What does a quant researcher do in a hedge fund? Revelations of a QR on gardening leave

If you're looking for a senior quant with a sense of the absurd to discuss quant-life with, then Giuseppe Paleologo may oblige. Currently on gardening leave before joining hedge fund Balyasny as head of quant research, Paleologo is busying himself writing books, running AMAs on Reddit and appearing on podcasts in between reading poetry and tending his collection of pocket knives. 

Get Morning Coffee ☕ in your inbox. Sign up here.

In his most recent podcast appearance, Paleologo gave a detailed exposition of what a quant researcher actually does in a hedge fund, and elaborated further on the difference between major hedge funds and electronic trading firms.

Citadel versus Millennium versus Hudson River/Jane Street?

Before getting into the weeds of the quant researcher role, Paleologo (who has in the past worked for Citadel, Millennium and Hudson River) suggested what makes top firms different. Quoting an unnamed "co-head", he said (paraphrased):

"Citadel is Singapore, it's centrally managed, is very efficient and everything is clean. Millennium is the United States; it's siloed, messy and big, but everything works out. High frequency trading firms are a bit like Wakanda: they're smaller, cooler and have the highest quality of people."

Wakanda, for the uninitiated, is a fictional African nation with a very high degree of technical expertise. 

This is a new take is on other people's suggestions that Citadel is full of keen young graduates while Millennium is full of jaded old curmudgeons. It's also a new take on Paleologo's own recent claim that hedge funds are usually better places than quants because they'll tolerate lower risk adjusted returns than the high frequency market makers, irrespective of HFTs' superior talent. 

Quantitative researchers in hedge funds are generalists 

Despite singing the praises of market makers and their "way above average" people, Paleologo's career has been mostly spent in hedge funds. 

He says quantitative researchers in hedge funds offer "general quantitative services" to the portfolio managers. The role of the QR is to, "basically, help the portfolio managers in their daily job of understanding their performance and monetizing their ideas."

Reading between the lines, this can seemingly cause a few issues. "QR is meant to maximize the PnL of the firm by helping the firm monetize ideas through repeatable methods," says Paleologo. It's an advisory role and is intended to make portfolio managers better risk-takers. 

Portfolio managers may not always want this advice, though. "Every PM believes they have amazing skills," says Paleologo. It is the job of the quant researcher to break down PMS' performance and to help them understand what they really achieved (or not). Working with a quant researcher can give portfolio managers "a more sophisticated analysis of their own performance." This can be "empowering," if they take it on board. 

Quant researchers and factor models 

Quant researchers in hedge funds spend their days working with large tables of structured data and time series analyses to create factor models that drill down into performance.

Factor models are intended to explain market phenomena. They are used for the prediction of prices, risk and anomalies, says Paleologo. Part of the role of the quantitative researcher is to determine both what should go into a factor model and how alpha (anomalies) should be defined. This determines what a portfolio manager should (and therefore shouldn't) be paid for. 

Quant researchers and hedging 

At big multistrategy hedge funds, Paleologo says quant researchers also work on hedging.

Hedging can occur at multiple levels. In some cases, individual portfolio managers are told to remain with the boundaries of their strict factor risk frameworks. Alternatively, or additionally, a hedge book is created at the firm level to offset the overall exposure to momentum from individual PMs' investments, or the portfolio managers can buy a momentum hedge created by the firm or from prime brokerage houses. This, too, is the responsibility of the quant researchers. 

Quant researchers and internal alpha

Alongside all these jobs, Paleologo says quant researchers also work on internal alpha generation and the central liquidity book.

Internal alpha generation occurs when another portfolio is overlaid on top of the core portfolios of all a firm's portfolio managers, designed to mimic individual PMs' strategies and to deploys additional capital at the right moment. The intention is to capture individual alpha, but to eliminate human behavioural biases.  The central liquidity book allocates risk to individual PMs at appropriate moments.

The implication is that quant researchers in hedge funds are very busy. This might explain why Paleologo is keeping himself occupied during his gardening leave. It's not clear when he joins Balyasny exactly, but there may be more revelations before he does. 

Have a confidential story, tip, or comment you’d like to share? Contact: +44 7537 182250 (SMS, WhatsApp or voicemail). Telegram: @SarahButcher. Click here to fill in our anonymous form, or email editortips@efinancialcareers.com. Signal also available.

Bear with us if you leave a comment at the bottom of this article: all our comments are moderated by human beings. Sometimes these humans might be asleep, or away from their desks, so it may take a while for your comment to appear. Eventually it will – unless it’s offensive or libelous (in which case it won’t.)