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Innovation and Consolidation in the Front Office

Posted on February 2020 By Ben Hodzic

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After spending six years recruiting for some of the most successful and innovative hedge funds, trading desks, and money managers in the world, I wanted to write about a topic that has been at the forefront of client’s inquiries over the past couple of years now. It’s a topic that I believe reflects innovation and consolidation in the front office, and how different human capital strategies are transforming the way in which these businesses operate.

Five to ten years ago investment managers traditionally separated Research and Development across two separate business units within their organizations. The word Research was synonymous with conducting empirical research, hypothesis testing, cash flow modeling, fundamental analysis, writing white papers, analyzing time series data for statistical trends, and was most often being done by graduates or experienced financial analyst’s coming from backgrounds in Finance, Economics, Econometrics, Accounting, etc. This approach to Research generated investment ideas, new products, new strategies to deploy by traders and portfolio managers, and served as the backbone to each Investment Manager’s pitch to clients around what differentiates their strategies and approach from the rest of the pack.

Development was a different world. The two weren’t a cohesive unit. Every aspect of “development” fell in a back-office Technology function where Computer Scientists, Engineers, and Infrastructure guru’s sat on separate floors from Researchers, sometimes even separate office locations. The software development they were doing was a project-based function where once in a while, a new software to analyze data would come to the Researchers hands and they would be able to cut down on their empirical research by 6 hours through using an algorithm to sift through the “noise”. Or a new application would appear on the Traders desk to help them calculate their daily VaR, PnL, or general Market Risk for a specific set of strategies. Technology and Development was so far away from the Investment function that Investors never even questioned what kind of tools, data, technologies, and analytics the Portfolio Manager was using to beat the market.

Today, things are different. Technology has transformed the way that Research is conducted, Trades are executed, and ultimately Investors decide where to put their money. Big Quant funds are consistently outperforming their peers, and while just about no one has been able to beat the market returns over the past 10 years, the funds and money managers that are using a vigorous statistical and scientific approach to trading are leading the pack. This bring me back to why I wanted to write this article in the first place. One of the main questions we get time and time again is what are these Quant Funds doing differently? How are they consistently outperforming the larger hedge fund universe? My answer is quite simple – they hire and attract the world’s top mathematicians, technologists, and engineers – and then teach them financial theory. Inherently this strategy brings hard science skills in to the front office where the need for constant development of new analytics and software to come up with novel ideas or new alphas is the only way to win - and win they do!

Technology has become such an integral part of the investment management process that most of the millennial's and Gen Z today who are going in to a Trading, Research, or Investment idea generating position are required to understand basic SQL, Python, or a scripting language. Data is on the up rise - there is more data out there today than ever before. Traders and Researchers are using this data to find alpha, generate trade ideas, and manage risk. In order to work with all of the data in an efficient way, front-end applications and software are needed in order to view the data, and make actionable decisions off of it. More and more Investment Managers are using systematic or quantitative approaches to their strategy development, and the need for software development, implementation, and optimization software for those strategies on a more frequent basis requires Technological support sometimes within minutes.

With most of our hedge fund, trading, and asset management clients, we have seen a large increase in quantitative development support for the research and trading function. These titles can range from “Quantitative Developer” to “Quantitative Engineer” to “Algo Engineer” or “Research Developer” all sat on the trading desk or investment team. At the core of what these professionals focus on is being the bridge that brings technology closer to research and trading. It’s the innovation behind bringing new technological capabilities to the front office, where historically ideas, pen and paper, and phone calls controlled most of the outcomes.

For job seekers, questions around what Quantitative Researchers will be responsible for in the future remains somewhat of a mystery. If Technologists are building research platforms that easily ingest data and make sense out of it, to what extent does this take away from the actual “research” or human element to the job? Is the role of a Researcher one that could fall victim to computers in its entirety? Most would say it depends on what type of risk-return an investor is looking for, the fundamental nature of the trade, and time horizon. But at the end of the day if all investors are after is the best risk adjusted returns, it makes sense that the world of active and passive investing is falling in “Quants” hands away from traditional factor based value investing which has continued to struggle.

As the investment community continues to invest heavily in to these profiles and take advantage of technology within the research and trading function, we’ve been busier than ever helping to identify, attract, and encourage the brightest minds across the industry to take part in these new ventures. At the forefront of this human capital evolution, Selby Jennings continues to mirror our clients’ needs and provides a consultative approach to our recruitment service backed with over 15 years of experience recruiting in the verticals of Quants and Technology.

How do you feel human capital needs within the Front Office have changed? Get in touch with Selby Jennings to discuss industry trends, or for support in hiring across in the Front Office.

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