What exactly are quants and quant finance anyway?

If you pay any attention to the finance and investment industry, you’ve probably seen the terms quant, quant finance and quant analysis at some point. Especially in the last couple of years, since the quant field’s been exploding and getting a lot of press coverage even though it had its origins in the 1970s.

“Quant” is industry shorthand for “quantitative analyst”, also known as a financial engineer. A quant is someone who analyzes both statistics and market trends while working with high-end mathematics to determine appropriate levels of risk management and securities (usually derivative) pricing.

Quants try to understand behavior by assigning a numerical value to variables and replicating reality mathematically. From this process, they create equities and derivatives trading models to accurately value key financial instruments (important for arbitrage), predict real world events and corresponding price changes, and otherwise profitably trade the markets.

So where did it come from? Quant analysis is the newest type of market analysis following on fundamental analysis (studying economic trends and data) and technical analysis (studying price chart data). So it’s based on current financial trends, past economic patterns, educated speculation, and logic. Quant finance builds on previous disciplines with more sophisticated math, primarily drawn from statistics and probability, calculus (partial differential equations in particular), and econometrics.

So who does this stuff? Quant analysts hired by large financial firms almost aways have a postgraduate degree in a specialized finance field plus a well-rounded analytical education that includes mathematics and computer programming (C++ and/or Java). Other quants come from physics, engineering, or mathematics backgrounds rather than economics-related fields. But regardless of their origins, working long hours with large amounts of data is a must.

If you’re seeking work as a quant, you could end up contributing to almost any application of mathematics in finance. Examples include statistical arbitrage, algorithmic trading, and electronic market making.

To get started, you could take specialized Masters and PhD courses in financial engineering, mathematical finance, computational finance, or financial reinsurance. This could lead to a position as any of the following in this non-inclusive list:

Front office quantitative analyst: Determines prices, manages risk, and identifies profitable trading or investment opportunities. It’s difficult to become a professional trader now without at least some quantitative analysis education and in the field of algorithmic trading there’s no longer any meaningful difference. If you work in this area, you’re usually much better paid than those in back office, risk, and model validation.

Algorithmic trading quantitative analyst: Often the highest paid form of quant because they’re the ones most responsible for making money. Algorithmic trading includes statistical arbitrage and anything related to high-frequency trading also.

Quantitative investment manager: Virtually all large asset managers and hedge funds rely on quant methods to some degree. Whether quant is the sole analysis method or used in conjunction with fundamental analysis, it’s now vital to modern investment management.

Risk manager: Considered more important after the credit crisis exposed holes in typical hedging mechanisms. Involved various forms of stress testing and direct analysis of the positions and models used by traders.

Model validator: Takes the models and methods developed by front office and other quants and determines their validity. Seen as a stepping stone to more lucrative positions in the front office and other trading-related disciplines.

Quantitative developer: Implements and maintains quant models and act as bridges between IT and quantitative analysts.

There are several more types of position available in quant finance, but by now you should have a good understand of what quant analysis really is and who’s involved in this fast-growing financial field.

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