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by Giuseppe "gappy" Paleologo 2/21/2024
If you are reading this, it's because I am addressing you for a university presentation, or you have contacted me on LinkedIn (most likely), Twitter (less likely), email (even less likely), or SMS (next question: how did you get my phone number? Extra points) for career advice. This is the best, most comprehensive answer I could come up with.
Let's start with some cautionary remarks. You are probably asking the wrong person because a) I wanted to do Physics or write books at your age, not finance, and moved into this industry exceptionally late in my career; b) all my decisions in life, including work-related ones, have been strictly non-revenue maximizing. So, you can stop reading now, or endure nine pages of advice.
Now, let's really start. If you are of legal age and are into it, now is an excellent time to grab a stiff drink.
The first question I would like to address is, "What are my chances of getting a job as a quant researcher?" The "buy-side" is the segment of the financial industry comprising firms who buy securities on their accounts or act as agents for third parties. These include private equity firms (e.g., Blackstone), venture capital (e.g., Sequoia), asset management firms (e.g., Blackrock), pension funds (e.g., CalPERS), family offices (e.g., Soros), hedge funds (e.g., Citadel), and prop trading firms (e.g., Citadel Securities). All of these have some quants on staff, but there are some differences. Every firm is a bit like Orwell's "Animal Farm": all employees are created equal, but some employees are more equal than others. In PEs and VCs, quants are not at the core of the business, and in a good portion of asset managers, pension funds, and family offices, quants are not working on the most exciting problems. You probably want to begin your career in a place where quants are first-class citizens and are using their brains. I will focus only on hedge funds and prop trading firms. They also are the only firms I know from direct experience. The first thing to realize is how tiny this segment is.
The Assets Under Management of the hedge fund industry are, give or take, $4T, out of about $100T. Prop traders are a rounding error of that $4T. The order of magnitude of hedge funds in operation globally is 10,000, but the distribution is heavy-tailed. Since inception and as of 2023, the top 20 hedge funds have generated 19% of the total profits (out of maybe 50,000 HFs). In the past three years, the top three hedge funds (Citadel, Millennium, DE Shaw) have generated 38% of the total PnL.
The multi-manager hedge fund platforms (more on them later) manage only about $300B in total (less than 10% of HF AUM), but are responsible for maybe 50% of the sector's PnL in recent years. They also employ about one-quarter of the total HF employees.
All of this should provide sufficient evidence for the following three points: