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What will the future look like for quantitative finance?

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With the financial industry constantly shifting under new regulations, changing customer expectations and advanced technologies, it’s not surprising that even the pioneers of quantitative finance are questioning the future of quants. When even Jamie Dimon is backtracking and jumping onto the cryptocurrency bandwagon, it can feel like the entire market is missing what could be another pivotal year in quantitative finance. Crystal-ball gazing won’t help predict the future, but looking at the factors making waves in the industry now could help paint a clearer picture of what to expect in the coming year and beyond. 

New technology and talent

Innovations in technology can be seen as both a challenge and an opportunity, requiring ever-increasing technical skill.  Everyone—and we mean everyone, across every industryis looking to improve data analytics capabilities through processes like automation and machine learning, and quants stand to lose out to newer FinTechs and players in other industries if they aren’t careful.

Simply put, the increasing technical demands on quants will make it harder and harder to find the right talent. Matthew Sargaison, Chief investment Officer at AHL Partners LLP, feels there has definitely been a shift towards technology on the buy side, and you need to compete with a host of the traditional top players in the computer science field for talent and ideas: “you’re no longer in competition with Goldman Sachs, you’re in competition with Facebook and Google.”

This does represent an opportunity for firms looking to improve their quantitative business. Developments in AI and machine learning are also cropping up the mass media more and more, but within the quant community some facets of this aren’t new at all. Take artificial neural networks, which lacked longevity simply because computational power wasn’t good enough to drive it through 20 years ago. Quants can and should leverage their experience with these developments to maintain their attractiveness to talent, and retain their edge. Technology will be what quants make of it in the future, but it will be people who drive that technology.

Changing skill sets

“It used to be the case that if you had a Ph.D. in maths or physics and you had solved PDs you could join the front office, earn a high salary and have a job for life. That’s no longer the case,” claims John Hull, leading authority on derivatives and risk management.

Quants are no longer expected only to provide technical solutions. There is now a much larger focus on staying curious and building a tool-set to solve original and novel problems to retain flexibility and integrate further into new businesses. Quants are expected to adapt their skills and assimilate with the rest of the bank to really understand the bigger picture. That cuts the other way as well, so quants should be prepared to explain and defend their work as corporate quant awareness grows. New ways of trading and new financial products will continue to emerge, so it is only with a good grasp of the whole ecosystem that a quant will stay ahead.

Damiano Brigo, Chair and Co-Head Of Group, Mathematical Finance at Imperial College, London, highlights the varied, multi-disciplinary skill set needed: “you need to understand maths, statistics and probabilities, but also economics, finance, the operational model of your specific bank, how the treasury is charging you, fund transfer pricing principals and a lot of other things that you wouldn’t have cared about in the past”.

A new horizon for regulation

Since the financial crisis, many regulations and adjustments have been introduced in an attempt to keep the industry in check this time round. This has added huge overheads and pressure to banks, especially when it comes to trading desks, and the trend shows no signs of abating yet. In many ways, some see the new regulation as the natural result of quantitative finance’s continued maturation as an industry and practice.

Others, though, feel regulations have gone too far, and will start damaging the bank's ability to operate effectively and create profit.  In fact, Jesper Andreasen, Head of Quantitative Research Department at Dankse Bank, says on current regulations,  “There are elements that are useful, the whole credit risk in the system, for instance, but I’m not so sure everything is.” Chief Risk Officers have also begun expressing some concern about the sheer volume of new rules being brought in. During a recent survey, one CRO stated, “The burden of regulation is now monumental and potentially having unintended adverse consequences.  While much of the regulation was proven to be necessary due to poor industry self-regulation, the overload of new regulations and their exhaustive implementation can impact the profitability of banks that is necessary for a strong well capitalized banking industry."

Within the quant community, developments in valuation adjustments are also something to keep an eye on.  So far, some are seeing the current system adjustments as a "patch" being used in valuation theory to include effects and costs that were neglected before. But Brigo insists this cannot last, "It’s only reasonable that the industry is resisting non-linear effects valuation, but at some point, we will have to take them seriously and check how much this is distorting the valuation picture.”

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