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I recently had a personalized information session with quantitative analysts at a "top three" investment bank. They have a group of 300-400 PhDs, all working e

by npk 19y ago

I recently had a personalized information session with quantitative analysts at a "top three" investment bank. They have a group of 300-400 PhDs, all working extremely hard to produce money-making mathematical models quickly. Their compensation is unreal. Probably, better than viaweb's. (Assume a 10% success rate, and that a viaweb founder's comp of $2.5mil/year, in funny numbers, that is $250K/year.) Ok, working for a big company sucks. There are small hedge funds like Renaissance (http://en.wikipedia.org/wiki/Renaissance_Technologies http://en.wikipedia.org/wiki/Renaissance_Technologies ). The technical problems in finance are more difficult that most in the average startup and the pay better. If you are one of the few people in the world who have the technical skills that these companies look for, then why would start at a startup rather than go into finance? I've been thinking about this for a few days, and the best answer I can come up with has something to do with culture. In finance, you're extremely secretive. Secrecy is downright unhackerish. Working for 10 years, amassing a fortune, and no one knows who you are or what you've done. Which is why I call finance the silent killer. You disappear into this pile of money. Anyone else want to share their feelings on this?

rms 19y ago
Can you start your own finance company? Can a PhD good enough to generate these models start his or her own hedge fund without a hundred million dollars?
- byrneseyeview 19y ago
  You can use your models to trade your own funds (that's what Simons -- the guy behind Renaissance -- did), but it's probably not worth it. Imagine that you're good enough to beat the market by 500 basis points: you earn 15% per year when the market does 10. Investing your own retirement funds, and starting at 100K, you'll end up just about doubling your money in five years. Hedge funds typically charge 20% of profits and 2% of assets. Let's say you spend your $100K paying a lawyer to incorporate you, and you take a year off to raise your first $5 million. Over the next four years, your earnings would start at $250K for year two, and hit $332K by year five. Even accounting for the missed year, the earnings from starting a hedge fund would be an order of magnitude higher than those from running your own money. This is obviously simplified (I'm ignoring taxes and inflation, which if nothing else will get me dirty looks from my fellow libertarians), but it should illustrate why so many PhDs are getting rich running money for second-generation MBAs.
- nostrademons 19y ago
  It is trivially easy to start your own hedge fund. I've got a friend from college that's done it, and obviously my employer's customers have all done it (I work for a financial software startup). All you have to do is file for a LLC - it costs like $45. The tricky part is a.) finding investors to give you money and b.) investing that money well. Your limited partners have to be "accredited investors", which means they need income of over $200K for the last 2 years or a net worth over $1M. Obviously, it takes a fair amount of persuasion to convince someone to fork over a million dollars. But if you've got a Ph.D in physics or successful experience on Wall Street, it's not all that hard.
  - byrneseyeview 19y ago
    A surprisingly common answer to (a) is to just kind of casually ignore those rules for a while. Nobody recommends this, but Warren Buffett, Michael Milken, and James Cramer all admitted to doing it -- and it definitely worked out for them in the end. The spirit of the accredited investor law is to protect the ignorant from the malicious; in the case of smart people willing to risk small sums on other smart people, it doesn't quite apply.
byrneseyeview 19y ago
(Full disclosure: I'm a recruiter for hedge funds -- including Renaissance): One of the points PG makes in his essays is that it's absurdly cheap (in terms of capital required) to start a startup: if you have a computer and an Internet connection, it's not much more expensive than doing nothing at all. This changes your risk perception: startups can afford to hire unusual developers doing obscure stuff, because someone with a 10% chance of utterly destroying the business is just going to change your odds of failure from 90% to 91%. Hedge funds and i-banks don't have that sort of equation: they're brutally competitive (you can start a new service and hope that Google doesn't know about it until you're too big not to be bought -- but if you start trading an obscure derivative, everyone is going to find out about it) and they tend to be risking millions of dollars of other peoples' money. So they're crazily cautious, which shows up in their hiring practices: one company I work with brags about rejecting all but one in five hundred candidates (yes. Their acceptance rate is less than MIT-squared), while another requires a BS/MS/PhD with a minimum GPA of 3.7 to be considered for an entry-level job. To attract people, they offer the ridiculous salaries you pointed out -- but there's an equilibrium between the absurd compensation and the absurd lengths you'd have to go to earn it. If you want to talk to some quants, try: http://www.nuclearphynance.com/ http://www.nuclearphynance.com/
- Alex3917 19y ago
  So, in other words, perfect robots make perfect robots.
- djangoboy 19y ago
  those folks at nuclearphynance are unbelievably arrogant
  - falsestprophet 19y ago
    They are unsurprisingly arrogant.
nostrademons 19y ago
I'm currently working at a financial software startup, and thinking of leaving for the far less lucrative world of consumer webapps. Here's why: At the end of the day, the financial industry is all about making money. If you do a good job, it means you and your customers get rich, and some other shmuck out there gets poor. Unfortunately, it's a zero-sum game. If you do well in the market, it has to be because someone else is doing poorly. Either that, or the market is bubbling upwards ahead of a crash. I kinda want my life to be meaningful in addition to lucrative. I'd like to think that I've produced something that makes other people's lives nicer and doesn't just transfer wealth from them to me. Finance doesn't give you that - you can go home with a fat paycheck, but that paycheck is your only legacy. If you're into money, though, a hedge fund is definitely the place to be. The hours are reasonable, the work is challenging, and the compensation is out of this world. I just can't shake the feeling that my industry is somehow "dirty". (And I don't even work directly for the big funds...I work for a small software shop that supplies some of the smaller funds.)
- deleted 19y ago
  [deleted]
- byrneseyeview 19y ago
  "If you do well in the market, it has to be because someone else is doing poorly." Have you read Hayek? I think it's hard to discount the importance of information. The market is able to do some pretty amazing stuff -- like tell you whether we, as consumers, would prefer more online stores or in-person stores or search engines or ranches. It's not as if the balance between those demands is intuitively obvious, and it's hard to believe that knowing the answer isn't worth making a few snotty New Yorkers pretty crazily rich. Not that this is why anyone does it. We're all out there to get rich, but for the most part it's hard to make money without somehow making the market more informative. If you're right, you make the transactions that say so -- and you can't make those transactions without pushing prices in the direction they need to go.
  - weel 19y ago
    It might be a friendly gesture to suggest a specific paper by Hayek that is to be read. I imagine you must have this one in mind: http://www.econlib.org/Library/Essays/hykKnw1.html http://www.econlib.org/Library/Essays/hykKnw1.html
corentin 19y ago
"If you are one of the few people in the world who have the technical skills that these companies look for, then why would start at a startup rather than go into finance?" To change the world?

by npk 19y ago

rms 19y ago

Can you start your own finance company? Can a PhD good enough to generate these models start his or her own hedge fund without a hundred million dollars?

byrneseyeview 19y ago
You can use your models to trade your own funds (that's what Simons -- the guy behind Renaissance -- did), but it's probably not worth it. Imagine that you're good enough to beat the market by 500 basis points: you earn 15% per year when the market does 10. Investing your own retirement funds, and starting at 100K, you'll end up just about doubling your money in five years. Hedge funds typically charge 20% of profits and 2% of assets. Let's say you spend your $100K paying a lawyer to incorporate you, and you take a year off to raise your first $5 million. Over the next four years, your earnings would start at $250K for year two, and hit $332K by year five. Even accounting for the missed year, the earnings from starting a hedge fund would be an order of magnitude higher than those from running your own money. This is obviously simplified (I'm ignoring taxes and inflation, which if nothing else will get me dirty looks from my fellow libertarians), but it should illustrate why so many PhDs are getting rich running money for second-generation MBAs.
nostrademons 19y ago
It is trivially easy to start your own hedge fund. I've got a friend from college that's done it, and obviously my employer's customers have all done it (I work for a financial software startup). All you have to do is file for a LLC - it costs like $45. The tricky part is a.) finding investors to give you money and b.) investing that money well. Your limited partners have to be "accredited investors", which means they need income of over $200K for the last 2 years or a net worth over $1M. Obviously, it takes a fair amount of persuasion to convince someone to fork over a million dollars. But if you've got a Ph.D in physics or successful experience on Wall Street, it's not all that hard.
- byrneseyeview 19y ago
  A surprisingly common answer to (a) is to just kind of casually ignore those rules for a while. Nobody recommends this, but Warren Buffett, Michael Milken, and James Cramer all admitted to doing it -- and it definitely worked out for them in the end. The spirit of the accredited investor law is to protect the ignorant from the malicious; in the case of smart people willing to risk small sums on other smart people, it doesn't quite apply.

byrneseyeview 19y ago

(Full disclosure: I'm a recruiter for hedge funds -- including Renaissance): One of the points PG makes in his essays is that it's absurdly cheap (in terms of capital required) to start a startup: if you have a computer and an Internet connection, it's not much more expensive than doing nothing at all. This changes your risk perception: startups can afford to hire unusual developers doing obscure stuff, because someone with a 10% chance of utterly destroying the business is just going to change your odds of failure from 90% to 91%. Hedge funds and i-banks don't have that sort of equation: they're brutally competitive (you can start a new service and hope that Google doesn't know about it until you're too big not to be bought -- but if you start trading an obscure derivative, everyone is going to find out about it) and they tend to be risking millions of dollars of other peoples' money. So they're crazily cautious, which shows up in their hiring practices: one company I work with brags about rejecting all but one in five hundred candidates (yes. Their acceptance rate is less than MIT-squared), while another requires a BS/MS/PhD with a minimum GPA of 3.7 to be considered for an entry-level job. To attract people, they offer the ridiculous salaries you pointed out -- but there's an equilibrium between the absurd compensation and the absurd lengths you'd have to go to earn it. If you want to talk to some quants, try: http://www.nuclearphynance.com/ http://www.nuclearphynance.com/

Alex3917 19y ago
So, in other words, perfect robots make perfect robots.
djangoboy 19y ago
those folks at nuclearphynance are unbelievably arrogant
- falsestprophet 19y ago
  They are unsurprisingly arrogant.

nostrademons 19y ago

I'm currently working at a financial software startup, and thinking of leaving for the far less lucrative world of consumer webapps. Here's why: At the end of the day, the financial industry is all about making money. If you do a good job, it means you and your customers get rich, and some other shmuck out there gets poor. Unfortunately, it's a zero-sum game. If you do well in the market, it has to be because someone else is doing poorly. Either that, or the market is bubbling upwards ahead of a crash. I kinda want my life to be meaningful in addition to lucrative. I'd like to think that I've produced something that makes other people's lives nicer and doesn't just transfer wealth from them to me. Finance doesn't give you that - you can go home with a fat paycheck, but that paycheck is your only legacy. If you're into money, though, a hedge fund is definitely the place to be. The hours are reasonable, the work is challenging, and the compensation is out of this world. I just can't shake the feeling that my industry is somehow "dirty". (And I don't even work directly for the big funds...I work for a small software shop that supplies some of the smaller funds.)

deleted 19y ago
[deleted]
byrneseyeview 19y ago
"If you do well in the market, it has to be because someone else is doing poorly." Have you read Hayek? I think it's hard to discount the importance of information. The market is able to do some pretty amazing stuff -- like tell you whether we, as consumers, would prefer more online stores or in-person stores or search engines or ranches. It's not as if the balance between those demands is intuitively obvious, and it's hard to believe that knowing the answer isn't worth making a few snotty New Yorkers pretty crazily rich. Not that this is why anyone does it. We're all out there to get rich, but for the most part it's hard to make money without somehow making the market more informative. If you're right, you make the transactions that say so -- and you can't make those transactions without pushing prices in the direction they need to go.
- weel 19y ago
  It might be a friendly gesture to suggest a specific paper by Hayek that is to be read. I imagine you must have this one in mind: http://www.econlib.org/Library/Essays/hykKnw1.html http://www.econlib.org/Library/Essays/hykKnw1.html

corentin 19y ago

"If you are one of the few people in the world who have the technical skills that these companies look for, then why would start at a startup rather than go into finance?" To change the world?