Loving fancy tech, but looking for reasonable explanation
Professional confession of modern finance professional
This time I am sharing not insight or model or investment strategy, but something personal about myself and my career thus far. Currently I am BI (Business Intelligence) Lead in financial department of big fintech company. Also if you reading this article you know I am working with prof. Plamen Patev (I-Shou University, Taiwan) in the area of investment research and education, a project that is producing this website and our stock portfolio. Also before that I obtained Ph.D in finance, specifically in the area of equity research and business valuation.
All that sounds great yeah?
Well it is not traditional finance career, is it?
Jumping from pure research (doctorate) to pure corporate finance and automation (BI) while working on research papers and educational videos. Some would ask “what this guy really wants to be?”. I have been asking myself the very same question. Finally I got my answer:
Traditional business roles no longer apply in this modern world. We are new breed of finance professionals, whose interdisciplinary set of skills bring the most value.
Why Quants can’t be just Quants and analysts can’t be just analysts?
Sure you still have the traditional roles of lets say Junior data analyst (tech guy) who is punching the SQL or the pure financial analyst who is doing budget vs. actuals in his spreadsheet, but if you think about it these are all less desired and less paid jobs. It is the same with the world of financial markets. Now pure quants are completely separated from investment process and they believe, trust and invest on their mathematical models. On the other hand we have the pure fundamentalists who still believe that top 5 stocks with ROE will be most successful. On top of that we have the individual traders who are pure amateurs and they got no idea of what they are doing, they just know what somebody else has told them to do this.
So what is the issue with the traditional roles?
Well, consider the following cases. In asset management world there are these guys with crazy math models, I mean with formulas on at least two rows. These models are incredibly complex and detailed, but most often are based purely on the econometrics and math. For example if you are fund manager and your quant analyst comes and tells you that TSLA price depends on inflation in Turkey. So when you ask him "Why?" he has no idea, he knows just that the relationship is significant. Same thing currently tech models tell you to invest long, but as economist you know that rise in interest rates is coming and then it will be blood bath on the stock market!
It is the same in corporate finance. Quite often purely tech guys are “too close” to the data. They do great automation, they have great understanding of the data flow in the organization….but in most of the time they lack the pure financial knowledge to recommend the necessary actions or miss the opportunity to introduce new vision to the organization.
How about pure financial analyst?
On the other hand pure financial analyst have on inherent advantage, they know what they are doing and why they are doing it. So the example that I want you to consider is: You are Global FP&A manager and one of your analyst comes to you and tells you your HR cost will be dropping in US because of upcoming interest rates rise. This is great, but when you ask him to give you the same scenario for all markets then he lacks the pure technical abilities to multiplicate it on global level and make sophisticated model out of it.
In the stock markets it is pretty much the same. Most pure equity analyst can get the financial statement of one company and decompose it to understand everything about the business. However most of those people can’t scale the analysis for global view. Often here we have collision between accounting knowledge and the pure technical ability. Simply put if you choose the career of pure financial analyst you dedicate yourself with understanding the economics behind the market.
So tech guys can do amazing stuff, but lack the understanding of finance, while finance people have deep knowledge but can’t scale it to biggest extend.
The rise of the Quantamental
Naturally people (and me) are bridging the gap between those two fields that need to work in consort. The idea is to get the best of both worlds. What I can do is use advanced statistical or BI software to perform complicated tasks and at the same time still stick to the traditional research and understanding of the financial data.
However this has downside! Person can use finite quantity of knowledge, therefore quantamentals like me are not quite as good as tech guys and also not quite as insightful as financial analysts. This is only logical, because the traditional economic theory states that if you separate and specialized in tasks you get better efficiency, but becoming quantamental is doing exactly the opposite - it is combining already separated tasks into single role.
So how are quantamentals not only surviving but thriving?!?
Well the traditional economic theory about work specialization is very good, but it is legacy system! The thing that made this understanding outdated is “data”! Simply in the financial world we have too much data and this changes things. Tech guys can make such a deep dive in technical aspects of data so they can’t see the whole picture, while pure analysts don’t have the tool to dig enough into the data on broader level.
So here are the quantamentals:
We (Quantamentals) have good understanding of the big picture and also enough knowledge of the tech tools to apply it on broader level. In the financial world that is full with data this is proving to be the difference and also very very valuable skill set. The rise of Business Intelligence, shows that in corporate world is becoming more and more valuable to understand finance and also work with data at the same time. In asset management the total dominant style for getting alpha return is the combination of complex models and sound economic/financial theories, it is not accidental that “every successful professor in investment, has his own quant buddy”.
Getting to the state of “quantamental” obviously goes through two roads. First if you have technical background then you need to start attending “boring” academic courses to better understand how the data is driven by economic and financial processes. On the other hand if you are financial analyst or operational person in finance or with academic background, then you need to start learning some data science and programming.
Both roads are headache, but don’t worry it is worth it and don’t forget you can always rely on ABIR Analytic for advice or education!