Risk Management Quants

[ArbiTrader]

There seems to be a wide variety of quants in risk management roles like

Cluster Risk Managers ( associated with certain desks), Risk Reporting, Risk Analytics, Risk Methodology, Model Risk, etc.



Any ideas of how these rank with respect to various criteria such as



1) amount of mathematical work involved, skills transferable towards other quant positions



2) opportunities for moving internally/ externally to a front office position in IB



3) opportunities for moving into asset management (as a portfolio manager)



4) compensation



5) job stability



?

[aaron]

Risk reporting is clearly has the lowest compensation and opportunities for moving into asset management. It has advantages as a career, better hours, less stress, less chance of being fired, but for the most part it is not for the ambitious.



Few risk management positions lead naturally to investment banking jobs. You might get an offer as a strategist, which can be sort-of investment banking. I suspect you mean here a front office trading position.



Some of the other terms are overlapping and used different ways in different institutions. Rather than focusing on the name, consider three parameters.



The first is how close you are to trading. Some risk managers trade themselves, generally hedges or overlays. Some work closely with traders, advising on trades or approving them. Some are far from the desk.



Second is how much of a quant you are. Model validation should require an extremely high degree of quant training and experience (although it is not always staffed properly). You can't just learn one area of finance and pick a favorite approach, you should be familiar with all areas and all approaches at a level to evaluate the work of others. Some Risk Analytic or Risk Methodology positions require equally high quant skills. At the other extreme, some risk management jobs have no quant component.



Finally is the level of decision-making. Some risk management jobs only produce reports, some involve advising, some require decision-making such as setting limit policies, and some participate in the highest level decisions of the firm. There tends to be an inverse relation between the amount of quant skill required and the amount of decision-making, although that's not always true.



For (1) some good areas are model validation, methodology jobs involving Monte Carlo simulation of complex positions and CVA hedging.



For (2), if you mean trading, the key is to get a job close to trading. General risk management jobs will not help much. In most cases you'd move from risk management quant to desk quant to trader.



For (3), Risk Methodology jobs involving high-level aggregation rather than modeling complex positions are going to work best. The transition here is likely to be from bank-wide risk management to asset management risk management to portfolio quant to portfolio manager.



For (4) the best paid jobs are for running departments, which requires management and political skills, not quant skills. Among quants who don't want to manage, the best paid are the ones that trade and make decisions, but you can pull down a decent bonus in the highly-technical fields like Model Validation without trading or making decisions.



For (5), Risk Reporting is pretty stable. If your technical skills are very good, you'll have more stability staying away from trading and decision-making.

[dgn2]

I would add that there is perhaps one benefit to a risk reporting job and that is that you may get a high level view of the firm's trading business. You may be able learn the business lines and understand which groups are doing well/poorly, what areas are growing/shrinking, etc... If you are ambitious you will probably not stay in the reporting area for very long. I did work in reporting as a student for 3 months and I got a lot out of it. That said, I couldn't have done it for long.

[ArbiTrader]

thanks for your answers guys,



Aaron, you never cease to impress me with the completness of your answers, it's amazing that you still find the time help others with advice when needed    Beer   



dgn2, out of curiosity, what area was your next job after the risk experience and how did you find the transition ?

[dgn2]

I moved to systems trading (prop) after risk. The transition wasn't difficult, but mostly because I spent much of my time at university backtesting relative value and high frequency trading models instead of going to class. Actually, I spent all my free time (evenings and weekends when I didn't have to to work) building trading models while I worked in risk as well. My interests were in systems trading early on.



I worked in the back, middle and front offices as a student. I started as a student in the economics department, moved to the back office to do interest rate derivative settlements, then moved from there into risk management systems. From the risk systems group I moved into front line risk on the trading floor, and from there I moved to a position as a trading assistant in 'equity related products' (listed options / algorithmic trading).



When I finished school I took a job in risk doing mostly credit products related stuff. I couldn't find a job in trading, but many of the guys I had worked with in front line risk moved into trading positions over the years I was a student so I figured I could eventually do the same. I worked in a bunch of positions in risk, but got increasingly frustrated with being in the middle office. I got increasingly tired of the politics at the bank and eventually decided I didn't even want to work in a financial center (around the time I was offered another role in London). I quit the bank and went to work for a small start-up that had been set up in my home town mostly because my wife (girlfriend of 7yrs at the time) really wanted to move back to our home town to live closer to our friends and family. I had really wanted to hook up with a prop shop in Chicago, but didn't end up going that route (effectively picked my girl over my career).



It took about 5yrs, but the shop a I moved to eventually found its niche. The place is like a Cdn version of Prediction Company started by some aerospace guys. I probably have the lowest IQ of the bunch.

[ArbiTrader]

That's quite a journey - interesting experience. I am glad it all worked out well for you.

[ArbiTrader]

A follow up question on this....  are model validation jobs in general better paid compared to risk methodology jobs or are they more or less similar in terms of total compensation ?

[aaron]

Model validation tends to have a high pay per hour, but doesn't lead to successful careers. It's often outsourced. The job requires people with extensive knowledge of the literature and practical experience with trading models. The person should be precise and meticulous, like an auditor or IT tester. There aren't a lot of people like that, and most have better things to do. Someone with the right skills and experience can often get a contract job.



When the jobs are given to internal people, they usually go to people not qualified to do it. In that case, there's no point in paying up for it.

[sv507]

I am not sure what sort of model val jobs Aaron is talking about.



If you mean derivatives pricing model val for an Investment bank. Then I believe they are better paid. The career progression is to become a front office quant ASAP.

[chiral3]

I can't disagree with anything Aaron has said, as I've experienced these things myself. I would only add that it is important to check the culture / type of shop. In large global companies model val can run into the local politics and practical considerations that can make them seen as glorified auditors. This can reduce their role to scoring a few points in a report and moving on. Also, some model val actually rebuild models to check the validity of what comes out and others just check the models for soundness. This can drastically affect the type / quality of work.



Many model validation people I have met / worked with I don't think can / could make it in a front office b/c they don't have a nose for money or can't see the forest from the trees. Others can easily bridge the gap, but I feel there is very little betwixt, the distribution being bimodal.



In terms of pay it can be quite high but has little variability in my experience. Low probability of being canned unless the role gets phased (which I have seen often and quasi-cyclically at two banks). I think after the crisis this role will likely be more stable.