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Is Quant Just a Buzzword?

By 10th May 2019 News No Comments

If you go to a supermarket with the intention of spending more than usual, you would probably go for something “organic” or “bio”.

Similarly, if you’re in the market for a new shampoo, you might go for the “natural” one, spending more but feeling healthier.

Every day, marketing needs new strategies to sell more, and sometimes a new word is a strategy in itself.

One example is “AI” which is not even a word, it is an acronym for artificial intelligence, but because that is too long, “AI” is usually enough!

When you buy a phone, or any new high-tech gadget, it will have some AI inside.

Of course, these words are used because they are attractive and their meaning is vague; therefore, clients cannot really tell whether they are used appropriately or not. (What exactly is a bio banana?)

The term “artificial intelligence, is just a sci-fi sounding   version of “machine learning, which has a proper meaning, but it cannot be used like the previous term to make people think that their electronic devices are intelligent.

Every business needs some magic words to open people’s wallets easier.

In finance, the “organic” equivalent is “quant.”

This word has a proper meaning, but around the 90s, it was commonly used in the asset management industry in order to make people think that they are smarter than their client. Therefore, they should be trusted and allowed to manage their money.

Nowadays, banks, asset managers, advisor brokers, etc., must have something with some quantitative characteristic to offer to their client. Otherwise, it would be like a fancy supermarket without organic lettuce.

We have not defined so far what the meaning of this financial buzzword is.

Similar to AI, quant has proper meaning, but it has been so misused that it seems like no one knows the original meaning anymore.

Let me try to remember. One sec.

A quant it is, in a nutshell, someone who intensively uses mathematics and programming in the financial industry to do their job. This is the most correct but also generic way to define it.

In the past, banks hired people with math or physics degrees, but no finance knowledge to try to find a more scientific solution to many financial problems, like options pricing that had previously only been solved by trial, error and experience.

This approach worked, so the universities started to deliver a proper education for these “financial scientists.” Instead of hiring someone with a PhD in math, but who cannot distinguish a stock from a bond, the banks can now hire someone with a PhD in financial math, who is ready to go.

At this point, who is a legitimate quant?

Someone who is working in the industry, but has a strong math background? Or someone who has graduated in quant finance, financial engineering, or financial math—different names for different programs but similar in content.

Buzzwords are usually terms that do not refer to something precisely. They are always very vague, sometimes meaningless or even an oxymoron. I have seen, for example, in a famous shop, overpriced “natural cookies”marketed as though they grow on trees.

Quant” is instead a word that can be precisely used to define people who use math and finance at work, or to describe financial products where these people have worked.

The problem is that, often times, there are no mathematicians working behind the trading system that you bought—even if the seller defines themselves as a quant trader.

And, sometimes, sadly, there are no mathematicians behind the investment strategy implemented by many asset managers.

Sometimes, luckily, words are used for the meaning they really have. Some tech gadgets are becoming “smart” and someone who trades financial markets can really count to ten.

The camera of your phone can recognize you, thanks to machine learning algorithms. Therefore, we can say that it has some sort of “artificial intelligence”, even if the latter term is a bit vague.

Some of the brightest minds of the world try to build models to forecast volatility using extremely hardcore mathematics.

Extremely sophisticated option pricing models are used by market makers, and highly skilled mathematicians are actually working to create stellar performance in some real quant hedge funds.

Quants really exist; they are like normal people, but they like math and finance more than the ordinary person.

As a simple rule of thumb, I could say that, for example, in the online algorithmic trading education industry, when you read the word “quant,” most of the time, they don’t even know how quant is spelled.

I might be wrong and too pessimistic, but prove me wrong! Show me that I need to have more faith in humanity. Do me a favor, ask the next person who claims to be a quant while selling you something to prove the Girsanov theorem, or ask them how they calibrate the Heston model. Then send me their answer. As a prize, you’ll receive a natural, organic shampoo.


Alberto Pallotta