The Coming Glut of Financial Engineers

QuantNet

Administrator
Staff member
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In the last ten years, the number of graduate programs in quant finance has exploded, as has the number of MFE grads with an eye on top jobs at big-name firms. A decade ago there were seven graduate level quant programs in the United States; today there are close to a hundred – each cranking out anywhere from twenty to a hundred graduates a year. Just as their students see a MFE degree as a surefire ticket to wealth, universities are trying to cash in on the bonanza of eager (if somewhat naïeve) future quants by offering multiple programs in the field. It’s a great moneymaker for the schools, but are the expectations fueled by these degree factories realistic? Can the finance industry absorb the coming glut of MFEs?

Financial trading has transformed over the past 30 years. In the early ‘80s, the people drawn to trading had a passion for markets, but few had the academic pedigree that’s a prerequisite today. Many had only a high school education, but the markets were straightforward enough that a basic understanding of option theory and CAPM sufficed. When derivatives markets exploded in size, both in terms of equity trading and footloose liquid capital, complexity increased by an order of magnitude. Traders with a technical background who had been there from the start were able to capture “monopoly profits” since a failure to understand the technical nuances of the business was a barrier to entry for many prospective quants. Academics and engineers were in short supply, and therefore were hot commodities.

Today, however, the situation looks much different. Where advanced training in quantitative finance was once the exception, there is a growing army with advanced credentials. Black-Scholes and Ito’s Lemma used to be hallmarks of an expert in quant finance; now they’re part of the MBA curriculum and even some undergraduate math programs. Interest rate derivatives and the Gaussian copula for credit and mortgage derivatives were similarly standardized.

As their numbers and sophistication grow, so does the gap between MFE students’ expectations and reality. While the majority of MFE students dream of becoming traders or big-time portfolio managers, the dismal truth is that there simply aren’t enough of those jobs to go around. Right or wrong, most people get those positions by working their way up through the ranks, starting out in jobs that are much less attractive to someone with an advanced degree intent on being the next big trading success story.

Not only are there are more than enough people with first-rate credentials, number of positions in trading, quant finance, and portfolio management is likely to shrink. Firms questioning the worth of their strategic trading platforms have increasingly chosen to spin off entire businesses. These trading jobs likely won’t go away, but will require less infrastructure and support staff – especially once regulators implement new rules tightening firms’ belts on compensation.

This means many MFEs will end up in fields like Audit, Risk, Finance, or Operations. While they may be less trendy, the jobs are important, engaging, and less likely to get hit in a recession. Firms will need more supporting staff to meet the requirements of new regulations, and the skills for these jobs are applicable outside of Wall Street, in areas like accounting, database management, and process management. They aren’t badly paid, but neither are they a route to fast, easy wealth and an early retirement. Success comes the old-fashioned way: hard work over the course of years, perhaps decades.
It’s all the more important, then, that prospective quants make sure they have the right motives. While there’s nothing wrong with wanting to make money, it’s not the way to choose a career, especially not when the chances of easy success are slim. Few things are worse than doing a job one hates – even fewer when one has to resign oneself to doing that job for many years. Those considering finance should stop to assess their real motives. Are they reading the financial press regularly? When they go online, are they frequenting trading and market blogs? Are they keeping up with the academic press, not because they have to, but because of a genuine passion for finance? If they aren’t among the lucky few to make it big, would they be happy dedicating their lives to finance? If not, that choice doesn’t bode well.

Our picture of the future of the financial industry is growing clearer, and it’s obvious that major changes are already in progress. A growing army of MFE’s will face limited and likely shrinking opportunities in trading and quant development, which will produce ever-larger numbers of MFEs chasing formerly snubbed spots in Audit, Risk, Finance and Operations. Schools need to be more candid about the prospects for students once they graduate, but students need to take a more critical view of whether they truly belong in finance, and if so whether they are in a program that will give them the skills to stand out in a growing crowd. While there will always be demand for highly talented MFEs, the run-of-the-mill candidate will likely find himself outcompeted and out of work, or doing jobs that used to require no more than a BS or BA degree. Nonetheless, graduate programs will continue to crank out MFEs. The question is, where are they going to go?
 

Joy Pathak

Swaptionz
Well, this is definitely an interesting article, a bit aggressive but interesting. I agree with the author 100%. Even in my VERY SHORT tenure in the finance industry I have seen many of the examples stated first hand.

There is a lot of risk management required in today's capital markets and I think it's an attractive place to be. At the hedge fund I am currently interning at we are increasing our exposure to stronger risk management techniques everyday which ultimately leads to a stronger and consistent alpha generation.

The article portrays a harsh reality which many of us MFE students need to see.
 

shzhang

New Member
Just wondering, after reading this informative article, is risk management counted as a sub-discipline of general quant finance?

Just a quick search in efinancialcareers.com I found more entries under risk management than that under quantitative analytics. Making me wonder whether that would be the outlet of this FE glut.

another question related, is FRM or PRM a worthwhile certificate to pursue if one is targetting a risk management related career.

Thanks for all the replies in advance!
 

Ken Abbott

Managing Director
Just wondering, after reading this informative article, is risk management counted as a sub-discipline of general quant finance?

Just a quick search in efinancialcareers.com I found more entries under risk management than that under quantitative analytics. Making me wonder whether that would be the outlet of this FE glut.

another question related, is FRM or PRM a worthwhile certificate to pursue if one is targetting a risk management related career.

Thanks for all the replies in advance!
FRM/PRM are kind of like the CFA - they make you digest a lot of occasionally complex material. I think of it as a way to "jump-start" your knowledge base. I wouldn't do it before I got the job - it's a lot of work and you might go into a field where you didn't need all of that info. Once in risk, however, it would be useful.

FULL DISCLOSURE: I have written many questions for the FRM and review the exam for GARP every year.
 

shzhang

New Member
FRM/PRM are kind of like the CFA - they make you digest a lot of occasionally complex material. I think of it as a way to "jump-start" your knowledge base. I wouldn't do it before I got the job - it's a lot of work and you might go into a field where you didn't need all of that info. Once in risk, however, it would be useful.

FULL DISCLOSURE: I have written many questions for the FRM and review the exam for GARP every year.
thanks for the reply. I would then take that as saying such certificate is weaker than a qualified degree from an estalished programme from a university, am I right?

But I'm a little confused on the later part. You mentioned such certificae as a way to jump-start the relevant knowledge base. I thought that's something an outsider who tries to break into the respective area would do, without commitment to a full degree level education. Why would you consider it a thing to do after getting the job? If they are jump-start sort of things, I don't think they will add much value to practitioners already in the field right? or do you mean they are more like enrichment education to expand one's expertise in the field?

many thanks!
 

Ken Abbott

Managing Director
The degree is more powerful as an entree, but once you're in the door, the FRM/PRM will equip you with a lot of practical reference knowledge. The FRM (for sure) and the PRM (I assume) make you learn about Basel, various risk-based analytical techniques, and a chunk of inferential statistics. If you were to join a quant audit team or a price review group, this knowledge would be of limited immediate use. In risk, however, it would be very useful.

One could say that it passes the use test: we recommend that new hires consider the FRM/PRM and we pay for it.

thanks for the reply. I would then take that as saying such certificate is weaker than a qualified degree from an estalished programme from a university, am I right?

But I'm a little confused on the later part. You mentioned such certificae as a way to jump-start the relevant knowledge base. I thought that's something an outsider who tries to break into the respective area would do, without commitment to a full degree level education. Why would you consider it a thing to do after getting the job? If they are jump-start sort of things, I don't think they will add much value to practitioners already in the field right? or do you mean they are more like enrichment education to expand one's expertise in the field?

many thanks!
 

mfegrad

CMU MSCF Alum
this should be required reading for all people considering pursuing an mfe degree.

too many kids think they're going to become big traders when they should be targeting roles in risk and/or research.

it's a great proposition for the schools, though, at least in the short run (isn't that always the case...?). take a ton of money from international students who have dreams of trading for gs. only after a few years have passed will prospectives have (hopefully) learned enough to stay away from the "quant mills." of course, by then, the schools will have made a pretty penny. it's a bubble all over again...

one can only hope that employers will be able to sort through the chaff.
 

anon

New Member
I am not sure if this piece is completely accurate. If you look at traders/salespeople at big banks, most of them come from right out of college...
 

statarb

New Member
Not surprising. I was just reading what a scam law degrees are in the NYTimes and MFE degrees / CQF have the exact same characteristics. Twenty-somethings who think they're smart and have heard that a degree in X will make them wealthy.

Every admissions person I've asked from either CQF or MFE has been cagey about the salary of their grads. "It's very hard to get data" ... well, maybe you should work harder at it if you want my $150k.
 

Andy Nguyen

Member
Cxianliu,
You are right. MFE programs have traditionally trained people for roles in pricing of derivatives, structured finance and prop trading. Now with those roles largely disappear, MFE graduates are left with a market where their training is not in demand. This speaks volume for the need for MFE programs to quickly adapt to market's demands and changing requirement.
Sadly, this is not the case. Very few MFE programs we survey have made changes to their curriculum since the crisis. Risk management is growing in demands but many MFE graduates would rather look for roles that no longer exist.
 

Ken Abbott

Managing Director
I disagree. Model reviewers (easily the second most populous function in risk, after desk coverage) need MFE skills. VaR model people need MFE skills. Senior desk coverage people, as well, need to understand the pricing models. Many of these have PhDs, but others have an MFE. The CRO at Morgan Stanley got his Masters at CMU.
 

zygmunt

New Member
Hey do you guys foresee a decrease in quant hires in prop trading, banks, specific areas of finance, etc.? What is your opinion on the future of hedge fund hiring?
 
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