Top Quant Trader to Launch Hedge Fund

Peter Muller, who headed Morgan Stanley’s Process Driven Trading group (PDT) for nearly two decades, is set to launch his own hedge fund spinoff.

Muller founded PDT, a 70-person team of Ph.D.s and math whizzes and quant traders who use algorithmic programs to take advantage of price discrepancies in global markets. The division invests Morgan Stanley’s own money, according to an article from Bloomberg.

Since he has had no outside investors, Muller has been able to keep his strategies secret. But the long-time math whiz, yoga enthusiast and part-time piano man, has reportedly racked up estimated annual average gains of more than 20 percent from 1993 through 2010. Given that hedge funds on average gained 10.4 percent annually during the same time period (source: Hedge Fund Research), that would make PDT one of the top-performing quant funds around, if it were independent.

Muller’s move was precipitated by the biggest regulatory overhaul of Wall Street since the Great Depression. The big investment banks are jettisoning their proprietary trading divisions in the wake of the Dodd-Frank Wall Street Reform and Consumer Protection Act, and the new Volcker rule, which prohibits banks from maintaining prop-trading desks. Many firms have spun off their trading groups. Morgan Stanley cut loose FrontPoint Partners LLC in March. Now they’re letting PDT relaunch itself as a separate firm by the end of 2012, but retaining an option to buy preferred stock in the new company. As Bloomberg puts it, prop traders aren’t going away; they’re just changing addresses and still raking in the big money.

PDT makes its money using statistical arbitrage. When research suggests that a stock is temporarily overpriced based on its trading history, the group bets against it while loading up on corresponding underpriced securities. PDT has reportedly only lost money in two quarters, since inception, and has never lost money for a calendar year.

The firm hires Ph.D.s and other math whizzes with unique skills for its trading jobs. They rely heavily on schools such as Massachusetts Institute of Technology and California Institute of Technology for Ph.D.s in math-heavy fields, looking for those with an interest in applying their research to the real world.

“I had grown disillusioned with academia,” says Denis Dancanet, 43, PDT’s head of futures trading, who has a Ph.D. in computer science from Carnegie Mellon University in Pittsburgh. “Maybe three people care what you do.”

The lengthy article in Bloomberg is worth reading if you’re interested in a career as a quant trader, or in Muller’s colorful background. Do you have a math-intensive background in academia? Does the lure of applying those skills as a quant trader appeal to you? Add your comments below.

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