AQR: Managers 'Can't Dabble in Quant'

Job postings and new hire announcements for quantitative researchers and developers at hedge funds keep popping up, but firms moving into the space now face questions over how to build out teams and integrate the talent they have hired into their organizations, industry watchers say. Firms may have to be ready for multi-million dollar investments in such teams, recruiters say.

AQR Capital Management has been tapping quant professionals for years and has learned there are no shortcuts, says Jen Frost, managing director and chief human resources officer at AQR. “We believe you can’t dabble in quant,” Frost said in an email to FundFire, noting the firm has been hiring such talent since its inception.

Many more managers are facing such strategic decisions on how to manage quant talent. Hiring halfway through 2017 has remained aggressive in machine learning, big data, and artificial intelligence (AI), with many firms looking to hire project managers to build out and run their efforts, says Michael Goodman, managing partner at New York-based recruiting firm Long Ridge Partners.

High-profile examples include Man Group hiring William Ferreira in late April in the newly created role of head of machine learning for Man GLG, as reported, and Citadel Group hiring Li Deng from Microsoft last month as its chief AI officer, according to Deng’s LinkedIn profile. Citadel declined to comment on how its building out its quantitative talent.

Hedge funds that haven’t traditionally dipped into the quant space are also getting their feet wet. Third Point founder Daniel Loeb announced last month that his firm hired six people to work on data interpretation, but the firm is not yet using the team for systematic trading, as reported.

While some larger hedge funds have downsized their staffs over the past year, as reported, hiring for quant roles is up. Yet hedge funds are facing big challenges when it comes to assessing and integrating quant talent, especially when people with fundamental investing skill sets are evaluating those with quantitative ones, Goodman says.

“Many firms are hiring quants because everyone else is doing it and they think they should be doing it,” he says. “They get onboard and they don’t necessarily know what to do with them.”

Shops built from the start around quant investing have pipelines of talent to draw from that discretionary managers do not, but the industry as a whole faces challenges from Silicon Valley and other sectors, recruiters say. AQR has drawn on recruits from top universities and employee referrals also serve as a “significant source” of talent, says Frost.

“One of the biggest challenges for hiring quant talent is that the competitive landscape is broadening,” Frost says. “We have always competed for top quant talent with academia and within financial services, but now we are seeing more competition from tech firms and other industries.”

Bringing on a quantitative team can be a multi-million dollar upfront cost for a performance measure that can remain unknown, says Deepali Vyas, head of Americas global markets and the hedge fund practice at Heidrick & Struggles. Firms are also faced with the challenges of outlining product definition, dealing with fundamental analyst interactions, and finding the right quantitative talent in a tight market, especially after some splashy hires from the tech world haven’t worked out, she says.

“We want to have this unique blend of an individual who understands how to invest or wants to invest as opposed to just being excited about the technology,” she says. “It’s finding a unicorn of talent for an unknown product with an unknown result.”

Hedge funds are approaching adding quantitative talent to their organizations in three ways, Vyas says. For firms that can stomach a large upfront cost, building an innovation lab or creating a research and design segment offers a path. For many fundamental shops, such as long/short equity oriented firms, building out a team of one to three people with a director of research is a more viable, scaled-down option. Other firms are taking yet another path – a long-term, bottom up view by building a quant-oriented program that will have fundamental analysts rotate through to understand quant approaches, Vyas says.

One of the biggest challenges for hedge funds remains identifying creative and intelligent quant talent and then motivating those professionals, says Desmond Lun, founder and CEO of Taaffeite Capital Management, an emerging quantitative managed futures hedge fund. For firms that are serious about having quants play a central role and not just act as “window dressing,” they need to hire a key person who can build a team with the right culture to ensure it thrives, he says.

“Very talented people need to be properly recognized for their talents, and it’s not simply a matter of pay,” he says in an email to FundFire. “For example, there are firms where quants are treated as subordinates to old-school human fund managers. Why would a truly talented quant work in such an environment?”

Bringing on quant talent is “only half the battle,” says Shanta Puchtler, president and CEO of Man Numeric. Quants need technology and technical support, with discretionary shops needing to make investments in technology infrastructure, coding, and database talent, he says.

“One of the biggest challenges traditional discretionary hedge funds face in this space is getting the critical mass of quants to create a quantitatively innovative culture that attracts more quants – a culture where the data scientists don’t feel like bolt-on employees within a larger, non-quantitative organization,” he says in an email to FundFire. “For some managers, creating this type of a collaborative work environment would mean breaking down some of the barriers between teams and groups that are more typically found in a traditional discretionary multi-strategy hedge fund environment.”

Firms also need to decide whether the quantitative talent they employ will be used for risk management purposes or return enhancement, says Jim McKee, senior v.p. and director of Callan’s hedge fund research group. Fundamental firms bringing on quants can face tensions, especially if direction and buy-in from the top of the firm are not clear, he says.

“I would look for evidence of how they drive collaboration,” he says. “If we are just hiring, paying [quants] high salaries without regard to the ultimate profits they generate, you will have the disconnect and dissatisfaction.”

The hedge fund industry is still in the early innings of integrating quant talent, Goodman says.

“It will be interesting to look back a year from now to see if firms are still doing it and sticking with it or being more reactive,” Goodman says. “You can either be reactive or proactive.”

Originally published on FundFire. View the original article here.