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Koch
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Joined: February 18th, 2004, 1:48 am

Quant: Competitive Advantage?

May 27th, 2004, 2:49 am

I was wondering, what do Quants think their competitive advantage is? or why do we do it?a) Salary: Premium attibuted to technical skills, because non-quant people feel assured by the numbers that are produced from all those complex models.b) Market: using complex models allows you to make incredible returns compared to an experienced trader (who has no access to your new funky model).c) Interest: Paid to fiddle with technical things all day (who cares about the money).
 
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Nonius
Posts: 5115
Joined: January 22nd, 2003, 6:48 am

Quant: Competitive Advantage?

May 27th, 2004, 4:48 am

QuoteOriginally posted by: KochI was wondering, what do Quants think their competitive advantage is? or why do we do it?a) Salary: Premium attibuted to technical skills, because non-quant people feel assured by the numbers that are produced from all those complex models.b) Market: using complex models allows you to make incredible returns compared to an experienced trader (who has no access to your new funky model).c) Interest: Paid to fiddle with technical things all day (who cares about the money).I can only speak for myself. I did not study math to become a quant. I studied math because I liked it. A sequence of seemingly random events led me to do quant work. It seems like more and more people are getting PhD in math, physics, and engineering and going straight to Wall Street. And, they are coming from all the top schools. I actually find this slightly alarming, because it suggests a possible brain drain out of academics and into finance. Could you imagine if someone like Gell-Mann chose Wall Street over Physics?From my own anecdotal experience, I think there is a spurious relationship between quant skills and salaries. Think about it, almost all of the really high profile people making the huge bucks are NOT quants. I am not even convinced that quant types make the best traders. One of our best traders is (sorry for this cliché) an ex Marine Pilot and is approaching 50 years old.My current role is not very stressful and points to a mixture of c) and relatively high salary.
 
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Koch
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Joined: February 18th, 2004, 1:48 am

Quant: Competitive Advantage?

May 27th, 2004, 6:24 am

True about the salary. I guess I had in mind premium on salary compared to a quant role in another industry / academia.In my circles, I still have not found a quant that uses his own models to make money on his personal account, so I was wondering if they exist. On the other hand, I guess the more you know/study/research about derivatives the less comfortable you feel about investing your life savings into one of them...
 
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Nonius
Posts: 5115
Joined: January 22nd, 2003, 6:48 am

Quant: Competitive Advantage?

May 27th, 2004, 6:53 am

QuoteOriginally posted by: KochTrue about the salary. I guess I had in mind premium on salary compared to a quant role in another industry / academia.In my circles, I still have not found a quant that uses his own models to make money on his personal account, so I was wondering if they exist. On the other hand, I guess the more you know/study/research about derivatives the less comfortable you feel about investing your life savings into one of them...I've had much more luck with real estate than trading...not that I am a magnate, but, I have been lucky in the few things I've done on that end. Incidentally, I know a few math professors who have made small fortunes just buying houses. One guy was at Berkeley, the other guy at Santa Cruz. I can't imagine what it costs to buy a shitty little house in the Berkeley Hills or in Santa Cruz these days. They made their money during the California RE boom in the 70s, as did so many others.The appeal of real estate is that it is one market that allows for leverage without margin calls. Secondly, you have to live somewhere, so your first purchase makes sense anyway from a utility perspective. Thirdly, I feel that financial assets are generally converted to real estate assets over time, so, long term it is a good market. One thing is, people involved in it professionaly are on average sleazier and more uncultured than people in capital markets. Read "A Man in Full", or consider the obvious dude in NY. P.S. you related to the Koch brothers of Witchita fame?
Last edited by Nonius on May 26th, 2004, 10:00 pm, edited 1 time in total.
 
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Scotty
Posts: 58
Joined: September 3rd, 2002, 5:59 am

Quant: Competitive Advantage?

May 27th, 2004, 9:42 am

The phrase competitive advantage is used very loosely everywhere. In fact, the strategic managment literature is interestingly bereft of a clear understanding or definition of 'competitive advantage' and how the term (which as I said is not well defined) relates to superior performance of a firm. This is probably to be expected from a field that eschews developing (falsifiable) theory and favours case studies.The closest I think I get (following Porter) is saying that a firm demonstrates 'competitive advantage' if is has shown sustainable outperformance of its peer group.So, to ask the question, you need to at least define a competitive group.The phrase comparative advantage is likely more relevant as to why people end up being quants.
 
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EnergyQuant
Posts: 167
Joined: July 18th, 2002, 4:34 pm

Quant: Competitive Advantage?

May 27th, 2004, 11:01 am

QuoteP.S. you related to the Koch brothers of Witchita fame?Don't you mean infamous??? The only nice thing anyone has ever said about Charles Koch is that he is a great businessman.
 
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Nonius
Posts: 5115
Joined: January 22nd, 2003, 6:48 am

Quant: Competitive Advantage?

May 27th, 2004, 11:24 am

QuoteOriginally posted by: EnergyQuantQuoteP.S. you related to the Koch brothers of Witchita fame?Don't you mean infamous??? The only nice thing anyone has ever said about Charles Koch is that he is a great businessman.Is he totally evil?
 
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pobazee
Posts: 246
Joined: September 23rd, 2003, 5:32 pm

Quant: Competitive Advantage?

May 27th, 2004, 11:37 am

QuoteOriginally posted by: KochTrue about the salary. I guess I had in mind premium on salary compared to a quant role in another industry / academia.In my circles, I still have not found a quant that uses his own models to make money on his personal account, so I was wondering if they exist. On the other hand, I guess the more you know/study/research about derivatives the less comfortable you feel about investing your life savings into one of them...A true quant life is madly incised in the beautiful art of modeling, the true value of their models is left for the market markers to appreciate, and "expropriate" for monetary gains. It is philosophically misguided to expect that a quant could get rich off models that subsume “unbounded” rationality on the part of other market participants. Yes, they could make a buck or two in the first or second rounds of the play, however, if they persist long enough the present value of their wealth would only sufficiently compensate them for their factors of production, particularly, for the unbridled quest for innovations.
 
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Nonius
Posts: 5115
Joined: January 22nd, 2003, 6:48 am

Quant: Competitive Advantage?

May 27th, 2004, 11:55 am

QuoteOriginally posted by: pobazeeQuoteOriginally posted by: KochTrue about the salary. I guess I had in mind premium on salary compared to a quant role in another industry / academia.In my circles, I still have not found a quant that uses his own models to make money on his personal account, so I was wondering if they exist. On the other hand, I guess the more you know/study/research about derivatives the less comfortable you feel about investing your life savings into one of them...A true quant life is madly incised in the beautiful art of modeling, the true value of their models is left for the market markers to appreciate, and "expropriate" for monetary gains. It is philosophically misguided to expect that a quant could get rich off models that subsume “unbounded” rationality on the part of other market participants. Yes, they could make a buck or two in the first or second rounds of the play, however, if they persist long enough the present value of their wealth would only sufficiently compensate them for their factors of production, particularly, for the unbridled quest for innovations.I hate being a desk quant who is paid a mild premium. I like being an office quant who has some power over the front office. As a character said in either Lewis' or Wolfe's book (can't remember), "you'll never get rich in this business".
 
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Duality

Quant: Competitive Advantage?

May 27th, 2004, 1:54 pm

QuoteOriginally posted by: KochTrue about the salary. I guess I had in mind premium on salary compared to a quant role in another industry / academia.In my circles, I still have not found a quant that uses his own models to make money on his personal account, so I was wondering if they exist. On the other hand, I guess the more you know/study/research about derivatives the less comfortable you feel about investing your life savings into one of them...Well.. depends how you define "quant". Examples of money-making "quant-traders":1. Thorp2. Simons3. Griffin4. Shaw... etc.D
 
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JohnJackson
Posts: 105
Joined: April 14th, 2004, 12:36 pm

Quant: Competitive Advantage?

May 27th, 2004, 2:06 pm

QuoteOriginally posted by: DualityQuoteOriginally posted by: KochTrue about the salary. I guess I had in mind premium on salary compared to a quant role in another industry / academia.In my circles, I still have not found a quant that uses his own models to make money on his personal account, so I was wondering if they exist. On the other hand, I guess the more you know/study/research about derivatives the less comfortable you feel about investing your life savings into one of them...Well.. depends how you define "quant". Examples of money-making "quant-traders":1. Thorp2. Simons3. Griffin4. Shaw... etc.DSimons and Shaw - definately, but would you really categorise Griffin as a "quant".
 
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pobazee
Posts: 246
Joined: September 23rd, 2003, 5:32 pm

Quant: Competitive Advantage?

May 27th, 2004, 2:12 pm

Duality:I don’t believe those people really made more money on the average, when adjusted for risk and innovations. In all likelihood they were compensated correspondingly up to the affine transformations of the amount of risk and innovations, otherwise, they would be regarded as a part of a “Ponzi scheme" or attributed to luck.
Last edited by pobazee on May 26th, 2004, 10:00 pm, edited 1 time in total.
 
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DogonMatrix
Posts: 242
Joined: August 1st, 2002, 12:30 pm

Quant: Competitive Advantage?

May 27th, 2004, 5:21 pm

QuoteOriginally posted by: KochTrue about the salary. I guess I had in mind premium on salary compared to a quant role in another industry / academia.In my circles, I still have not found a quant that uses his own models to make money on his personal account, so I was wondering if they exist. On the other hand, I guess the more you know/study/research about derivatives the less comfortable you feel about investing your life savings into one of them...Then your circle appear to be quite limited. The list below ae good example, but you can add Andrew Lo, Nassim Taleb ( though I don't know how succesful they are, but they are certainly quants who believe in their models and trade with them)I will put myself in the ranks of the ones who got into this field just by interest for the core theoretical material ( like Nonius), but also to see the models in action. As a PhD student I never been interested in staying in academia ( no to say that academia is not surely so important for the advancement of the field), but the idea of "beating" the market my taking the time to step back, analyze and model is for me so compelling. I never been interested in trading the news, based on good hunches or a good feeling of where the market will go, yelling left and right to the broker on the floor. And I believe almost religiously in the superiority of models. Where they fail they are just bad models or poorly implemented. If there is any competitive advantge it should be there Models period.
 
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Fulvio
Posts: 19
Joined: April 9th, 2004, 11:01 pm

Quant: Competitive Advantage?

May 27th, 2004, 5:24 pm

I'm learning the first basics of Quantitative Finance and don't have a clear view of what it is about yet, but it seems to me that most of it is about modelling and devising systems for trading mostly derivatives, trying to make a profit at low or no risk. Sounds like a few people use options to hedge a risk in their investment but most traders just try to play the derivatives market to make a profit. Is that the case? If so, aren't traders basically trying to make money out of each other and isn't the average profit that traders make about zero? If so, why are financial companies so keen to recruit quants and traders to play the game? Or is there something I am missing?
Last edited by Fulvio on May 26th, 2004, 10:00 pm, edited 1 time in total.
 
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Scotty
Posts: 58
Joined: September 3rd, 2002, 5:59 am

Quant: Competitive Advantage?

May 27th, 2004, 9:01 pm

QuoteOriginally posted by: pobazeeDuality:I don’t believe those people really made more money on the average, when adjusted for risk and innovations. In all likelihood they were compensated correspondingly up to the affine transformations of the amount of risk and innovations, otherwise, they would be regarded as a part of a “Ponzi scheme" or attributed to luck.Pobazee, I know where you are coming from. In the long run almost everything goes to NPV=0 as new people come in and compete away your economic rents (excess risk-adjusted returns). Nevertheless, I would have thought that innovation is the source of excess returns over the medium term.The problem with being a quant is that they tend to be specialists. Even if you develop a model that prices securities faster or more accurately, you don't typically control the critical factors of production and the economic rents are invariably expropriated. Nevertheless specialists get paid reasonable money.