Investment firms should hire more quants

The investment world is increasingly being driven by data and ever more complex data analysis. And let’s be honest for a minute here: Analysts trained in economics or finance are simply not properly qualified in complex data analysis compared to data scientists and people from the hard sciences like maths, physics, etc. So, companies are increasingly hiring these quants to deal with investments. But does that pay off, or is the lack of financial and economic knowledge of these quants going to hurt?

Well, the title is a giveaway of the results of a study by Ling Cen and others. Using the Revelio Lab database which collects professional and educational backgrounds from sites like LinkedIn and others and pairing this data with institutional investor data from Reuters’ Global Ownership database, they could analyse the impact of 2.9 million people at 7,408 institutional investors worldwide between 2008 and 2021. I guess if you want to analyse quants you better do a massive quant exercise yourself…

The primary result was that hiring quants improves performance. Every additional data scientist or quant hired by an institutional investor increases trading profitability by 0.004 percentage points. That’s apparently a 13% improvement on the average trading profitability of investors. The massive database allowed the researchers to look at the roles these quant employees had within the organisation, and they found that quants working in data analyst have a bigger impact than quants working in data maintenance or data collection (indeed, using quants to collect data is a waste of money since it does not add any performance).

So far this shows correlation but not causation. What makes the study so interesting is that they found a creative way to check causation: local university programmes. Essentially, they could show that if a university establishes a data science degree, then four years later local institutional investors start hiring more quants and their performance improves.

So where do quants find employment? As you might have guessed predominantly in hedge funds. Second most common employers are financial advisers and fund management firms. Then come banks which seem quite reluctant to hire quants and pension funds are lagging even banks by a wide margin. So, my plea too banks and pension funds is: Please hire more quants because you are increasingly outgunned and your performance is likely to suffer because of it.