There are ways to apply quant in any trading desk, investment team, or advisor. So why not consumer, real estate, retail…. )

Fitting in the organization

What’s the ideal reporting structure for putting a quant team in an organization?

For investments, we treat the quant effort like a Portfolio Manager. Quant can report to the Chief Investment Officer for example, ideally not to the technology team.

Outside of the investment industry, we ideally put quant in as a source of high-level strategy for the business. We resist the urge to see it as a implementation tool. It won’t add much value there. So it can either report to the Chief Strategy Officer, or to the CEO — even better. Quant is a very high-level tool to take in all information about the world, and about our operations, and then find places where that information is indicating things we can do better. It’s a tool for priority setting.

The most common mistake, which is understandable, is to treat quant like we treat the IT function, or worse, make it report to the IT function. The information technology function takes detailed requirements from every other function — and helps that function by building and acquiring technology to accomplish their own individual strategic direction. Quant does the opposite. It provides high-level guidance to set priorities and drive strategy — both for the firm as a whole, and definitely for each function.

The confusion is understandable. After all, both quant and technology involve coding. But quant is almost the opposite of IT. IT mostly provides tools to help people do what they already are doing, while quant should drive and improve priority setting and decision making. Quant has the ability to combine highly detailed data with human heurestics by using math and science to bring the two together.

Guiding the quant team

The organizational structure is related to the way we direct the quant team. It’s far better to ask the quant team to find new alpha strategies which fit within the our firm’s investment objective than to tell the quant team to predict interest rates or the weather. Unless there happen to be easy ways to do way better than the existing predictions, this kind of specific direction will likely be a very expensive — and slow-moving — failure.

That said, it’s certainly helpful to share gut feelings about where alpha might be hiding with the quant team, particularly if this alpha might involve signal too weak, complex, or variable for a human observer to uncover.

A similar observation is true for other types of business. Rather than asking quant to figure out how to use a specific hiring test to hire better people, it’s more productive to ask quant to use every bit of data available to find out if there are any ways the organization can be more profitable. Quant will improve returns most when we give it the most strategic freedom.

A note on defending the quant team

If there is a bit of fear around quant, you might find it facing a bit of organizational resistance. Possibly revealed as intransigence and misdirection. Because of this, we recommend that senior leaders understand and prepare to defend quant culture. Quants tend to be fairly non-political, so without a supportive sponsor, the quant effort may tend to stall. Outside of asset management, there may be organizations where the reaction to quant can be hostile, and this is particularly challenging when the hostility is hidden. However, this is quite normal, and just indicates that the quant sponsor needs to be quite senior and committed.