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Finding a job in finance
Emanuel Derman gives careers advice to those seeking a job in today’s finance markets.
You’ll have to have plenty of education, and intuition too

                                                        eigners) who want to succeed here must make            funds can use quants to evaluate hedge funds.
                                                        cultural adaptations.                                       Then there are the service providers. Ac-
                                                            So, what should you do about finding a job         counting and consulting firms need model-savvy
                                                        in quantitative finance nowadays?                      staff to perform model audits. Risk management
                                                            If you want to be a classic 1980s model-builder    software companies, such as Algorithmics, Barra,
                                                        for a trading desk, get a PhD in finance, physics      Northfield, Numerix and SunGard, need pro-
                                                        or some other technical field. You’ll need that to     grammer-quants. And everyone needs informa-
                                                        do research. But consolidation has killed many         tion technologists and back-office staff who
                                                        of the classic positions during the past decade,       understand models and can help organise a firm’s
                                                        and the remaining firms are less inclined to de-       books and records.
                                                        velop models or publish papers about them. You              I grew up believing, and still believe, that
                                                        need to be open-minded and take advantage of           quantitative finance is in essence a multidiscipli-
                                                        the fact that as complex products have prolifer-       nary enterprise. To be effective, you must learn
                                                        ated, quantitative skills have become increasingly     finance, mathematics and programming. The lat-
                                                        valuable in wider domains.                             ter is critical because most trading innovations
                                                            First, think about risk management, every-         involve software, and if you can program, you
                                                        one’s new categorical imperative. Investment           can always add value. If you can’t, you have to
                                                        banks, commercial banks and hedge funds need           be a lot smarter to earn your keep.
    n 1985, when I joined Goldman Sachs, there          risk managers, not only for their skill but also for        More generally, learn how the financial

I   were scores of places to work and you needed
    no education in quantitative finance. You could
look for a position at Goldman, Salomon, First
                                                        the comfort they bring to investors and regula-
                                                        tors. Banks need risk monitors to intermediate
                                                        between risk managers and traders, and risk
                                                                                                               world works. If you want to work in that world,
                                                                                                               don’t pay attention only to academics, who
                                                                                                               often have great misconceptions about how
Boston, Merrill Lynch, Morgan Stanley, Prudential,                                                             models are used. Listen to the people who live
Drexel, Shearson, Lehman, EF Hutton, DLJ, Smith                                                                by their models; go to practitioner seminars and
Barney, Paine Webber, Bankers Trust, Chase Man-
                                                        Quantitative finance                                   industry conferences; Join the Professional Risk
hattan, JP Morgan, Chemical, Citibank and Manu-         is in essence a                                        Managers’ International Association, the Glob-
facturers Hanover, to name only a few among the                                                                al Assocaition of Risk Professionals or the In-
large respectable trading firms. All of them need-
                                                        multidisciplinary                                      ternational Association of Financial Engineers;
ed people adept at bond maths or options pricing.       enterprise. To be effective,                           read the Wall Street Journal and Risk; follow
    In those days, not only couldn’t you get a                                                                 markets, rates and spreads.
degree in financial engineering, but there was          you must learn finance,                                     And, importantly, seek to gain intuition.
actually no such field. Being a quant was ama-          mathematics and                                        Quantitative finance isn’t mathematics or chess;
teur heaven. You learned options theory your-                                                                  it’s not a field for brilliant idiot savants; it’s an at-
self and made up your own models to fit new             programming                                            tempt to model the world of markets and peo-
products. No-one expected you to know Black-                                                                   ple, and you need a little wisdom and experience
Scholes or CapM; being reasonably smart and             monitors don’t need PhDs; they do need to love         to know what can work.
flexible was enough. Now, 20 years later, it’s a        markets and know what to worry about: bad                   When you do get a job, even if it’s not exactly
different landscape.                                    marks, mis-specified contracts, uncertainty, risk,     what you thought you were looking for, stick
    First, many of the big firms have merged, been      value-at-risk, illiquid positions, exotic options.     with it for several years. Get to be an expert in
acquired or self-destructed. Second, education is       Controllers too, who must mark to model the            your firm that people around you can rely on.
now de rigeur. Academia has not only caught up          large exotic and illiquid books at trading hous-       Make the best of what you’ve found and then, if
with the practitioner world, but caters to it. There    es, need analysts with a thorough understanding        you move, move cautiously – there are idiot boss-
are scores of MSc and PhD programmes in quan-           of derivatives and the models used to price them       es everywhere. A resumé filled with short innings
titative finance, financial mathematics or finan-       (Risk July 2001, pages 48–50). So do the margin        doesn’t look that good. And when you leave,
cial engineering; if you can pay you can attend         providers in prime brokerage.                          don’t tell your boss off; he may be interviewing
a conference or lecture series each week on                 Which brings me to alternative asset man-          at the same place you just moved to.
everything from credit derivatives to statistical ar-   agement and proprietary trading. As the num-                I’m grateful to Bob Long, a principal at the
bitrage. Amateurs are out.                              ber of investment banks have shrunk, hedge             search firm Denison Group, for his insights on
    One thing has stayed constant: most quants          funds have multiplied and grown in sophistica-         the job market. ■
still come from abroad. A few weeks ago, I took         tion. In the past, most of them focused on glob-
a poll and only one of the 70 students in my class      al macro or distressed trading; now, many are          Emanuel Derman is a professor at Columbia
at Columbia right now is American born and ed-          quant shops, spawned from the proprietary              University and a risk adviser to Prisma Capital
ucated. Americans want to be managers and have          desks of investment banks. Hedge funds can use         Partners. His book, My Life as a Quant, will be
outsourced their menial and quantitative tasks to       quants to trade, manage risk and do performance        published by Wiley in autumn 2004. You can
immigrants. Consequently, quants (that is, for-         attribution. And, moving up a level, funds of          reach him at emanuel@ederman.com

XX    RISK MAY 2004 ● WWW.RISK.NET