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Quantitative Analysis: Be a Rocket Scientist on Wall Street

Quantitative analysts are number whizzes. On Wall Street they're often called "rocket scientists."

"Quants," as they're also called, may work in many different settings. But number analysis is at the heart of their work. They manage assets, predict markets, improve efficiency and maximize profits for companies.

During these difficult economic times, quantitative analysts are in high demand.

"Even in this economy, and I might say especially in this economy, our students do very well," says David Kelton. He's a professor of quantitative analysis at the University of Cincinnati.

"And the reason I say 'especially' is because companies these days have got to be efficient," Kelton adds. "If they're not, the competition is going to be -- and you're going to be -- gone. So doing this kind of analysis is essential."

Kelton also directs the university's master's of science program in quantitative analysis. "It's a highly prized kind of degree to have. And even in this bad economy of the last couple of years, our students have had no trouble getting jobs," he says.

Quantitative analysts may work at universities, in consulting firms or at financial institutions. Titles include financial analyst, logistics analyst, manufacturing analyst and many other possibilities.

Many quants work in the asset management industry. They look for trends and patterns in order to develop sales forecasts and investment strategies.

"Demand is stable for top talent," says Michael Miles. He's a senior vice president and director of human resources with an asset management firm in Boston.

"There is no carved-in-stone description" for quantitative analysts in asset management, says Miles. However, these people usually have some of the following traits, according to Miles:

* A doctoral or advanced degree in statistics, economics, finance, physics or applied mathematics

* Familiarity with academic financial literature and its practical applications

* Strong statistical and econometric skills

* Experience with statistical packages and databases, including Matlab, SAS, S-Plus and SQL

* Excellent analytical skills and a hands-on attitude toward research

* Experience in financial databases, such as Factset and Bloomberg

* A creative, curious nature, and a love of numbers and mathematical/statistical modeling

Many quants also work in security analysis. They analyze industries and companies to predict the return of companies' stocks and bonds.

Economists use quantitative approaches to see where the economy is going. They look at many factors like the growth rate of the economy, changes in employment, productivity, money supply and interest rates.

The role of quantitative analysts is not limited to these fields. Quants may work wherever complex systems are found. Often their role is to make systems as effective as possible. And wherever they work, their job is all about applying math to real-world problems.

Math Skills Required

"[Quantitative analysis is] building mathematical models of real systems, either existing now or contemplated for the future, and analyzing them," says Kelton. "Trying to make them better, improve them, maybe even trying to optimize them, making them the best that they can be in terms of efficiency."

In a business context, this often means maximizing profits or minimizing costs for the company. In a military context, it would be to ensure the military is as ready or prepared as it can be.

"Risk management is an important part of quantitative financial jobs," says Esther Eiling. She's an assistant professor of finance. "That's the kind of job where you need very strong math skills," she says. "That's not the kind of job that just anyone can do."

Kelton agrees. He says there are three subjects to excel at in high school and undergraduate studies if you want to get into this field: "Number one is math, number two is math, and number three is math," says Kelton. "It's as simple as that."

Kelton has a bachelor's degree and a master's degree in math. Many of his colleagues were also math majors.

"It's all based on math," says Kelton. "It's really just applied math. And so the best preparation that students can have... is a solid math background.

"If you're like many kids and you went through school hating math, you should not do this because it's all math."

Optimization and Computer Simulations

A big part of quantitative analysis is "optimization," which means to make the best or most effective use of something.

Kelton gives the example of airlines.

"The airlines, every day, solve great big optimization problems to pair crews with flights and airplanes," he says. "A certain crew is qualified to fly a certain kind of airplane and they're positioned some place. And then there are all these requirements, like they have to have a certain amount of rest between flights.

"So what is the least [expensive] way of pairing crews to flights so you can meet your schedule on that day? That's an example of a complex optimization problem."

Quantitative analysts often use computer simulations in their work. Kelton specializes in computer simulations.

"For instance, we build a factory on the computer -- a model of the factory -- and we just watch the widgets go through the factory and figure out what's the best way to lay it out," says Kelton.

Simulations aren't just useful for designing and improving factories. Any system that involves the flow of resources or people can be simulated and analyzed on a computer.

"An increasing growth area for us is health care, doing things like patient flow analysis in hospitals, typically using simulation," says Kelton.

"So you want to build a new hospital or add an emergency room to your hospital. How big should it be? These are [very] expensive facilities to build, operate and staff. They need to be big enough for obvious reasons, but you don't want to make them too big because that's very expensive."

Salary

A good quant is quite literally worth his or her weight in gold. So quants are well compensated. After all, they can save a company much more than the cost of their salary!

Kelton has a friend who uses this to his advantage. He works for an airline. Each year he has to complete an annual report about his performance the previous year.

"He documents the amount of money he saved the airline -- not in terms of dollars, but in multiples of his own salary, so he'll say, 'I saved 42 times my salary this year,'" Kelton says with a laugh.

Starting salaries for new quants vary widely, says Kelton.

"We've had some of our graduates go into Silicon Valley with companies like eBay and Yahoo Inc. at six digits," says Kelton. "But I'd say more like $60,000 to $80,000 is typical."

Job Opportunities

"Ten or 15 years ago, I would say that most of our graduates go to manufacturing, doing things like assembly line balancing, flow management, plant layout, those sorts of activities," says Kelton. "And we still have some of that, but not much, because manufacturing has declined so much in North America.

"We do still send people into logistics or what's now called supply chain management," says Kelton. "We have people working for FedEx, US Airways and some consulting companies that serve the trucking industry and railroads."

Globalization, economic uncertainty, and an aging population are some of the major forces behind the recent demand for quants. And that demand isn't going away.

"I think the demand is going to continue to be strong," says Kelton. "If anything, it's going to grow."

Health care is one major area of opportunity.

"I just turned 60, and people my age are going to do nothing but get sick and die from here on out," Kelton says. "So for people going through college and graduate school at this point, there's a bright future in sickness and death. And so going into the health-care industry is something that I think is going to be incredibly important.

"The cost of health care is what's driving that," Kelton adds. "So we've got to get more efficient at delivering high quality health care, and I think that the people with the skills that we provide in this program are going to be essential to that effort."

Energy is a second major area of opportunity.

"With energy prices doing nothing but going up, we have to be more efficient at energy use," says Kelton.

"Anything having to do with health care or energy consumption are going to be growth areas," Kelton adds. "And it's not that we in analytics have all the answers, but I think we're going to be essential contributors to addressing those problems."

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Quantitative Analysis: Be a Rocket Scientist on Wall Street

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