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The End of the Bonus Culture Is Coming to Wall Street? (bloomberg.com)
218 points by pseudolus 8 months ago | hide | past | favorite | 220 comments

No the end of bonus culture is never coming to Wall Street. It sounds nice in theory and makes for a good headline but it never works in real-life, particularly for performance oriented jobs like fundraising, sales, etc.

The reason is that when you work in environment that's all about getting more funds, selling more products it's not a rewarding job like marketing or software development.

The only rewarding part is making money, scoring deals and beating your other colleagues, competitors. Other than that, most people hate these jobs. And even to manage sales teams isn't easy. High-turnover rates, bunch of high-testosterone jerks ...

I'm talking about finance here. Yes software sales or gym membership sales you can be a nice consultative sales person who's simply there to maintain the status quo and benefit from a good product that sells itself.

Turn these jobs into regular consultative sales and you're going belly up. That's because in wall street you don't simply have a game-changing product like some Silicon Valley startup - that's solving real need.

There's no difference in what you offer other than how you can win clients on your side. And most of these clients don't want to deal with average sales dude ... because they're simply not one of them.

The top traders at the floor in one of my past jobs didn't even sell, they talked about cars, yachting, girls and played golf and poker with clients.

And yes, everyone gets bonuses in investment banks, but it's really the commissions they earn and dealmakers who drive the performance.

Don't know how long ago you worked in trading, but the changes, technically and culturally, have been coming hot and heavy since about 2010. First the technical: as the Bloomberg article points out, most traders today are also coders. Trading floors on the big equity exchanges are empty and quiet as most trades occur electronically. Many seven and eight figure/year NYSE specialists have had to find new careers or retire. You many remember the old NYSE DOT and super DOT program trading systems, both of which sent orders directly to the specialists on the floor, preserving their hold on the exchange-based trades. All of which has gone the way of the dinosaur. Along the way, low, low commissions, low-friction, low touch, low-latency trades are now the new normal.

On top of this, I started in this business almost 40 years ago, when guys were animals on the trading floor. When I think of the misbehavior from that era and the new ultra-PC, metoo social environment, I'm amazed the old culture has all but been erased from today's trading floors. I do miss the levity, the practical jokes and general yuks we had, but that's the price we pay.

Sure, most guys are coders, but every hedge fund, every investment bank 100% relies on people who raise money. To have a hedge fund is all about your ability to attract funds, 95% don't outperform index. Nobody will do this without huge bonuses, they'll simply launch their own funds, hire developers themselves and offer bonuses to other people like they are.

I used to work for a hedge fund until 2013. Was there for 9 years. I was in back office IT. In 2005, we were around 1200 employees, around 900 of which IT/development. We didnt beat the S&P 500 that year. Knee jerk reaction was to fire 600 from IT. Personally went from being 1 of a team of 13 managing 2 critical systems and a couple of GUIs and various tools to being a team of 1 inside of a week. Lasted that way for 7 years.

2008 was a shit show. We lost around 80% of all AUM in the space of a single month. Earned it all back in 2 years (40:1 leverage is a bitch when the market turns and what youre holding isnt liquid).

I now work at a firm that primarily operates mutual funds. Far less stress, but far lower performance of the funds. The MF is far more cobservative.

The great hedge funds look great, probably mostly due to survivorship bias. The ones that last are mostly lucky (although there's some strategy there).

Some of the big losers are also remembered. Such as Brian Hunter and Amaranth (fun read, look it up. Single trader blew up a 9 billion USD hedge fund). I also remember when someone taped a $2 bill to the front door of Bear Stearns when their stock price dropped below $2.

That said, I put in long hours over the years I was at the hedge fund. 80 hour weeks were expected. Did 6 months once of 100 weeks (only went home every other day). The only carrot to do that was the bonus, which for backoffice IT was was 20-25% of my base salary. I bought a pretty nice car with my last bonus. My bonus was certainly a far, far lower percent of my overall comp than the traders, but that bonus was huge for me. Also, my base salary was likely higher than the traders.

Jesus Christ I was getting paid $500K base, arranged to get at least $250K bonus and I barely showed up to work. I hope you were getting at least double.

I should be clear that I was one of the best coders they had at that time. My work didn't suffer.

Why did you work 100 hours a week? Were you being paid 500k+?

Bit of a rookie here, but aren't the people who are giving the funds doing at least some due diligence researching how much better the returns will be than on index funds?

There are a number of tactics used to obfuscate the likelihood of underperformance, such as rotating funds within the firm (it's amusing to see how many funds were closed/created around 08/09), advancing an esoteric investment thesis (often in a way that plays well to various cognitive biases; this is where the salespeople come in), having a strong personal brand (e.g. Bill Ackman), showing strong past performance and misleadingly implying future success (success is quite often one-off or close to it), etc.

And maybe the most powerful weapons Wall Street has have nothing to do with them: investors get really amped up about an occasional big win (especially failing to understand when that win is predominantly explained by being near the top of an economic cycle or more generally correlated with some random variable well outside of anyone's control) and/or fail to track net results over time.

Hah, fascinating. I've read a bit about that anecdote where Warren Buffett set a public challenge to outperform a basic index fund, and I was stumped as to why hedge funds are as popular as they are. You'd intuitively assume that agents become more rational the farther up the ladder you go, but this seems like a testament to the contrary.

It reminds me a little of a blanket email that was sent out to the entire mathematics department while I was a grad student. The sender was looking to poach people who'd be interested in implementing his idea for the sports betting industry. He explained that he understood that any strategy was likely to have runs of poor performance, and his idea whenever it happened was to "swap" to a better performing strategy which was having a good run at the same time.

Maybe it is a rational response?

The actively managed hedge funds farther up the ladder get individual agents lower on the ladder to give them massive amounts of money they can take huge cuts from while putting little at risk themselves.

The people not managing their money as a job are at a disadvantage and the active managers can leverage that.

I'd suspect most people should passively track the market via index funds and then make the occasional active bet if they have some reason to.

The index fund bubble seems likely to be a real thing, but it's not obvious how to correct for it, so probably still worth doing total market and hoping for the best.

> You'd intuitively assume that agents become more rational the farther up the ladder you go, but this seems like a testament to the contrary.

This is a well known bet from Warren Buffett, but you should not take conclusions without really understanding what the bet is about, and its underlying assumptions.

- The first assumption is that you're in for 10 years, this is the duration of the bet.

- The second assumption is that you don't need that money during the whole duration of the bet.

Why are these assumptions important? Because different investors have different risk profiles.

If you are in your twenties, saving for your retirement, then you should definitely follow Buffett's advice: just "buy the market" (S&P, Russel, whatever low expense ratio ETF or index fund tracking these will do).

This is because the longer horizon you have on an investment, the higher the volatility you can afford. It will always average out after a while.

Imagine now you have a different risk profile:

- You are now in your late fifties and expect to retire in ~5 years;

- You are an insurance company and may have to withdraw from your portfolio at any time to cover for expenses of your clients;

- You are an income investor and expect to live from the interests of your portfolio;

Would you be well advised to invest in an equity index? Definitely no! The volatility will crush you at the worst time, and you cannot afford to wait 5/6 years for the market to catchup.

In these scenarios (and there are plenty of them) what you want is diversification. You can accept to have less performance, in exchange for less volatility; so that once you sum all your different, uncorrelated portfolios, you have something with the risk profile that you can afford.

On a more local scale, you can apply this idea intra-portfolio. This is called "minimum variance" optimization.

Now there are a lot of things you can do to tailor your portfolio to your preferred risk profile. Traditional literature (e.g. "The Smart Investor") will advise you to buy some investment grade bonds, since they are almost anti-correlated to equities. You could also buy some real-estate, that will provide you cover during recession or very high inflation. etc, etc, etc.

What I want to emphasize here is that you cannot just look at the performance of a fund and decide whether it's a good or bad investment. If it exists, it means someone, somewhere, has a need for such investment, because it fits well with its current portfolio.

> He explained that he understood that any strategy was likely to have runs of poor performance, and his idea whenever it happened was to "swap" to a better performing strategy which was having a good run at the same time.

That's called "market timing", it's the unicorn of alpha combination. You will find multiple papers on internet explaining you why this is incredibly hard to do, and "beating the 1/n" is almost never possible.

It's not necessarily about if the fund outperforms an index. Most hedge funds have the primary goal of not losing money. The Sharpe Ratio should be used when comparing hedge funds vs equities/indexes.

Thanks for the reference! I looked it up and yes, the Sharpe Ratio pretty closely encodes what I think I meant by "how well it outperforms an index fund".

I'm pretty conservative when it comes to gambling my own money so I doubt I'd ever go near a hedge fund. Since getting involved in a debate on here about the Kelly Criterion I've wondered on-and-off what the best way to bet is, if you want to maximise the bottom 5th percentile of your profit.

You can make a graph say anything you want. And for the index fund to work, someone has to be doing better on their own, at least in the short term.

The bad ones don't outperform and need marketing to find suckers. The good ones won't take your money even if you beg, don't need to advertise themselves and are rarely if ever in the news.

We should let the market decide. This is exactly how it does it.

Given just how many funds there are now, I wonder if we aren't already seeing a bit of this happening?

I knew someone who worked for an R&D company and the lead for grant proposal writing was making just shy of twice as much as the lead developer. Base salary. Now to be fair, this person had tried to leave before so they had to sweeten the pot for retention purposes, but it was serious serious business, and this employee was functionally irreplaceable. I may write all the code we sell but I won't do that if the paychecks stop coming.

I think one of the things that the ridiculously wealthy have trouble finding is people they trust - deservedly or otherwise. Money they've got figured out. Next week they'll have a little more or a little less, but they know where to find it if things get bad.

All that yammering on the phone is building rapport, and putting in time interacting. It doesn't sound that different than the way that informants are recruited (eg, The Like Switch). They feel comfortable with the guy who gave them tips on how to get out of a sand trap. Despite the fact this proves nothing about whether IBM is a good buy right now.

> particularly for performance oriented jobs like fundraising, sales, etc.

I've always been a bit confused and frustrated by this job categorization. Someone good on CS can easily have a stronger effect on contract retention than the flashy sales folks - and all of our jobs are performance oriented, it's just a question of being fired vs. keeping our jobs instead of the magnitude of bonus.

I think the better framing might be "directly observable impact on performance"?

If Alice in sales lands a client by showing off a shiny new dashboard which Bob the programmer built, obviously they both had to perform. But it's fairly easy to run the counterfactual Alice: if Carol didn't land a similar client with the same dashboard, Alice is adding more value. (At least over large sample sizes.) It's very hard to run the counterfactual for Bob: would a worse dashboard have lost Alice's client? Would a better one have landed Carol's? Would another programmer have built something better or worse, in more time or less? Since you only want one of that dashboard, those things are exceedingly hard to answer.

Notably, some companies with consulting/deployed engineers do pay bonuses, because like a physical craftsman they're building many client-specific products. If one person's dashboards consistently land contract extensions than another's they're probably performing better.

(Of course, nothing is ever this clear or easy. If Alice just gets better clients, Glengarry Glen Ross style, Alice didn't actually sell better. If Alice promises a dashboard that doesn't exist yet, leaving Bob too busy to fulfill Carol's client's requests, that's not better either. And at Wall Street is infamously asymmetric, rewarding risk taking rather than actual performance.)

On retention, yes. On closing deals with 0.01% of rich people, largest funds, I can't imagine how.

But the system being sold is usually the result of a team working together - just because one person ended up closing the sale why are they potentially receiving a much larger pay day than those employees supporting the product?

cynically it's because you can quantify the contribution of a sales person - they added xMM to business this quarter. the same kind of itemization/attribution is very difficult for software. the infamous patio11[1] blog post about how to leverage credible bottom line contributions can be used to get paid more as a dev.

but more genuinely i do think sales does bring more value. customers aren't rational actors so closing a deal isn't about features or stats or whatever material a software dev contributes. it's about value prop and trust and meeting needs and all the language sales people use.

[1] https://training.kalzumeus.com/newsletters/archive/consultin...

I agree with that as a possible source - I think a similar sort of justification of value is why extroverts tend to earn more overall and is also partially responsible for the gender pay gap (due to upbringing factors).

I just wonder if there is some way to counter that effectively and also probably couple that with taxation and service provision to make it so that someone working hard at a dying company has a chance at a decent life compared to someone doing nothing at a successful company that gets a wealthy life due to happenstance.

It's interesting to me that the income security of a non-commissioned job is sort of a trade off against profit sharing - where one extreme can leave a hard worker destitute and the other extreme can leave a lazy worker wealthy.

You could argue that the market would want that nobody works hard at a dying company.

I think that's a fair statement, and I think it's well reflected in reality, most employees will judge the company health of various employers - whether it's inclusion in the DOW index, some promotional information about various clients or the condition of the site and investment in long term company health (like a restaurant not having "That one freezer that's always on the fritz so we always just use the other one - oh sure it'll be fixed one of these days, just need to get approval from corporate")

I agree that it definitely shouldn't be that way.

It's a cop out for the sales team to point and say "we made the sale, we're itemizing the value as ours when the whole possibility of the sale is made by the team.

This is why I like an RSU component as an engineer. If our value goes up, I expect to see some of it.

If there is no equity upside, engineers should stop working for bankers.

The sales man gets the glory and they get all the bad as well. If selling was as easy as features then some of the biggest companies in the world wouldn't exist. Also for startups, it's almost required to have a sales person because the market has so many competitors

Once upon a time I think that sales folk working on commission did operate that way - they were mostly independent contractors trying to sell bids for a company and if they failed they took nothing home - most folks in sales these days have a modest to cushy salary that their commission bonus gets applied on top of - in fact their base "total failure contributed nothing" take home is probably higher than that of someone working in the mail room.

So maybe "The sales man gets the glory, but if the bad comes they don't get quite as much." is a more accurate statement.

Because to build the system you need to sell the employees to come join. The power dynamic starts from the get-go.

Why do we tip the server and not the chef?

An interesting speculative-fiction writing prompt: performance-based compensation gets declared illegal. All salespeople instantly change careers, because, without performance-based compensation, their jobs are awful and they hate them. Every company in every market suddenly has to get by without the ability to actively get their products into people's hands.

What happens next?

This in fact happened in Russia in the early 20th century.

The results were, among other things:

- allocation of resources happened through centralized planning committees of credentialed supposed experts, rather than organically by decentralized market forces checked and balanced automatically via competition among the actors, leading to huge economic inefficiencies. Perpetual shortages of consumer goods, and at times even basic foodstuffs. 10+ year waits to get a car. Hours-long lines for bread.

- a massive increase in corruption, bribery, and influence trading (collectively known as блат, "favors"[1]), as people turned to unofficial backchannels to further the economic interests of themselves and their organization, since there were no effective legal channels to do so anymore;

- concominant erosion of any notion of popular respect for doing things properly or legally. There simply was no legal way to advance your own economic position.

- The expansion of an institutionalized system of severe punishments to force people to work productively at their jobs anyway, absent any possible reward.[3]

- Eventually, economic and technological stagnation[2]. With no legal economic reward possible for working harder, trying new things, or improving conditions, why bother? Your salary is the same if you succeed, and you'll be punished severely for counterrevolutionary activity if you fail.

[1] https://en.wikipedia.org/wiki/Blat_(favors) [2] https://en.wikipedia.org/wiki/Era_of_Stagnation [3] https://en.wikipedia.org/wiki/Gulag

The world is vastly improved as all search results are now 'organic', and people find the products they need without being bombarded with advertising and cheap behavioral economic manipulations to encourage them to purchase products and services they don't need.

I think you're thinking of marketers/advertisers, who are not, in fact, compensated based on performance.

Is there a location that you can attach to this state of affairs? Because it's definitely not true where I live and work.

That’s not true. Marketers these days increasingly have revenue targets

Target-based compensation (i.e. “getting a bonus if the project succeeds”) and performance-based compensation (i.e. “working on commission”) are different things. One directly rewards effort; the other (mostly) rewards office-politicking, by e.g. finding your way onto projects on the cusp of success.

No. Lots of marketing is directly tied to revenue generated and get compensated on their direct ability to generate pipeline. It's directly tied to performance.

The aggressive performance-based compensation loving go-getters become mercenaries or warlords or gangsters just like they used to be in the medieval times and we are all worse off.

I think this is one often underappreciated quality of the corporate world - an outlet for people who would otherwise cause a lot more direct harm.

> and we are all worse off

It's possible they'll do it in a specific area that isn't where everyone is (or that is where most people are not). I'd argue that we would be collectively better off in that case.

When I was interviewing for roles at tech companies while working on Wall St., I remember having conversations with recruiters where I would tell them my salary and my bonus (which was usually 30-40% of my overall comp), and they would say something like, "We don't give out 30% bonuses here. Is that okay?" And I would say, "If you can match the overall comp, then yes, that's terrific."

The point being, bonuses are just a way for finance companies to flex your salary down when the firm has a bad quarter, or you're unvalued or working on an unvalued project. From that standpoint, I don't see bonuses going away any time soon, but if they do then all the better for the employees.

In this situation, do you think getting "flexed down" by your company is overall better or worse than companies just eliminating your position entirely?

Edit: Did someone read some snark in my question? It was an honest question.

It's the difference between a screw that can be tuned to performance, or a nail that is hammered in place permanently. bonuses differ from raises in that their isn't an element of entitlement or a long term commitment from the organization.

It's not about being squeamish about eliminating a position, companies have no concerns with that.

> It's not about being squeamish about eliminating a position...

If that's the case, wouldn't it make sense to offer a 'stable' higher salary to an employee, and then sack them when it's financially beneficial to the company? I think the company does indeed have a concern with that - it becomes known that a particular company just thins the ranks every 18mos, and they'll have fewer folks lining up to take jobs.

On the other hand, even if the salary is lower, an employee can be more confident in keeping at least a modicum of income in lean times, and can also 'compete with colleagues' when bonuses are available. The perception (of the employer to the employee) is valuable to some extent.

> sack them when it's financially beneficial to the company?

Depends on how onerous a task it is to rehire when things pick up again ... I presume that’s part of the reason foe generous separation packages when a company actually must let people go ... at least you won’t have a bad reputation militating against you!

> it becomes known that a particular company just thins the ranks every 18mos, and they'll have fewer folks lining up to take jobs.

I don't think this is a thing at the high levels sadly. Both the employer and employees have moved away from the job security concept long time ago.

Wall St. is equally adept at eliminating positions as well as cutting bonuses. I've seen numerous lay-offs during my time working at bulge brackets, some of which enter and leave business-lines on a whim (ie., FX, fixed-income sales, etc.).

On Wall St., if you're older than say 45 yo and make a good salary for your years of experience, you have a target on your back. This is somewhat the same for tech, but stand outside any bank's office in Manhattan and you'll notice the youth of the employees.

I think there are probably a few forces leading to there being a lot of young people at big banks. One is that they will hire a lot of junior analysts and many of them do not last while others will move to smaller firms that require more experienced staff because they can’t train people straight out of college.

When I was at university, the people I knew who wanted to work in finance seemed to be planning to work stupidly hard for some number of years and make a load of money and then retire. So maybe an alternative reason is that many people choose to retire at a relatively young age. But those people didn’t exactly have much actual experience in investment banks and so maybe they were just wrong or maybe those ideas are more predominantly held by people who are keen on investment banking while in university than in investment bankers at large.

Or maybe the old people all turn up at a different time or spend all their time meeting with clients outside their office (or half the time with clients so they arrive at the office at weird times), so you just don’t see them if you watch.

To be clear I don’t want to suggest that I disagree with what you say, just that there may be other forces at play than a bank’s desire to fire senior staff.

I'd rather have been paid my full comp and then laid off to look elsewhere than have half my comp pulled out from under me.

Of course it's better. If you prefer to leave your position you can always just resign.

It's a false dilemma in most situations. If someone isn't needed, reduced salary won't let them keep their job.

FWIW, in the more senior ranks at Google, 30-40% bonuses are entirely achievable. L7 bonuses start at 25% and go up for good performance.

That 25% bonus is only on base salary which makes up perhaps 40% of total compensation at those levels. Most of the money is as RSUs which makes up about half the total comp.

At hedge funds, the majority of your "cash bonus" can take the form of deferred comp that's locked up in a shitty fund that doesn't perform anything like the famous ones (both Citadel and RenTec do this). Some don't let you pull it out unless you never work again.

RSU comp can be quite competitive when you take those factors into account.

Why dont the employee funds just mirror the trades of the main fund?

Usually because the strategies which have genuine alpha and consistently outperform are capacity constrained, and so cannot be scaled to handle both.

Of course, at RenTech in particular the employee-only fund is the good fund. But that's not always the case, so the parent commenter has a point. Deferred/locked up compensation can really suck.

>Of course, at RenTech in particular the employee-only fund is the good fund

Yeah, but only the long tenured/high performing employees get access to the good fund (there's a merely average fund that most employee deferred comp goes into, if I understand correctly).

Former colleague of mine was a M&A trader at Lehman during the crash. 95% of his net worth was in his fund, which was up 50%+ for the year when the bankruptcy trustee seized everything. IIRC, he was starting to get his money back in ~2014-15.

> bonuses are just a way for finance companies to flex your salary down when the firm has a bad quarter, or you're unvalued or working on an unvalued project.

This. At the height of "bonus culture" the smart folks realized that it was a means of trimming comp costs without reducing headcount.

That's the point that a lot of HN readers don't see no Wall street or City firm is going to want to commit to paying more fixed pay over non contractual bonus.

I've worked in the industry and gotten multiple job offers over the years from them. It still blows my mind that >50% of your compensation is issued as a once-per-year completely-discretionary "bonus". It mostly works fine, due to firms wanting to safeguard their reputation. But if for any reason, you piss off the wrong person or the firm has a bad year, you will lose 50% of your expected compensation... retroactively for the work you had already done in the past year... with no legal protections or recourse whatsoever.

Sure, tech companies have significant bonuses and RSUs as well. But the bonus is more limited in size. And the RSU vesting schedule is more fine-grained, explicitly defined in your employment contract, and the stock valuations are determined by the wider market.

Imagine working in finance for a year, expecting to earn $300k for a year's work, and then finding out at the end of the year that you're only going to get a fraction of that. It blows my mind that this doesn't scare more people.

But then again, what's the retention rate in analyst classes? Probably half of the classes quit after their analyst stint, either for greener pastures, business school, or complete career changes. Some stay for their associate roles, or come back for associate or VP after business school - if they even bother with investment banks.

Adjusting bonuses like that seems like a cruel way of enforcing "up or out". If for whatever reason you don't like some subordinate, or think they're cut out for future promotions, just hand out mediocre bonuses until they jump ship.

I think that in banking (and many other businesses), it's entire possible to be a good / well-performing junior banker, but not necessarily have the skills of succeeding in more senior roles, where your job is very different. (e.g mostly dealing with clients)

Well it goes with the culture of investment banking: high-risk, high-reward. Once you are in, of course, they give you the ol’ wink and nod about how much of that risk they are actually taking on.

> It blows my mind that this doesn't scare more people.

I don’t work for finance anymore, but when I did, the reality was I could walk down the street to another firm (even in 2000/2001) and I was seen as creating value for my current firm and forecast to continue doing so.

If you want to nerf my bonus, you can do it legally, but I’ll take a cardboard box and pack up. If the company overall temporarily stumbled and bonuses are poor, some people leave; others stay and get “made whole” in the future.

People always explain the existence of bonus culture through the firm's ability to manage comp downward in hard times. I'm not so sure though - I've been through hard times at a hedge fund. One year my bonus froze at the previous year's value, and another year the more senior people took a 10% hit to their bonus.

I honestly think bonus culture is about power - specifically the power you're describing there. Your boss's boss can ask you to come in at 2am because if you don't, you risk taking a massive hit to your comp.

The other reason - also related to what you're pointing out - is that if you quit six months into the year, you leave a significant chunk of money on the table. Silicon Valley has similar golden handcuffs in that regard though.

I agree, the power is a factor and that it's not about the company having a down year. This exists in Tech Software sales too. It's about not paying full price for a person who doesn't produce.

It's about shifting the budgeted comp of the under-performers to the over-performers. Inevitably, you will end up with a bunch of over-performers killing it, and the under-performers who can't make their number will leave. It's a giant selection process.

Good employees make bank. Bad employees quit and go somewhere with less downside risk.

Perfect. That’s what good employees and companies in asymmetric businesses should want.

Bonuses were always very political. Sometimes you win, sometimes you lose, despite being on the winning team (desk).

This is the opinion of one guy from UBS. Pretty much summarized in two words: irrelevant sensationalism. My bonus isn't going anywhere but up in the next 25 years.

Also this is only talking about trading at bulge bracket banks like UBS but "Wall Street" is much larger and more complex than that.

That's cool. I came from the hedge fund side and left 12 years ago, but many of my peers stayed on. In the last 4 years virtually 100% of them have left due to meager bonuses (we're talking about the systems/infrastructure side of the business, including in HFT) and have all gone on to work at FAANGs (average comp I'd say between & 400k-600k).

Another advantage of working in Tech is that you can trade on the side. Working in banks or hedge funds usually comes with rules that make it impossible to do any interesting trading. Initially this sounds fair, after a while it becomes a real opportunity cost. Its one reason I moved to Tech from Capital markets.

In banks it wasn't so much the rules in my experience (although they do make it very difficult to express a negative view on a sector or stock and the minimum hold periods can make life a bit more difficult) as the fact that as soon as you want to make an interesting trade in a single stock and ask for permission, very often you find out the bank has a conflict of interest issue (at least, that's what I assumed it was - obviously they wouldn't tell you why you didn't get permission) which means you aren't permitted to do so. From this perspective, funds are much much better.

Yes, that 30-day lock up on stocks is killah. I still remember the days of DBL, before the insider trading scandals, where they had these private partnerships that were offered to everybody--from the ceo to the mail room guys--like getting a monthly bonus. Of course, mbs and junk bonds were big and making big $ during the mid-80s. What a time that was.

Currently working in asset management and the trading rules are a killer. I used to trade options on equity indexes and commodities. These were the only derivative products I could trade short term (less than 30 days w/ profit). It would have been very beneficial to not have to deal with tons of overhead of talking with compliance every week about what each security was because it wasn't in the database.

Even when buying individual equities I would get emails indicating my trades were flagged for further analysis. It isn't enjoyable to be good at managing money but unable to do so without fear of punishment.

Even though I follow the rules, the process made it too difficult to manage. It is a real opportunity cost because in order to invest aggressively I would have to quit.

Maybe I should work in finance.. I'm locked out of making apps/games because of my day job, but my investing hobby is going as badly as the average WallStreetBets user


My counter anecdote is that I left an asset manager about 5 years ago, and the firm I left has grown twofold, mostly hiring quants, has low turnover, excellent work life balance, and bonus payouts have gone up. I kick myself for thinking FAANG was greener pastures because I make less money as a senior engineer in FAANG than a two years out of school quant, while also having a more stressful job.

Quants are still in demand and getting paid a fortune. It's the thing that makes me think of going back. An averagely-competent C++ developer can make much more in this industry than elsewhere right now.

As for the stress and greener pastures bit, really you aren't wrong.

what does an averagely-competent C++ dev look like? And how much will he earn being a quant?

If you have any experience with concurrent programming and XDP or DPDK, I'm seeing roles advertised at 600k in NYC.

What is XDP or DPDK? Can't find it in google. Is it something related to kernel bypassing? How does one get this kind of experience?

What FAANG are you at that's more stressful than being a quant?!

FAANG sorted by stressfulness decreasing is N>>>AAF>G, from what I hear. So if they're working for N, this wouldn't be too surprising.

Everything I hear from friends at all these companies is that for stress, Amazon > Apple > Netflix > Facebook > Google. Netflix seems far less stressful than Apple from everything I've heard from employees that have worked at both.

Think it really depends on where you land. I think everyone agrees that Google is easy-mode; beyond that, it depends on which group you're in.

Two friends at Apple illustrate: one says he does basically nothing but surf the web, the other last I heard is is nearly sleeping under his desk in a crunch.

The impression I got was that Netflix was a very cut-throat environment due to their propensity to fire people quickly. I can't speak for all roles at either company, but Apple doesn't seem to have that reputation.

Most of them are. Quant jobs are often highly academic. Basically the same project structure as FAANG but never any deadlines.

Banks are where the arbitrary high stress jobs reside, and then certain specific companies that choose to enforce stress culture, like GSAM and Citadel.

But most have normal 9-5 hours, few deadlines, autonomy, project self-selection.

Maybe I don't really understand what a quant does, but I imagine it would be stressful because if you make a mistake I imagine it could have huge financial consequences. That's true at FAANG, too, but maybe just cause I know how things work there it doesn't seem like something I need to worry about very much.

Most quants are copying their friends algos any way. At least until that model doesn't work. Not too much stress there.

Like most software, quant investing models are usually separated from production systems when being created and undergo integration testing, back testing, etc., and have all sorts of automatic and manual revert capabilities in the deploy systems.

Not much different than shipping something broken to millions of users and needing to triage a rollback.

Of course there are outlier firms that play fast and loose and can have risk of huge sudden losses that can’t be stemmed, but most firms do risk management as a core part of their purpose for existing, and this applies to risk of bad code / bad model just like anything else.

Yeah, but even with integration & unit tests, people regularly miss some corner case.

Again, maybe I just don't know enough about how it works, or maybe I just know enough about what I do -- but every once in a while you make some catastrophic mistake that takes done Google or Facebook for a few minutes -- the only cost you incur is opportunity. The same mistake at Knight Capital cost them like $500M in 15 minutes or something crazy.

So, taken a step further, the little bugs that regularly make it into Google that cause 1% of requests to 500 on some service is a big deal, the opportunity cost can exceed your salary for years. I imagine the same thing is true in trading, except it's not opportunity -- it's real money. That just seems way more stressful to me, but maybe it just doesn't happen very often, or the test coverage is taken much more seriously, and it's better.

what was your compensation before you left?

In the range of $500k / year assuming the bonus was the target amount. One year it was substantially higher.

Sorry to bother you but do you know how much a senior engineer in a FAANG could make as a developer in these places on average? Especially London?

It depends on how much you're bringing to the table and how well you interview, but $400-600k/yr "total compensation (considering 4yr cliffs, etc)" packages happen with regularity and I know two people who have negotiated a 1m/yr total comp at Facebook(on the IG team). Neither were "senior devs" as I'd normally call them but extreme ICs who have deep understanding of Linux and can scale big infrastructure and sling code.

Don't know about London though. All values in USD.

Gah. I messed up my question. I was asking what someone currently working in a FAANG could make if they moved to these financial firms.

FAANG pay in London is far lower than in the Bay Area.

And how much are you earning now as a senior dev in FAANG?

Why is that relevant?

Yes and that seems to be their intended scope. In what corner of the street do you dwell?

Sell-side. M&A advisory

Are you in TMT? SF or NYC?

No, Industrials NYC

Probably buy side

If the blowback from the 2008 financial crisis wasn’t enough to kill it, I am skeptical that anything can.

The sell-side has become pretty boring and just like other industries. Everything interested has moved to the buy-side, in which bonuses as primary compensation is still alive and well.

Yes, quite. I have a friend who was only 26/27 and took home 325,000 USD as his bonus.

Another is cagey about what he earns but it's stipulated he earns more than the number above.

Meanwhile another friend at a different hedge-fund had a budget over ~20k USD to decorate his personal office at work.

The excesses of finance are absolutely still alive and well but somehow the buy-side has managed to escape the public eye (presumably because they're mostly private)

Just out of interest, knowing these people personally: what are the kinds of tradeoffs involved in these jobs that pay so extraordinarily well so early in one's career?

Is it a case of spending your 20s 8am-10pm in the office, no weekends, no vacation, etc?

Or, if not, then what's the path into a job like this? Are they simply 0.00001% level brilliant people, lucky, well connected?

I knew people like that. First of all, the first few years are a grinding machine and it pays shit (relatively speaking). You spend literally all your waking hours at the bank, w-e included and even when you have some time off, the bank restrict what type of activities you are allowed to do. Every year, the bank unceremoniously fired the bulk of your team. Anything is fair game to get the upper hand. There is no such thing as a friend. Even if you are in a team, there is no such thing as team work or team mate.

If you survive 4 years, then you get into the really well paid positions with 300K bonus a year being common. I have seen 2 scenario unfold: either the 4 previous completely ruin your value system, so you are either a complete asshole or addicted to a life of excess that keeps you in the system. A few will get promoted to hire levels yet and enter a weird world of mostly networking.

In rare circumstances, generally the one lucky to have a good and sane social circle before going into the grinder, you retire at 30 with several millions in your bank account.

At my bank, and we had a particularly bad group but it was successful (and this is mid level not a top tier), 2 kids out of 30 finished the two year "program". No one ever tells you the employment contract is for 2 years out of undergrad, and maybe you get "invited" for a third year, and maybe you get "promoted" from analyst to associate to compete with all the post MBAs who want to beat you out.

And honestly the wash out was a mix of things: quit, got fired, suffered too much took a random job, suffered too much held out and got an amazing job....etc.

I believe the ratio is better at other banks and also better in current times.

I had drinks with my old boss a few months ago and I warned him he would kill a kid one of these days. His answer was "oh culture is fixed, we give one Saturday off a month now. Morale is much better".

Granted this is a tiny skewed example. But your message is spot on.

Edit: source: https://www.google.com/amp/s/www.wallstreetoasis.com/forums/...

I think this is an extreme view that isn’t entirely represented. I’ve had friends that worked pretty much 7am-7pm tying to get to that huge bonus, yes, but the majority of the team didn’t get fired. They did, however mostly all transition to other roles that are not as well known for lavish bonuses, but they do do very well. There are many support roles, client dealing roles, project management type roles, that are less ruthless than a front office buy side role. And less well compensated too, I’m sure. But that is where the majority end up at these banks.

You're talking about banking. I think the context of the original question is actually the buy side, because that's the comment you're replying to.

I have not seen any of the typical sell side grind common to investment banking among hedge funds. New grads hired to reputable hedge funds typically work comparable hours to their friends who work at Google/Facebook. They might earn 20 - 100% more though.

Most of the time, people go to hedge funds by first working as analysts for 2-3 years at a bank

That's not really how it works for software engineers/quants. But in general, yes.

The story varies enormously by kind of institution and by specialism.

Being an associate in mergers and acquisitions at an investment bank is famously gruelling - long hours, terrible work culture - and as far as i can tell pretty menial, low-skill stuff most of the time.

Being a quant at a hedge fund can be pretty fun.

My general impression is:

1. Smaller companies are better, on all axes, than bigger ones

2. Trader/associate/etc > developer in all of hours, stress, and pay

3. Front office > back office in all of hours, stress, and pay

So basically, like grad school but much better paid?

Important note: the person you're responding to is talking about the buy side. It's not uncommon to find a work life balance resembling tech in the buy side. For example, it's a popular meme that Citadel has a horrible work life balance. But I know two devs there who earn in excess of $500k each year and only work about 45 - 50 hour weeks.

I also know another new grad recently hired at Hudson River Trading, and another new grad recently hired at Jump Trading. Both are earning over $400k per year, but they work 45 hour weeks. And since RenTech has been mentioned in this thread: the people I know there have wonderful work life balance.

I have found that most popular conceptions of bad work life balance in finance apply to banking and sell side, not to the buy side. Working as a developer at a bank usually sucks, both financially and culturally, in my experience. Not always, but commonly. Working at a hedge fund can be very nice both financially and culturally.

What backgrounds do the new grades that work at Hudson River Trading, Jump Trading and so on have? BS, MS, PhDs? What schools are they coming from, etc? What fields did they study?

Usually top ~20 schools with a bachelors in math or CS. Sometimes Masters or PhD, but those end up working directly in research. The new grads I know aren't actually quants.

What are those new grads doing? Trading, development, quant?

They work in what's usually termed the "front office." Quant, sure, but also research development (read: trading algorithm implementation).

Cool. That's adjacent to what i do, but i have more experience and make less money!

As an aside, i love that the names for things vary so much across the industry. Where i am, "research development" means things like building historical market data archives that other people can use to backtest algorithms etc.

It's not a meme about citidael I've never heard anyone praise them. They churn and burn. Plus what are they even doing? Turning a dollar into a dollar five. That's really making people's lives better.

It may seem counterintuitive, but turning a dollar into a dollar five actually makes people’s lives better. Many of citadel’s investors are teacher, firemen pension funds. Even beyond that, Citadel gets paid for essentially contributing to liquidity in financial markets. And, liquid and well functioning financial markets are critical to a well functioning society.

I don’t think it’s much different at Facebook, Amazon, or Google

I have a brother-in-law who had a job like this. He started right out of university and worked his way up to a VP position with his company before retiring last year at 40. He’s married and has four kids, huge house, boat, they go on extravagant vacations, etc.

One of his teen daughters said, when asked how she felt about her dad retiring and being home all the time, that it was ok because he is “nice” now. She went on to explain how her primary memory of him over her youth is that he was always “mad”.

That sounds awful... having that much cash is nice, but it cost him seeing his children grow up and having a good relationship with them right now.

When you're fresh out of grad school I can imagine the thought process of grinding it out for a couple of years to get to the higher pay brackets. But when there's a wife and kids involved... not so much.

Well, it could be worse. You could be mad/anxious all the time and not making the big bucks. The people that are mentioned here, making the big bucks with plush material lives are not the majority. Just like during the 80s and 90s, most sell-side traders were not making millions.

The trick is generally to find yourself in a situation where you take home 300k because you made 3000k for your firm.

I'm not being facetious. With anything trading-related, a big part of having the ability to make three million dollars more-or-less "on your own" is to have tens of millions of dollars to sling around, plus a good idea of the manner in which to sling it. So a firm will give their people a couple million in buying power and then tell them to go make an X% return. Those that can do so are compensated.

The downside, as I have it, is that the "work-life balance" is, as you mentioned, non-existent and also immensely stressful. Plus, having that kind of money in your 20's can be a problem all on its own.

Depends where you are talking about M&A (company mergers, IPOs etc) is notorious for the long hours that they make associates work, mainly to knock up powerpoints and excel cashflow models.

Trading/Sales is normally 6.30am start to 5pm-ish in the evening, which possibly drinks/client entertaining some nights after that. You probably have to spend a few years as desk gopher - coffees, doing the trade reporting admin no-one else wants to do etc. I don't think trading or sales typically work weekends. I think some may trade out of hours as well, but I think (in large IBs in the UK) that they are in the minority.

I work with a bunch of HFT firms and my impression is as follows:

>what are the kinds of tradeoffs involved in these jobs that pay so extraordinarily well so early in one's career?

>Is it a case of spending your 20s 8am-10pm in the office, no weekends, no vacation, etc?

You'll be in the office for the bulk of the trading day. You will need to be available/online though not necessarily "working" around open and close (possibly from home, many employers are flexible about butt-in-seat hours). Early mornings are rare. Late evenings will be commonplace if your employer does not have their end of day routine down.

If the team you work with is on their game this business is basically a money tree and predictably with that comes a very good work life balance. I have no idea how much vacation these people take but things get very, very quite around basically every holiday so I don't think they're lacking.

>Or, if not, then what's the path into a job like this? Are they simply 0.00001% level brilliant people, lucky, well connected?

Some combination of all of the above and being in the right place at the right time. These are smart people who understand finance, understand tech and understand the implementation. The algorithmic arms race isn't all that fast but the competition is stiff enough that you need to have all your T's crossed and you I's dotted to make money. Have you ever considered buying a microwave link because the fastest fiber money can buy is too slow. That's the level to which everything is built. People roll their own implementations of protocols because the off the shelf ones aren't optimized for what they want to do. Some of these firms reverse engineer the topology of the exchange's computer systems (by sending various orders and carefully analyzing the responses) in order to gain a competitive edge. This stuff can get crazy.

A lot of these firms need to stay under a specific headcount for legal/compliance reasons and when you need to cram that level of competency in all those skills into very few people they obviously wind up being exceptional (in the literal sense) people and they are compensated accordingly (because supply and demand).

They have a mandatory two consecutive weeks away from work rule.

It's even better than it sounds. During those two weeks, they're prohibited from conducting their job by law. They would get in trouble for responding to a normal work email. Very few highly compensated people get vacation like that.

>Or, if not, then what's the path into a job like this? Are they simply 0.00001% level brilliant people, lucky, well connected?

A lot of it is about jumping through hoops but also I think a lot of people who "overachieve" just started young.

I knew people who knew they wanted to be lawyers from age 12 and were finding ways to do work experience from that age.

Similarly, I know many people who were coding from <small age>. (Maybe on the BBC micro, or learning BASIC or learning Java for Minecraft, take your pick).

I have also known people managing personal investment portfolios, and pianists sinking 50 hours per week practising when they were 8 years old.

My personal favorite (because it concerns people close to me) are two people who have instinctively honed the skill to sell and have been selling in some shape or form since they could essentially talk.

When it comes to these "prestigious" type jobs, I think a lot of the people who did well and got the jobs had been prepped a long time in advance. Quite a lot of it is worldview/personality grooming that happens from the high school you go to and your parents but less about direct connections because there are very few grad-level people who get blatant nepotistic hand-me-outs at the big companies you've heard of. Though coaching and interview prep probably does probably abound.

That's not to say it's too late in life to try learn something new, but inevitably life takes over (relationships, and kids).

Having to outperform all your similarly greedy (due to self selection) peers not only in business outcome but also in the social arena sounds like an inevitable burden when so much is at stake. This would be 24/7 hell for people who don't naturally fall into the appropriate behavior patterns even if working hours where somehow enforced to a lazy 20h week consisting almost entirely of breaks.

Right place, right time, right skills, and sometimes the right connections.

I hate this argument. It's such an excuse.

I have 5 friends in that bucket. And none of them had the "right connection".

Some are immigrants, some are minorities, some were dirt poor and came from nothing.

But all of them had some of the highest drive and grit and sometimes intelligence out of my friend group. These guys would have done well in absolutely any industry.

8 to 10pm x 7 days a week would be an absolutely pleasure. It's hard to convey how hours longer than that weigh on you with multiple back to back subsequent years of "service".

But finance isn't special. 27 year old top attorneys make 300k. And suffer similar pain.

Even in consulting like BCG comp is not as high but you get weekends off. But you're still elbow to elbow with ambitious people.

But heres the rub. I did the math once. My calculation showed there were 4,000 private equity professions in the US. Maybe that's changed. That's an absurdly small number. How many bariatric surgeons are there? Like when you compare these very small knifes edge type quantities, sure, you see excess.

So finance used to be 7% of GDP, up from 4%, so for a period you had the ratio of people to GDP skewed so smart people rushed to normalize it. And it normalized. Now you see the equilibrium hit. But that doesn't mean sometimes the equilibrium is high. There's no 28 year old making 500k in silicon valley? Or spending 20k decorating their office?

Like it's just a matter of perspective.

Sorry for the rant. But the connection thing drives me crazy. I'm sure the silicon valley guy has really hard to obtain skills and didnt network at a bar into his top engineering job.

Edit: didn't mean for this to be combative. I've long believed humans are sort of fungible. You take a partner at an accounting firm and throw him in a consulting firm (and somehow roll back time) that same person will sort of get to the same spot. I believe when you're 14 or 16 or 18 or 20 and you sort of pick what you want to do you are so impressionable that it ends up being partly passion and partially luck.

Getting advice on which fields to study, which schools to apply to, what friends to make who also know which schools to apply to, and which companies to apply to all count as “right connection”. And of course, getting an interview because your friend’s parent knows someone at a firm looking for someone.

I know I like to hire based on personal recommendation of people I trust, it removed a lot of risk for me in dealing with random people. Hence “right connections”.

That's an extremely watered down definition of "right connection." My brother is at JPM/MS/GS. We're immigrants, we grew up outside of New York entirely outside of the finance orbit, we went to public K-12, etc. He got into an Ivy-league school because he's a nerd who always turned in his homework early since age 6 and prepped hard for the SAT. I was the one who gave him advice on "which fields to study" and "which companies to apply to"--based on nothing more than doing some research on internet forums. (He was originally planning to go into a PhD program in STEM, something we had exposure to from our upbringing.) The interviewing process didn't require "know[ing] someone at a firm." The companies came on campus and interviewed the STEM nerds with the highest GPAs. The process isn't easy, but it's highly structured, and meritocratic for some definition of meritocratic.[1]

[1] I think its more accurate to say that the field requires lack of significant adversity more so than "connections." The median family income at Harvard is $168,000, the 80th percentile. These kids aren't working all summer to help their parents make ends meet. At the same time, their neighbors are engineers, doctors, government employees, etc., not hedge fund managers.

Same for my wife. She is quant at a top tier bank. Takes home the big bacon. I take home a slightly smaller slice of bacon working in tech

I can only wish to not only be so attractive, but to meet these types of women.

Exactly this. I have family (through marriage) who grew up in the New York / New Jersey area and went to nice public schools. Many people they went to high school with ended up in finance on the buy-side. They knew the path from high school onwards: Get into an Ivy League for college, major in CS, EE, or Math (but with no intention of working in those areas) get recruited by a top 3 bulge bracket (MS, JP, GS) in either M&A or LevFin, put in your two years, network with the people a year or two ahead of you in college who then went onto private equity or hedge funds, get an interview there, make bank.

Actually, you're spot on and maybe my comment is wrong.

Recruiting has these crazy dance steps. Unless you know in October of your sophomore year what the door knock is on this special process it can be hard to get in. But you can get in later. Its just much much harder.

I've been trying to figure out for a few years what that's called. It's not wealth, because knowing to apply is some sort of social/human capital, and its intergenerational. But I wonder like in the area where I volunteer...how much of the difference in outcome is related to just not knowing how the process works?

It is a type of wealth. There are different kinds of wealth. Having a good, supportive family is a type of wealth. Being born in a country with plentiful drinking water and other natural resources is a type of wealth. Being able to sell your services is a type of wealth. Having a network of contacts in many places around the world is a type of wealth. Learning how to do something is also a type of wealth.

Some wealth you’re born with, or you come by from circumstance (many times relating to who you’re born to). Some wealth you can work on obtaining yourself.

> Getting advice on which fields to study, which schools to apply to, what friends to make who also know which schools to apply to, and which companies to apply to all count as “right connection”.

Or you can "just" get into a top 5-10 MBA. Still hard, but at least you're an adult at that point

It's actually really hard to go from sell-side to buy-side, post-MBA. I went to a top-5 business school in the US and everyone recruiting for banking wanted to eventually move to the buy-side. I think out of a group of ~100, <5 might have made it into a decent buy-side job. Top private equity funds put their best analysts through business school and then just hire them back. Breaking in at a post-MBA level is really hard. You really have to know "the path" early in college and get into a top bulge bracket right after college graduation, put in your two years of 100 hour weeks, and then get on recruiters' radars for PE and HF.

Geez really just 5? That seems super low. So that implies 20ish non-prior-buyside people in North America break in post-MBA? Basically impossible?

That was just my school, 5 years out of graduation. That might change in another 5 years as bankers get to MD levels, and then have a client and relationship roster that they bring to the buy-side. There are also people who switched to Tier 3 or Tier 4 buyside firms, but then don't make the kind of money you make at a top PE or HF.

Also, I did not go to Harvard, which typically sends more people to the buy-side then the other top-tier programs (but is somewhat self-selection, because HBS tends to accept a lot of pre-MBA buy-side people from top firms)

Agreed. I was referring to breaking into sell-side from outside Wall Street. Apologies for the confusion.

>>had a budget over ~20k USD to decorate his personal office at work.

These sort of perks are common in senior management in several software companies as well. Especially if your job involves some sort of client/customer facing responsibilities.

Indian IT outsourcing firms give their top management a very lavish budget to spend. Typically 5 - 7 star hotel stay, business class travel, thick daily per diem to spend and the best meals money can buy. Plus they also get paid to spend what it takes to impress clients to win contracts. Office furnishing budget etc. I even know one person who bought a fairly expensive bose sound system, and even took it to his home over time. No one really audits these things, and money once given is large aggregated in a group by statement in a report somewhere, and since its already sanctioned, no one cares how its spent either.

This is one of the biggest motivations for me to move into management as a career upgrade.

You can often be happier more easily by learning to enjoy life without extravagant luxuries instead of fighting in a rat race for expensive baubles.

May be in a first world country like the US, the country from which I come from(India), things like these make huge difference to a person's lifestyle.

How does something like a sound system help you more in India than the US?

It's not a sound system. It's round the clock house help in a country like India. A driver (instead of working your way through mind numbing traffic every day, twice a day), a chef, a maid, etc.

It's buying real estate to secure your family's future for generations instead of living hand to mouth.

It's sending your kids to good schools or doctors in the West as opposed to hoping to scrape together enough cash to educate or send them to doctors at all.

It would be really hard for a first world person to understand how big the chasm is in less privileged parts of the world.

You do not want to be on the wrong side of the wealth divide.

It's not about speakers.

Just adding more to your point. People in the US and western hemisphere in general how many things that are just nature to them are not available to us here in India.

Case in point air and water. Just air and water. Like try breathing the dusty, polluted air. Or drinking water which gives you and your family throat infection every two months, and outbreaks of dengue killing family and friends every 6 months or so.

I'd literally do anything at this point just to breath good air. And that's just starting with the most fundamental requirement of life itself.

Why do you call these "excesses"? What would not be excess?

my usage of the term "excesses" was in the context of an article about "Bonus Culture" itself a topic in the public eye.

So less a term used as a value judgement and more a term with contextual meaning in this topic (IMO).

Presumably these organizations have worked out that they can afford to pay their staff this and that it is profitable to do so, in the same way that FANG can pay their engineers pretty well too.

Meanwhile, the median US household income is $56,516 for two adults...

They didn't get the money by performing well. They do it by convincing people that they performing well. Even thought that 98% will not outperform a basic cheaper index fund with skill.

That's a bit of a meme. Not entirely wrong. But the people who have hedge fund money know how to read the fine print about returns.

The goal of hedge fund is to reduce volatility and/or to generate uncorrelated returns. Some people are ready to pay a premium for that (in the form of under-performance compared to an index). Hedge funds are more an alternative to fixed income than an alternative to equities, if you think about it.

I think the key part you missed is that the statistics of this sort are usually quoted net of fees (which makes sense from the perspective of the investor).

So it's evidence that fund managers take an unequal share of their outperformance, not that they don't outperform the market/benchmark (of course, not all do that either).

Measuring the performance of hedge funds is quite difficult. You have to account for survival bias, reporting bias and hidden risk.

20k is pretty much a year of minimum wage work. That's a lot of budget for decorating an office.

I don't really understand how Buy Side can be all that good still. AQR is in trouble, Bridgewater had their first loss in decades, Millennium was good, 2 Sigma is OK if unspectacular, Citadel is good, Point72 is still struggling, Rentec is presumably still great but no one ever knows. The HFT funds like Tower/Virtu are all finding their well dry, over all more hedge funds shut down than started. Which hedge funds are actually doing well in this environment? (OK I listed 3) but I don't see the future as very promising.

You cannot mix companies like that. Each of the companies you listed have a lot of funds with very different strategies and PnL.

Long short are having a hard time since 2018 for instance, doesn’t mean directional funds have too.

Also, we are in a high deleveraging in L/S environment, so the last 2 years should not be taken as benchmark IMHO.

Some funds share bonuses across the entire firm, while others operate as internally competing pods/teams. I know people at Jump Trading doing spectacularly well because they're on a high performing team. Not everyone does as well. Millennium and Citadel have a similar model.

RenTech and TGS had a spectacular year as always. But even if you don't work at a firm like that, being on the right team at a strong second tier firm can be extremely lucrative.

You've listed a handful of funds that have good PR, which are the only ones software guys have heard of. They are a fraction of the total buy side. This would be like saying Yahoo, Uber, Google and Cisco represent the entire tech industry.

When the S&P500 is up 25+%, there is a staggeringly large amount of money paid out in bonuses.

The ironic thing is, anybody who bought and hold diversified index funds since 2018, has done excellently. And it required 0 human intervention of any kind of get that return.

Believe me, they’re coming for that too. Pretty much every hedge fund manager these days seems to reckon that “alpha” is automatable.

It is but we are still in infant stages in automation as it pertains to electronic trading. Its a bit of an arms race, I anticipate it is going full circle in that after the point where we have more technologists than traders hits, we will realize all our tech is as strong as the next guys and will need to re-enlist more traders to help with new strategy to differentiate said algo's from the competitions.

We don't really need traders anymore. Stock pickers won't disappear, though, because it's much harder to automate (it would be akin to having a real artificial intelligence).

All stock pickers are traders, though not all traders are stock-pickers. Moreover, I think there's still a lot of alpha for human traders/market-makers. Even the quant power houses like Jane Street and D.E Shaw still employ human traders.

Can you explain what you mean by sell and buy-side?

Sell-side == banks, selling financial instruments / market access to investors.

Buy-side == hedge funds, proprietary trading companies, high-frequency market makers, maybe also VCs, PEs, investing (their own or other people's) money, buying financing / market access / financial instruments from the sell-side.

Sell side are selling liquidity, they're like car dealers who stand ready to buy or sell any financial instrument with buy side firms. As well as the buy side firms listed by tomp above there are also what we call "real money": pension and insurance funds. Unlike hedge funds they are regulated and have to run long only strategies. Can't have pension funds blowing up LTCM style.

They can allocate to hedge funds, but a number like CalPERS divested entirely from alternatives

Maybe in the US, but that wouldn't be permitted in the UK.

Sell: brokerages. Buy: hedge funds.

Basically the buy side try to be smarter/better/faster/stronger than everyone else, the sell side try to provide an essential service to the buy side, whether that’s a good platform or liquidity or whatever.

The sell side provides liquidity to the market, by engaging in market making and other activities, while the buy side consumes market liquidity (transacting so they can construct/manage a portfolio).

So as others have said, sell side typically is the investment banks and brokerage houses, while buy side is your asset managers.

In what way? I work in sell side M&A and it’s pretty interesting.

Sounds like right now banks want people who can code but also have "quant skills". What's the best way to go about learning/acquiring quant skills?

(Given that you've taken the calc 1-3 + probability and stats 101)

- Linear Algebra

- Numerical Methods

- Stochastic processes

- Time series analysis

- Mathematical Optimization

- Multivariate statistics

- Statistical inference

- Computation intensive statistics

- (Machine Learning)

- (Differential Equations)

- (Mathematical Methods and modelling)

On top of that, some decent knowledge in scripting and programming.

Pretty much any decent Statistics or Applied Math program will provide you with a good foundation of quant jobs.

CS or math masters followed by a masters in computational finance. Most quants are hired right out of these computational finance programs -- which, unsurprisingly, are some of the most difficult programs in the world to be accepted into as you're competing against people from across the world with masters or PhDs in mathematics. Salary ranges are ridiculous; at the school I went to for an MBA it was not unheard of for signing bonuses in quant finance to top $500k (and that was a decade ago).

A friend of mine started in the industry right of school with a CS degree but then got a masters in financial engineering at night a few years in.

You're better off getting the up-to-date scoop from people that are active in the industry:



Those are principally forums for people who would like to work in the industry. Take with a grain of salt.

Learn math, stats, probability.

By not working for banks

I am not working for a bank, and this lack of work so far did not contribute to me gaining quant knowledge. I don't think your advice is very useful.

Not the OP, but he/she was probably suggesting that acquiring "quaint skills" is not the best use of her/his time for a person curious enough about acquiring "quaint skills", it's like warning someone "don't go down that dark alley, it's not worth it".

I’ll speculate as well. The op is saying that the banks want quant skills but don’t have them. Therefore you need to acquire them somewhere else since the banks are lacking these skills.

I think you’re misreading the word “quant” and coming off with a very different understanding of subtext here.

Could be, generally speaking is difficult to get the right subtext from just a couple of sentences.

Automation is going to hit the jobs market in many unexpected ways. Interestingly its going to take as big a bite out of white collar jobs as blue collar ones. The majority of trading, accounting, and other number related jobs could disappear along with the truckers, manufacturers and fast food jobs.

We really are entering a new era when it comes to employment and the definition of the 'means of production'. Software and robotics is reaching into uncharted territory.

Should be very interesting in the next decade or two to see if society reacts with the adage to just pull yourself up by your bootstraps or starts to seriously look at a UBI.

Technology has been destroying jobs for nearly all of human history and yet here we are with full employment. Those that assert that "this time it's different!" have a steep hill to climb when it comes to evidence.

Full employment simply means people have a job, not that it meets their minimum income requirements. This article is a good example, its stating that they will be doing the same work but just getting less pay for it. These people are at the top of the food chain, but the same thing happens to people at the other end.

This isn't responsive to the argument 'harryh made; it basically just repeats the premise he responded to.

Yeah, this right here.

It's taking operational expenses (which cannot be "owned" as a means of production) and converting them into capital expenses (which can be). The more of the work that can be done by things that are "owned," the more the gains accrue to the ownership class.

In previous eras, the ownership class was known as royalty (later as "landed gentry") and they effectively or literally owned the people working underneath them. This removes the ethical problems of owning people while retaining the benefits.

When it hits society like the opiate crisis has (white, young to middle-aged people) suddenly -- the problem will be deemed legitimate enough to solve.

Julius Krein has written about this and I think he analysis is very prescient: https://americanaffairsjournal.org/2019/11/the-real-class-wa... . He associates it with a much greater malaise across the economy, and the growing gap between the top 10% and the 0.1% percent.

Leaving aside hedge funds, the business that I see changing most has to be mutual funds.

I've seen a number of mutual fund managers who generally underperform their index for years operating a relatively high-fee fund (compared with ETFs) getting huge bonuses. It's just ridiculous.

Vanguard and ETFs in general are coming for those people, albeit slowly.

> mutual fund managers who generally underperform their index for years operating a relatively high-fee fund (compared with ETFs)

There is a bit more nuance here. The fund manager oftentimes has an obligation to follow a given mandate, which may not seek to outperform a given index. For example, investors may want exposure to specific factors (value, growth, momentum, etc.) or asset class (municipal bonds, preferred stocks, etc.). Additionally, investors may seek funds with better risk adjusted returns as opposed to funds with greater absolute returns. In these cases, managers are compensated for delivering on their mandates. The ETF space has similar high fee products.

Even given that nuance you'll find ETFs of all types, generally with fees far less than what you pay for the equivalent mutual fund.

Bottom line, for me, is that the active management employed by a large portion of the mutual fund complex provides little additional returns, yet they get paid handsomely for delivering a sub-standard product.

I think the headline is a bit sensationalist. But it's mostly true. The GFC was the catalyst. The resulting regulation handcuffed most trading desks (like the failed and nonsensical volcker rule).

But the bonus culture is still alive and well at the small shops, especially the quant shops that embrace automation and scale.

Really? It doesn't make much sense to have bonuses for automation since it's largely a group effort. And that's probably the main reason why those performance bonuses are disappearing.

Soccer is a group effort, but you still have star players that get paid outsized compensation.

Trading is very much about managing and taking on risk. Even if there are computers managing trading - managing risk is still human driven.

Let me clarify my point a bit: the easier it is to measure the actual performance of an employee, the more their compensation will be linked to their performance. Take for example a company developing software. The variance in the compensation of the software developers will be lower than the variance in the compensation of the salespeople. That's because it's much easier to measure the performance of a salesperson.

In most trading shops it's becoming more difficult to estimate the contribution of a single individual because technology is more important than before, and plays a role in how competitive you are. That doesn't make them any less talented, educated, hard-working, etc. It just makes it more difficult to know their exact contribution. Which means that their compensation will not necessarily fall down, but will become less performance-based.

I think were talking about 2 different things. Yes, technology is important - but these aren't simple systems - nor are they open source.

In the trading world, as an employer you are disincentived to give the keys to your model - aka your secret sauce - to all your employees. You will reward only a select few who you trust to stay on board, manage the model, continuously improve on it to stay pace with the changing markets. If you give the keys to too many people, eventually they will jump to other shops, copy your ideas and your edge will deteriorate.

Automation = following model

Whoever build a good model get a good bonus ?

You're not wrong in the absolute; my point is more that designing, implementing and running a model, good or bad, is increasingly team work. So there is not a single 'whoever' behind that model.

why do you consider the volcker rule failed and nonsensical?

One argument for why it might not make sense is that banks were actually hurt by traditional banking problems (extending credit to poor risks and run on the bank type issues), not traditional investment banking/brokerage/trading firm problems (large market trading losses, getting stuck with large unsold underwriting positions, being sued by investors they missold to).

I'm just sitting here and wondering what the landscape will look like after the next financial crisis.

Bailout by taxpayers - then back to our originally-scheduled programming, injected with warnings about the threat of looming Socialism, without a hint of irony.

I hope more Wall Street companies will use better programming languages and improve the corresponding infrastructure like Jane Street and Bloomberg did with OCaml, like Standard Chartered did with Haskell. I hope to see more adoption of those rather than Python, also hope for getting [1] Rust in this circle.

[1] https://internals.rust-lang.org/t/proposal-business-applicat...

Matt Levine on this very topic:


Lots of agreement and disagreement.

I am sure that wall street /city employers will support a move to more fixed pay NOT

I am sure employees would enjoy having a more fixed Quata and not have to worry about what they get come bonus time

No it’s not. It’s simply not.

nice post

Ha! Picture me rolling on the floor with laughter, barely able to type this comment. The article's idea is somewhere between a fairy tale and an urban legend.

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