & Sentiment Analysis” hosted by Deltix and RavenPack, two preeminent vendors in the front-page world of quant investing.  The organizers asked me to give the lead-off talk to the room of about 100 number-crunchers, the topic of which was basically “What does the rest of the investment world think about quants?”   My message was as follows:

Capital markets connect investors, managements, employees, retirees and other savers – basically everyone in society – together into one economic ecosystem.  As such, markets are hugely important and their credibility is a lynchpin social issue.


Fundamental investors – I used famed Fidelity Magellan Fund manager Peter Lynch as one example – are useful spokespeople for capital markets.  They connect what goes on in asset prices, especially equities, to economic outcomes in a way people can understand.  And, if they do as well as Peter Lynch did for his investors, these “Heroes” of capital markets can act to give the broad population some confidence that market-based capitalism really is a sensible way to organize the allocation of scarce resources.


The issue quant investors face is that their newer approach to capital allocation, based on technology and math and speed, hasn’t yet developed the utility of their narrative back to society as whole.  Indeed, its opaque and fragmented nature can engender suspicion from existing capital markets participants and regulators.

The whole “Hero” narrative, I thought, was a neat way to explain both why fundamentally minded investors have trouble with quant investors and to recommend some solutions to bring this Hatfield – McCoy style divide a bit closer together.  Perhaps it was the fact that I was the first speaker, or perhaps the coffee didn’t kick in, but at the close of my brief chat it took a little while to get some questions from the audience.  Always an embarrassing moment, that part where you say ‘Any questions?’ in a chirpy voice but only hear crickets in return.  I checked to see if the whole pants thing was the problem, but no…  They even matched the jacket.

Later, as I listened to several presentations by other speakers and the very lively discussions about their back tests, mathematical equations and statistical regressions, it struck me just how truly different the quantitative approach to investing is from the fundamental school.  As a long time adherent of the latter, I have always been a bit jealous of the former.  As it turns out, the grass isn’t necessarily greener on the quant side of the fence.  Come to think of it, It might not even be grass over there…

Later in the day, I jotted a quick Top 10 list of ‘Why it is actually tough to be a quant after all”:

1. They are just as lost as any fundamental investor.  As I listened to the morning’s presentations, I expected to hear about wildly successful algorithms and quantitative processes that had excellent back tested results and were delivering outsized returns with minimal risk.  The gating element I expected to hear about was computing power, or execution speed, or access to large and complex datasets.


The reality is that quant investing is still in a relative infancy, with debates like “How much does news really move a stock?”  Fundamental investors simply try to forecast specific events like better than expected earnings or revenue shortfalls.  Quants need to know that, plus how much, on average, will such news change the stock price?  Not easy stuff, and the targets change frequently.


2. Developing common rule sets for different stocks in various sectors/markets is difficult.  Imagine coming up with a common set of trading guidelines that could apply to all the stocks you know well.  Some are easy – a big earnings beat, or a surprise dividend boost.  But how about news in the supply chain?  Or the customer base?  The former, as it turns out, has less impact than the latter.  But figuring that out takes time.  A lot of time.


3. The relationships between stocks, fundamentals, and news changes constantly.  Remember the move off the 2009 lows for U.S. stocks, as low-quality companies had much larger returns than their high-quality peers?    Makes all the sense in the world to a fundamental investors, since the highly leveraged third-tier player in a tough industry with a $3 stock will bounce to $10 long before the #1 company in a great industry will even double.  To a quant that killed it from 2006-2009, however, that’s nightmare material.  Worse than the pants dream.  Their model was likely tuned to own quality companies and short the bad ones.  How do know when to flip the whole process on its head?  And would your investors forgive you if you got it wrong?


4. Math both helps and gets in the way.  Make no mistake – quants know numbers.  And models.  And they have access to a myriad of financial information.  But they also only have 24 hours in a day – the same as the rest of us.   They can be caught in analysis paralysis the same as a fundamental investor can feel the need to visit every single operation of a complex company before they make a recommendation.


5. The good stuff is very difficult to use.  Twitter is a big topic in quant land at the moment.  Everyone in the room seemed excited by the prospect of this fire hose of information.  At the same time, there was general agreement that social media generally is very heavy lifting indeed if you want to include it in an investment process.  How do you know a tweet is positive, or sarcastic?  Sure, a 12 year old knows.  But a computerized algo reading it?  As if…


6. It doesn’t work all the time.  Good investors of any stripe – fundamental or quantitative – know they are playing a numbers game.  If you can win 66% of the time, you are doing a great job.  However, unlike their fundy-counterparts, quants rarely hold a stock long enough to make a huge return.  So they must rely on their process to grind out steady returns with generally short-ish holding periods, without the benefit of a +100% return on the sheet from a long term anchor investment.


7. Everything starts with a back test.  Most things, anyway.  Back tests, where you show that your idea for an investment process or data set worked in the past, is a big part of the quant world.  But every quant is keenly aware that past is not always prologue.


8. Signals are everywhere… And nowhere.  In the modern information age, data is everywhere.  Want an hour-by-hour weather report for every Wal-mart story location?  No problem.  Daily pings to Google Trends to see what the world is searching for?  No problem.  Data on search term traffic for popular momentum stocks?  No problem.  But knowing where to prioritize your time and efforts?  Not so easy.


9. Quant investing is now in the regulators’ crosshairs.  While it didn’t come up in the sessions I listened to, conference attendees must have been aware of the recent decision by Warren Buffett’s Business Wire to cease selling high-speed access to their news flow.  Now, not all quants are high frequency traders, so perhaps it didn’t matter all that much to them.  Still, one of the original advantages to quantitative investing was the inherently compliance-friendly nature of the process.  Take publicly available information, crunch the numbers better than the next computerized trader, and make money with little risk of stepping across any regulatory lines.  Now, how quickly quants get information is clearly a front-and-center issue for regulators.  What might be next for their focus?  Hard to say.


10. More and more competition.  Attendance at the Deltix/RavenPack conference was excellent.  Standing room only in a large venue.  No mid-morning fade, and no post-lunch dropoff in headcount.  Quant-oriented investing is still clearly popular, and therein lays a challenge for everyone in the room.  Just as when hedge funds started to run rings around the long-only community in the 1990s, only to see returns fade in the 2000s, managing money with computerized algorithms and ever more complex datasets is getting very competitive.

In summary, my short time living in the quant world gave me a renewed appreciation for just how difficult investing in highly competitive markets has become, regardless of your discipline.  Their super-fast computers and programmers and Russian accents and high math does, at first blush, seem like something akin to magic.  But the quant world, to borrow from an old saying, has to put its pants on one leg at a time, just like the rest of us. 

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The Gooch's picture

That term reminds me of queef.

Learn something every day.

That should be the title of Fuck You Bernanke!'s book.


The Gooch's picture

"Everyone in the room seemed excited by the prospect of this fire hose of information."

"Relatin' dudes to jazz- fIREhose"


Leveraged Algorithm's picture

It is much better than the Cramer crowd. Now with all the government regs you MUST invest like the crowd! At least quants can make a decision not to play and watch the SHTF from the sidelines. Worked well in 2002 & 2008 if you know where to look. Banks want customers to go long only to get fees and refuse to exit the market. JPM has no losses and trust me they use quants and will be massive short on the next round while keeping the sheep long.

What does it all mean's picture

Mr. Colas was a very good speaker.  But he was the least quantitative speaker for the day.  Funny how the observer is most accurate when not part of the oberservations.

johnQpublic's picture

shared responsibility payment


i thought they said it was only legal as a tax?

so if you(I) quit your job(check), and move on up to the mountains(soon), and live 'off the mattress', thereby having no further new income, do you owe the 95 dollars, or do you get free healthcare?

odatruf's picture

You will get a free insurance policy, which is not the same thing as free care.  If you don't sign up for the free policy, then you would still owe the $95 assuming you didn't have other income that made the 1% shared responsibility payment higher.


Pareto's picture

If by trying to understand highly competitive markets you mean trying to understand targeted FED intervention, 40% (or better) bond ownership, POMOs, and HFT wtf trades 6 sigma gold smack downs and the like, and loaded MSM booster feeds, then in my opinion, there's your economic problem.  Otherwise, 1 - 10 really don't mean shit to either the quant or the fundamentalist.  

johnQpublic's picture

ding ding ding

and we have a winner

bugs_'s picture

11.  getting the desk next to nopat

Umh's picture

The government and the FED bothers quants simple because they can change the rules without notice.

The Wisp's picture

My Heart Bleeds,

Jump You Fuckers.. the Bankers at the Bottom will Cushion your Fall.

IridiumRebel's picture

Why the Hell is this Colon dude doing the Michael Snyder Top Ten?

Cabreado's picture

Mr. Colas,

"General embarrassment ensues.  And then, hopefully, you wake up."

Richard Chesler's picture

tiny violin --> .


Cacete de Ouro's picture

Wait until Snowden reveals that the biggest and fastest quant team is some embedded NSA Signals team that's been hovering up all the news and trading it up and down Water Street, and in and out of Maiden Lane.

FiatFapper's picture

Cry me a river you bunch of quants; god help us when quantum computing becomes commercially viable.

RaceToTheBottom's picture

So basically, what you are saying that even being a criminal has difficulties?


Urban Redneck's picture

Capital Allocation IS NOT a high frequency process.

Ness.'s picture

Reversion to the fundamental... in milliseconds.  It's going to be epic.

Radical Marijuana's picture

Quantitative Analysis is the leading edge of surfing the waves, BUT by automating the basic ELECTRONIC FRAUDS. The whole system is based on legalized lies, backed by legalized violence, which has become a globalized system of electronic frauds, backed by atomic bombs.

The main thing that ought to worry anyone intelligent enough to be employed as a "quant" is that the quaint system of force backed frauds, delivering a little piece of the pie to them, is destroying the ability to make more pies in the future.

MedicalQuack's picture

And guess what, health insurance companies are falling in love with quants...don't need to explain that one I don't think...look at Obamacare...actuaries can't do it anymore...now they are looking for quants to rescue the models...

This is a good video from a former Wall Street Quant, Cathy O'Neill and I hope she gets more press..bonus points at the Q and A with comments on how it was to work for Larry Summers at DE Shaw back then..."modeling for inequality using segmentation"...she thinks he has some psychosocial issues and puts it forward very professionally..this video was done way before his name came up for consideration of the Fed too, kind of what makes it real, the red and blue bar chart request on the spread sheets...what some of ask of a multi talented quant she states:) 


logicalman's picture

HFTs just distort an already massively manipulated system that no reasonable person would take part in volunariiy, IMHO.


luckylogger's picture

Good ridence you fuking quant gold digging ass holes....... The sooner you go broke , the better off the world will be. Hopefully the goldman quants got fired and fuked in the ass.

Good ridence pricks.

How else can I say it???!!!

EndOfDayExit's picture

Spot on. The more information is out there, the more time and effort it takes to come up with and backtest new profitables ideas and models... The HFTs are in a race against each other on who can get the best and brightest PhDs (and hopefully for not much more than half-a-mil a year per head) and then get them crunch the data.

TheRideNeverEnds's picture

I don't know what is left to quantify out there, just close your eyes and buy everything, preferably with leverage on margin.  


The best bet is probably to sell SPX DEC 16 3000 leap puts with an equal amount of long SPX DEC 16 700 calls for maximum leverage.  The spread was trading at a credit today.  


With the FED backstopping the market forever and all policies aimed at making sure the "market" goes up till the end of time; its a no brainer.


I suppose if you wanna get fancy you could buy calls in Facebook and Tesla if you think they will reach 100 and 1000 respectively before the S&P trades through 2500 this year.  


Its a tough call.  

youngman's picture

The mention that the room was standing room only says it all....its no longer a market..its a rigged casino...with several owners all on the house side with garanteed winnings....and the Regulators allow it because they all got paid off...or the politicians did.....

rbg81's picture

I'm not a "quant" by any means, but I do dabble in trading algorithms (weekly trading signals vs. by the nanosecond).  Most of this is spot on.  I still think anyone who uses Twitter is a sap.  And despite the advertised "successes", the virtual will always be the bitch of the physical.  Years worth of data can't compensate for a single bad headline or downgrade. Lastly, the win/loss ratio is a poor indicator of success--its profit margin that matters.  "Winning" 70% of the trades by a narrow margin may not help much if you lose spectacularly even 5% of the time.

kenezen's picture

In a limited way "Econometric Factors" Were developed in a far more embedded way into the geography of econometric formulaic usage with the advent in the early 80's of derivative product. Before then it was used primarily as a prediction device of movement using various components. 

With derivatives it opened intellectual visibility. A "Quant" was respected as an integral part of the trading team. not just a guy in the back room. Econometric equations combined with defining "Factors" spewed forth. And, they continue. Most are relevant and productive. Some are proven to be victims of a market that can squash all intellectual endeavors with uncaring fundamental changes and massive volatility. The "Whale" comes to mind trying on his PC's spread sheet in crisis late at night  to determine a formula for recovery or minimization.   

When one looks at these times of Volume and Volatility it is clear that fundamental thought . "Business Common Sense" "Fundamental clarity" is the basis for fundamental underpinning of all business investing. I know several PHD Econometric experts  and some, there were few not long ago, but, more now that have a genius "Fundamental" understanding as well. They are the ones that create successful funds and businesses that by measurement become most financially solvent and best. The math is important. The Economic understanding of the worlds markets are necessary,however, it's also necessary to operationally create a flow and rhythm that allows sequential organized movement of business creating organized results that become a part of a much greater whole. 

The greats, Sandy Weill (Read his "The Real Deal"), Jamie Dimon (His success in 2008 when so many failed) and Bill Marshal (Perhaps the field's greatest intellect ever) come to mind. Great men with all the ingredients to teach willing aspirents.