Why Independent Quants Don't Exist

Summary

The video addresses the misconception that one can easily become a successful independent Quant. It debunks the idea that Quants can make millions without working for firms, explaining the financial and operational challenges. The speaker uses hypothetical scenarios to illustrate that working for a firm is often more lucrative and less stressful, with a guaranteed salary and benefits. The video also touches on the reality of scaling in finance, suggesting that successful Quants typically transition from working for firms to running their own, leveraging experience and networks to attract investors and manage teams.

Takeaways

• 🤔 The common myth is that one can become a successful independent Quant, but the reality is often more complex.
• 💼 Most Quants work for firms due to the financial and operational support they provide, which is crucial for success in quantitative finance.
• 💰 The idea of making millions as an independent Quant is romanticized, but it overlooks the significant challenges and resources required.
• 📈 Historically, Quants have made significant money, but this was often during a different market era and with different economic conditions.
• 💼 Working for a firm provides a stable salary, benefits, and lower stress levels compared to the uncertainties of independent trading.
• 💹 The market average return is around 6-8%, and achieving a 10% return consistently is challenging and not guaranteed for independent Quants.
• 📊 The script emphasizes the importance of scalability in finance, suggesting that without the ability to scale, it's not profitable to be an independent Quant.
• 🏦 To be successful, Quants often need to transition from independent trading to running a firm, which involves managing a team and dealing with investors.
• 💼 The transition from an independent Quant to a firm owner involves significant legal, regulatory, and operational overhead that is often underestimated.
• 💡 The script debunks the fairy tale of easy wealth through independent trading, highlighting the hard work and team effort required in the finance industry.

Q & A

Can an individual be a successful independent Quant?

It is challenging for an individual to be a successful independent Quant. Historically, Quants who made millions did so in a different financial climate, and today's markets are more competitive and require more resources.

What are the typical earnings for a Quant starting at a firm?

A Quant starting at a firm can expect to earn around $100,000 to $120,000 per year, with additional benefits and a guaranteed salary regardless of performance.

What are the advantages of working for a firm as a Quant?

Working for a firm provides a guaranteed salary, lower stress due to a regular work schedule, and benefits. It is also easier and less risky compared to being an independent Quant.

What are the potential earnings for an independent Quant with a $1 million investment?

An independent Quant with a $1 million investment could potentially earn $100,000 in the first year with a 10% return, assuming no costs or salary for themselves.

How does the script suggest scaling a Quant's operations to increase earnings?

To scale operations, a Quant would need to find investors to raise significant capital, which allows for larger profits. This involves managing a team, dealing with legal and regulatory issues, and potentially setting up a firm.

What are the risks associated with being an independent Quant?

The risks include market volatility, the need for significant initial capital, the challenge of consistently achieving high returns, and the overhead costs of running a trading operation.

Why is it difficult for an independent Quant to attract investors without experience?

Without experience, it is hard for an independent Quant to prove their ability to generate profits, which makes it difficult to attract investors who are looking for a track record of success.

What is the significance of having a team when running a Quantitative trading operation?

A team is significant because it allows for the division of labor, including strategy development, trade execution, data management, legal compliance, and investor relations, which are all crucial for a successful trading operation.

What is the role of a Quant in a firm setting?

In a firm setting, a Quant's role may include developing trading algorithms, conducting quantitative research, risk management, and contributing to the overall strategy of the firm.

What are the potential career paths for a Quant according to the script?

A Quant can either work for a firm, gaining experience and eventually starting their own fund with investors, or they can remain working for a firm, leveraging the firm's resources and expertise to manage risks and operations.

How does the script describe the transition from an independent Quant to running a firm?

The script describes the transition as a natural progression where Quants who start independently often end up creating a firm to manage growing operations, investors, and a team, thus moving away from true independence.

Outlines

00:00

💼 The Challenges of Being an Independent Quant

The speaker addresses the common question of whether one can be a successful independent quantitative analyst (Quant) or if all Quants must work for firms. Historically, Quants have made significant money, leading to the allure of independent wealth through financial engineering or quantitative finance. However, the speaker argues that independent success is unlikely due to various practical challenges. A hypothetical scenario is presented where a Quant starts with a million dollars, aiming for a 10% return. Despite initial success, the lack of a guaranteed income, transaction costs, and the need for infrastructure make it less appealing than a salaried position with benefits and lower stress. The speaker emphasizes that while anecdotal success stories exist, the majority find it more advantageous to work within established firms.

05:02

📈 Scaling in Finance: From Independent Trading to Firm Building

The second paragraph delves into the financial realities of scaling a Quant's operations. It discusses the potential of a Quant to consistently achieve high returns and the subsequent decision to seek investors to scale up to millions, aiming for larger profits. The speaker outlines the complexities of managing a growing firm, including legal, regulatory, and operational challenges. The narrative suggests that while independence is an initial goal, most Quants eventually become part of a larger entity, either by working for an established firm or creating their own, which requires managing teams, investors, and various business aspects. The conclusion is that in finance, scalability is key to profitability, and the romanticized idea of independent wealth through trading is often replaced by the practicalities of working within or building a firm.

Keywords

💡Independent Quant

An 'Independent Quant' refers to a quantitative analyst who works on their own, outside of a traditional firm or institutional setting. In the video, the speaker discusses the challenges of being an independent Quant and suggests that it's difficult to be successful without the backing of a firm, as it involves significant financial risk and the need for substantial initial capital.

💡Quantitative Finance

Quantitative Finance is a field that applies mathematical and statistical models to solve problems in finance. It is central to the video's theme as the speaker debunks the myth that one can easily become a successful independent Quant by simply having a degree in quantitative finance.

💡Prop Trading Firms

Prop Trading Firms are companies that trade on their own capital, as opposed to trading on behalf of clients. The video references historical success stories of such firms, particularly before the 2007-2008 financial crisis, to highlight the allure of becoming an independent Quant.

💡Financial Engineering

Financial Engineering involves the use of mathematical and engineering techniques to solve complex financial problems. The video mentions that many aspire to become Quants by obtaining a Masters in Financial Engineering, suggesting it as a pathway to financial success.

💡Market Average

The 'Market Average' in the context of the video refers to the typical or average return on investment that can be expected from the market. The speaker uses this term to contrast the high returns one might hope for as an independent Quant with the more realistic returns that are generally achievable.

💡Transaction Costs

Transaction Costs are the fees or expenses associated with buying, selling, or exchanging financial instruments. The video mentions these costs as part of the discussion on the financial realities of being an independent Quant, emphasizing that they can significantly impact profitability.

💡Base Salary

A 'Base Salary' is a fixed amount of money paid regularly to an employee, typically regardless of performance. The video contrasts the security of a base salary with the variable income of an independent Quant, highlighting the benefits of working for a firm.

💡Regulations

Regulations in finance refer to the rules and laws that govern financial institutions and activities. The video discusses the regulatory challenges faced by those looking to set up their own trading operations, emphasizing the complexity and cost associated with compliance.

💡Scaling

In the video, 'Scaling' refers to the process of expanding a business or investment strategy to handle a larger amount of capital or operations. The speaker explains that successful Quants often move from independent trading to running larger firms, which involves scaling their strategies to manage more significant sums of money.

💡Investors

Investors are individuals or entities that provide capital for a business or investment with the expectation of a return. The video discusses the importance of securing investors for a Quant who wishes to scale their operations and the responsibilities that come with managing other people's money.

💡Risk Management

Risk Management is the process of identifying, assessing, and mitigating risks. The video touches on risk management in the context of working for a firm versus being an independent Quant, suggesting that firms often provide a more structured and less risky environment for Quants.

Highlights

The common misconception that independent quants can be very successful is debunked.

Historically, quants made millions in the 80s, 90s, and early 2000s, creating a false narrative of easy success.

The speaker argues that being an independent quant is not as lucrative as working for a firm.

A scenario is presented where a quant with $1 million makes 10% return in the first year, but faces various costs and no salary.

The importance of transaction costs, technology, and learning resources in the quant's success is highlighted.

A comparison is made between the potential earnings of an independent quant and a quant working for a firm with a base salary.

The benefits of a stable salary and reduced stress in a firm job are emphasized over the uncertainties of independent trading.

The speaker explains the challenges of setting up a hedge fund or prop trading firm, including regulatory and operational hurdles.

The concept of compounding returns is discussed, with an example of $1 million growing to $2,593,742.46 over ten years.

The average annual return from compounding is calculated, showing a lower income compared to a firm job.

The reality of starting a trading venture is contrasted with the romanticized idea of independent success.

Scaling a trading operation by finding investors is presented as a way to increase profits.

The necessity of a team, including data engineers, traders, and legal professionals, for scaling a trading operation is discussed.

The transition from an independent trader to a firm owner is described, with the associated responsibilities and challenges.

The importance of experience and networking in gaining investors for a quant's own fund is emphasized.

The conclusion that quants typically end up working for someone else or creating their own firm is drawn from the discussion.

The necessity of scaling in finance for profitability is reiterated, explaining why quants often work for firms.

Transcripts

foreign

today we're going to answer subscribers

question and probably one I get a lot

and somewhat I would like to debunk a

little bit uh the question is can you be

an independent Quant or do all quants

work for firms so yes and no and it's a

challenging question but my typical

answer is no you cannot be an

independent Quant and be fairly

successful which shocks people because

we start to look back at historical

quants or you know prop trading firms

and we go wow they made millions and

millions of dollars back in the 80s and

90s and maybe early 2000s before the

2007-2008 financial crisis so therefore

all of us want to go out and get a

financial engineering Masters or

quantitative Finance Masters and we're

going to be millionaires and the beauty

of all this is you don't have to work

for anybody so let's run through a

scenario here why this doesn't work out

in practice and I will note and put a

little caveat I am sure there are some

anecdotal evidence here there are a one

or two people that have done it but

let's go through the math a little bit

from a Quant perspective so you know

let's type it medically say

you have a million dollars I just gift

you a million dollars you have a million

dollars and it's just sitting in your

bank account okay it's a million bucks

um and you're gonna make ten percent on

that return in the first year so let's

just do simple math here a million

dollars times ten percent you made a

hundred thousand bucks so people are

like oh man Dimitri that is awesome that

is amazing I made a hundred thousand

dollars and I don't work for anybody

well that's assuming you pay yourself

nothing that also assumes there are no

costs associated with the trading we're

just going to pretend transaction costs

disappear uh we're gonna pretend the

computer the internet

um the time the textbooks the learning

all that stuff just disappears and we're

gonna say you made a hundred thousand

dollars and you paid yourself nothing

now you could rewind this back and say

okay Dimitri let's say I'm really smart

I can get 10 return which as a note

that's more than the market average here

so Market average is between like six

and eight percent with well

diversification if you're really smart

you might be able to knock in a 10

return here so let's just say you can do

10 and you take a hundred thousand

dollars every year so you have a million

dollars somehow which we're not going to

ask questions how you got it but you

have a million dollars uh you can

generate a hundred thousand dollars a

year and you pay yourself a hundred

thousand dollars a year if you can

consistently do that you would make yes

a hundred thousand dollars a year now

when you looked at the two videos which

I'll link above or below

um in the description

quants can work for firms making a

hundred-ish thousand dollars to start

now the beauty of not working for

yourself is you get paid your salary

regardless of performance that's what a

base salary is so you can start at a job

you could do sell side like me and risk

management have low stress uh regular

hours work 40 hours a week have great

benefits on top of all this which they

don't include inside that hundred grand

and you can get paid you know 80 to 100

000 to start within a few years you're

probably making one 120 140 depending

where you're at New York City you should

be making a bit more uh other places

where it's cheaper to live you'll be

making a bit less but in general you're

making 100 Grand with essentially no

stress or minimal stress because you're

working for someone else who has to deal

with all that now this also assumes the

fact that you somehow know how to set up

a hedge fund or a prop trading firm uh

you also know how to go through the

proper regulations you also have free

data to you there's essentially no costs

associated with this so you know you can

see here if you made that ten percent

per year at a hundred thousand dollars

it's more lucrative less stress and

easier to actually work for someone else

than it is to say okay

um the 10 is not guaranteed I have to

perform and I have to do extremely well

and if I don't do extremely well I might

not get paid so you might make I don't

know say six percent for the year which

is about prime Market average six to

eight but you're a little bit on the

Lower Side you make six percent a year

you're only making sixty thousand

dollars and again there's that risk

associated with your performance here so

you can see it's more advantageous just

in this scenario to work for someone now

let's pretend somehow

I don't know your family's super wealthy

you got the million dollars for free and

you're gonna compound that money 10 per

year right that's what everybody likes

to assume here so if we take a million

dollars and we compound that out at 10

years at 10 if my math is correct uh

you'll end up with two million 593

742.46 now you got to subtract out your

million dollar initial investment which

your family gave you or you borrowed or

something altered that's not really a

return that's just assets you had uh you

take that out you end up with one

million 593

742.46 and now you divide out all that

effort that you had over a 10-year

period and you end up with 159

374 and basically 25 cents we rounded up

160 000 a year is a terrible salary for

a firm like you could work somewhere

five ten years into a career and be

blowing past two three hundred thousand

dollars which we saw in the Carnegie

email and Report here again you'll be

making this towards towards some

experience this isn't like you just

Waltz out and make tons of money off the

bat but you can see when you started you

know making around 100 Grand 90 100 with

benefits and all that kind of tight and

everything for your base salary it's

much more advantageous and much easier

to work for someone else in that

scenario now in the case that you don't

need any money and you compounded

everything else again you're not making

a whole lot of money now the secret in

finance though and why people end up

starting firms and actually making

millions of dollars which we want to

talk a little bit about is they're able

to scale this so to scale this

in this scenario let's say you could

make 10 Returns year over year and you

could prove that you could do it uh now

it's much more advantageous to run out

and find investors to raise 50 million

or 100 million or 200 million dollars

that you can scale the operations to now

make the profits much much larger and

now you can pay your employees those you

know a few hundred thousand dollars to

250 whatever in these ranges and get

some new employees and train them you

know from about a hundred thousand up

and you can bring all this in and build

a firm but again you have to go out and

find investors

so again doing it independently with no

investors no team nothing sure it might

be possible there's a lot of risk in it

and a lot of people lose money and get

nothing for the year

um the expectation of returns though it

is usually much more advantageous to

work for someone else now that being

said though going through the scenario

here where you go out you find a bunch

of investors well now you're tied to

those investors and now you have to

report and deal with the investors and

now as you start building a firm you're

going to have more and more legal

paperwork like thin right you have to

deal with because you have to follow

rules and regulations and perhaps you're

another country as an example and you

have to do the same thing well as these

things start to scale

you'll start finding out too that your

one strategy only worked for a short

period of time you have to come for the

new strategy and so now you start

finding out you need to implement these

things into automated systems you need

to have things set up so you need data

Engineers uh you need a Quant to come up

with the strategies and build out you

know the research portions of it you

need someone to execute this which is

typically like some sort of Trader and

again you needed someone to deal with

all the investors and you'll need a

lawyer and you'll need accountants and

as you see here you'll probably need HR

because now you have all these employees

and as these things start to grow you

might be we'll put an air quotes

independent but you're not independent

anymore now you're just creating a firm

and a lot of quants end up doing this

where they go and they work for someone

else they make some good money they have

some nice Financial cushion they take

their ideas their information their

Network contacts to hire really good

employees and they start their own firms

and they become profitable and

successful in that notion here so I hope

you guys get from this takeaway here

it's not like like this I don't know why

this fairy tale exists where it's like

I'm gonna go out and become really

really smart and be because I'm really

really smart in quantitative Finance I'm

going to make millions of dollars

there's just a lot of ignorance in that

ideology here and kind of that

storytelling and yes it is very romantic

it would be amazing if you could just

quit your day job work for yourself sit

here like in an office like I am doing

my YouTube stuff but instead just be

trading and making millions of dollars

and it'd be great and wonderful the

reality is though is one trading is very

very challenging markets are very brutal

to be competitive you have to have a lot

of resources and a team behind you to do

it effectively and efficiently and

there's lots of other costs and

overheads that come into this on the

firm side as well so building a firm is

typically where you end up with you know

there might be this romantic fairy tale

of you starting your own trading

Ventures and then if it grows and you

are successful it will turn into a firm

if you are not successful it'll turn

into you working for someone else it's

not realistically that fairy tale dream

is kind of a Tipping Point where it's

like you might start in that ideology

but you're going to end up either

working for someone else or creating

your own firm and having a bunch of

people work for you but but in finance

if you cannot scale it is not profitable

so that's why quants end up working for

someone else it's much safer or they

work for someone else for a while and

then start their own fund because they

have experience so they can gain

investors here so if you don't have

experience and you're nobody it's really

hard to get investors if you've worked

in the industry for a while and you know

a bunch of people and you can prove that

you can make a profit it is much much

easier to get investors here so you're

gonna end up one of these two camps

either you know working for someone else

which isn't all bad because there's a

lot of the risks associated with running

a fund That You Don't See as a newbie

and the firm takes care of all that they

have people hired to do all that they're

experts in actually running firms and

investment firms and then on the other

side you might gain all that experience

gain a good Network build out your own

firm and do it yourself but again you're

not really working for yourself you have

a lot of investors you report to you

have employees and teams to manage and a

bunch of other things that perhaps

aren't as fun and exciting as building

models and doing quantitative research

so anyways thanks for listening thanks

for watching and as always until next

time

[Music]