Professionals with financial engineering degrees and backgrounds are still in demand for hedge fund positions as both hedge funds and banks try to manage risk and build better financial models. Many newly-minted quantitative analysts or “quants” as they’re called are needed to write computer programs that will handle a greater share of market trading, according to a report by Reuters.
Quants have been blamed for intensifying the recent crash in financial markets, since many of their mathematical models didn’t account for certain factors precipitating the crash. You may recall that author Nasim Taleb hammered quants in his recent book, The Black Swan, for being unable to take into account totally unpredictable, extreme or random events that can disrupt markets, such as the recent subprime mortgage crisis.
Quant funds make up about 7% of the hedge fund universe. As the mortgage crisis roiled financial markets this year, the funds had to start selling off stocks to raise cash. This upset the precise quant models and set off a chain reaction that drove the market downwards.
Another famous example of a quant model that failed was the Connecticut hedge fund Long-Term Capital Management. It collapsed in 1998 because its mathematical model failed to foresee the Russian debt crisis.
Nevertheless, graduates from “quant farms” like New York University and Carnegie Mellon University are still in demand. However, these and other schools are now tweaking their curricula to include irrational human behavior and a wider view of markets beyond mathematical models.
“Risk management is still a growth area, and pension funds, hedge funds and mutual funds are still looking for talent,” according to Rick Bryant, executive director of the quant program at Carnegie Mellon.