This content is from: Portfolio

Quant in a Very Old Box

The future of investing belongs to the geeks — but so did the past.

  • Leanna Orr
  • Kip McDaniel

On May 21 the Wall Street Journal published a lengthy exposé titled “The Quants Run Wall Street Now.” To open the piece, authors Gregory Zuckerman and Bradley Hope regaled readers with the story of Alexey Poyarkov, a Mathematical Olympian (there apparently is such a thing) who left Microsoft for TGS Management, a quantitative hedge fund that won a bidding war with Renaissance Technologies and Citadel for his algorithmic talents. Later in the article another hedge fund employee is quoted: “You take tours of offices, and everyone is always pointing out some guy off in a corner, working on his own. They say with pride: ‘Over there is our quant. He’s building signals.’”

A new sentiment? Not quite, as the authors admit and the January 1979 cover story of Institutional Investor shows: “‘A strange thing seems to be happening lately,’ said the obviously puzzled pension officer. ‘When I visit money management firms, they trot out this guy I’ve never seen before. He talks about R-squareds and volatility ranges and how they’re using Barr Rosenberg’s systems on their portfolios. But you know, I have the funniest feeling that as soon as I leave they lead the guy back to his cellar, close the door and throw him a few bones from time to time.’”

Replace “Barr Rosenberg’s systems” with “data science,” and the above paragraph — published in the 1979 story “The Rise of Token Quants” — could easily fit into the Journal’s piece.

For Alexey Poyarkov and his fellow Olympians, the market for their talents was much the same in the late ’70s, as II described: “Anyone who qualifies as a quant these days will find no shortage of job offers.” But the compensation has somewhat changed, even adjusted for inflation. In 1979 salaries offered to quants went as high as $90,000, II noted with amazement — $322,000 in today’s U.S. dollars.

The technology these richly compensated geeks were experts in? Modern Portfolio Theory.

A 33-year-old quant literally laughs out loud when he hears this. “That is so funny,” he exclaims. “MPT to me is just so outdated!” As head of public markets and hedge funds at MMBB Financial Services, Matt Sherwood is responsible for most of a $2.9 billion retirement fund for Christian ministers and missionaries. He spent a number of years on Wall Street as a prop trader and portfolio manager before moving to the institutional side, and has brought derivatives to the clergy portfolio.

To Sherwood, being a quant means recognizing the power of data, and that no one is smarter than the market. “The definition of the ‘quant’ is always evolving,” he says. “In ten years it might just be the person reading the machine learning output. Looking back to what was called a ‘quant’ 20 years ago, I would say no, that person is a technical analyst. We’re living in the age of the quant, and we will be in the future.”

And in the future a 33-year-old will be laughing at the quants and II of 2017. Bring it.