Selby Jennings had the honor of attending and speaking at this year’s QuantMinds Americas conference, held in Boston. Oliver Cooke, Managing Director of North America, moderated a panel of esteemed professionals, exploring the topic, “What should we be teaching the next generation of Quants?”
QuantMinds Americas brought together experts from banks, investment managers, regulators, Silicon Valley, academia and beyond, to learn, network and share expertise on the future of the quant industry. Attendees heard about the latest breakthrough research, as well as the biggest issues facing the industry, from some of the world’s most revered quant thought-leaders.
Selby Jennings sent a team of specialist recruitment consultants to network, attend sessions with thought leaders from across quant finance, and share key developments within the industry. At Selby Jennings, we are always working hard to add value to our professional network. With that in mind, we have put together a guide summarizing the key takeaways from the QuantMinds Americas conference, focusing on market updates and hiring trends.
The credit cycle and general market is at an inflection point. The United States’ debt-to-GDP ratio is higher than ever, however default rates on high-yield bonds, which are widely considered one of the most accurate predictors of an upcoming recession, remains low.
Negative interest rates are a real possibility in the United States. Most of the European Union is exposed to negative interest rates and continues to apply stimulus to their struggling economy in response; the outgoing European Central Bank (ECB) president Mario Draghi has announced that it will restart its quantitative easing measures and has cut its bank deposit rate to an all-time low of -0.5%. Negative interest rates in the US would significantly impact banks and other lenders as they would lose their main source of revenue: the interest that they charge for lending capital. This could hurt specific lending businesses and squeeze the margins where they could operate.
General Volatility is expected to remain low with big blips hitting the markets due to continued trade wars, and downbeat global economic data and pessimistic growth across the globe. President Trump’s prolific use of Twitter has a ‘statistically significant’ relationship with market volatility. His Twitter activity has a largely negative impact on equity returns — with his posts contributing to volatility aggravated by the US-China trade war, policy uncertainty, and a yield curve indicating a possible recession. Financial products are being created to track President Trump’s tweets and volatility in the market.
Many people believe that a recession will hit in the next 6-12 months. Experts share little consensus on the scale of impact that a recession will have, but many agree that banks are well-positioned to handle any economic downturn. However, if the recession has a similar effect to the Great Financial Crisis in 2008, banks and other lenders could be negatively impacted by high residential mortgage delinquency rates, leading once more to a rapid devaluation of financial instruments.
A Recap of 2019 to Date
Market and credit risk teams have had a slow year on the hiring front so far. Most risk teams have remained flat or cut their team’s headcount due to over-hiring last year and less regulation-focused policies coming in to play than anticipated. In fact, the current legislation has been creating more loose policies and even unwinding the Dodd Frank Act. This instrumental law passed in 2008 prohibited Trading desks from taking speculative or proprietary bets on the markets. The Office of the Comptroller of the Currency (OCC) and Board of Directors of the Board of the Federal Deposit Insurance Corporation (FDIC) approved a rewrite of the Dodd-Frank Act’s Volcker Rule, which placed regulatory restrictions on proprietary trading. Many have welcomed the ‘Volcker 2.0’ as an intelligence approach to risk, while leaving regulation targeted at banks with the largest trading operations. Others argue that the current Volcker Rule, which was passed in 2014, has not had a chance to be tested with a full credit cycle to know how it will work during an economic downturn.
Front office e-trading and quant teams in banking institutions have not hired much this year because of pushback getting headcount approved. Most of the hiring that has taken place has been on the research and development (R&D) aspects of e-trading algorithms so that banks can compete for market share within the quant investing community. Looking at who has performed well this year, statistical, machine led quant trading firms have all outperformed and created a lot more volume in the market for banks to capitalize on. Competing for this market share and keeping the most up-to-date algorithmic trading products in the market was key for big banks.
Large asset managers, including Fidelity, BlackRock, MassMutual, Vanguard, have notincreased hiring across investment teams because of a tough fundraising environment. Investors continue to be less interested in traditional asset allocation strategies and are seeking more quantitatively rigorous strategies that can cope with rising and falling markets (market neutral). Costs to manage funds are rising for actively managed accounts, and most investors are not seeing an advantage to investing in these funds.
The biggest winners this year are pure quant-driven trading firms and hedge funds that use highly quantitative strategies. DE Shaw, Two Sigma, Citadel have all had positive returns this year, most in double digits, and continue to drive positive Profit and Loss (P&L) this year.
Credit hedge funds have had a great year. Most credit hedge funds have hired this year and performance from a P&L standpoint has been positive. Most of the best performers in the Credit fund management market have been using systematic, rules based strategies and research to capitalize on swings in the interest rate and credit markets. We’ve seen an expansion of ETF and actively managed products that track credit markets, and there has similarly been increased hiring on the sell-side with Investment Banking credit Capital Market and Trading teams.
The following section breaks down the hot markets where hiring is expected to continue to grow:
A lot of funds and investment teams are looking at this approach to portfolio management. There are several examples of flagship funds running an alpha capture strategy that pulls alpha off all the signals that are generated through crowd-sourcing or other researchers across an investment platform.
There is a lot of talk and traction in this field where investment teams are looking to imbed technologists directly into their team structure. Most research and trading teams are now building their own software, systems, and databases and are becoming much less reliant on back office tech teams. This requires a unique skill set from employees, where traditional quants are now required to develop and implement their models from scratch into production-ready code.
Credit hedge funds are doing well and will need to capitalize on hiring at the biggest credit funds as well as credit desks at investment banks. Investment banking credit teams have seen a higher-than-normal hiring appetite this year due to client demands from the buyside within these markets. New exchange-traded fund (ETF) offerings in the credit space, as well as electronic trading products offered for credit securities, have been at the forefront of growth in the market for this year.
Systematic, rules-based alpha research is a hot market and there is increasing demand from hedge funds to produce new alphas. Long/short and market-neutral are the main strategies that we see over-performing and where most of the hiring continues to take place.
This seems to still be a buzzword however, there is now greater empirical evidence that supports where it works well in the investment process and where it does not meet expectations. Many hedge funds and asset managers have hired machine learning scientists only to find that their lack of financial intuition knowledge means that they struggle to produce investment-ready ideas and alpha. We continue to see a build-out in this market particularly with vendors, payment companies, and research teams where machine learning and neuro-linguistic programming (NLP) is used as a tool to do a job function like read a paper or analyze thousands of consumer loans.
Options market making and volatility-based strategies are performing well this year, particularly at the later end of the year where volatility has picked up. Quants add a lot of value in these markets by helping to build analytics, tools, and derive strategies from options data and price these derivatives. With large swings in volatility, quants also help to build a platform and system that allow for faster interpreting and analyzing of the key data needed to run these strategies profitably while also creating new products and securities that can benefit from volatile markets.
FinTech and Vendors
FinTech and vendors will continue to hire into engineering and research groups. This is a market that continues to grow and the companies and vendors that are doing well will continue to hire. We have seen an uptick in electronic trading product offerings and trading platforms from some key FinTech vendors this year, all with the backing of large institutional clients or investment banks. Some have even spun-out of investment banks to diversify product offers and combat the low interest-rate environment we are in.
To learn more about the insights from this article, get in touch with the Selby Jennings Team.
Selby Jennings is a leading specialist recruitment agency for banking and financial services. For more than 15 years, we have given clients and candidates peace of mind that the recruitment process is in expert hands. Our continual investment in best-in-class technologies and consultant training enables us to recruit with speed, precision and accuracy. Today, Selby Jennings provides contingency and retained search recruitment across 11 offices in 6 countries. Contact us to find out how Selby Jennings can help you.