Transcription
Foreign, today we're going to answer a subscriber's question, and probably one I get a lot, and somewhat I would like to debunk a little bit. Uh, the question is, can you be an independent Quant, or do all quants work for firms? So, yes and no. And it's a challenging question, but my typical answer is no, you cannot be an independent Quant and be fairly successful.
Which shocks people, because we start to look back at historical quants, or you know, prop trading firms, and we go, wow, they made millions and millions of dollars back in the 80s and 90s, and maybe early 2000s, before the 2007-2008 financial crisis. So therefore, all of us want to go out and get a financial engineering Masters or quantitative finance Masters, and we're going to be millionaires. And the beauty of all this is, you don't have to work for anybody.
So let's run through a scenario here why this doesn't work out in practice. And I will note and put a little caveat, I am sure there are some anecdotal evidence here, there are a one or two people that have done it. But let's go through the math a little bit from a Quant perspective. So, you know, let's hypothetically say you have a million dollars. I just gift you a million dollars. You have a million dollars, and it's just sitting in your bank account, okay? It's a million bucks. Um, and you're gonna make 10% on that return in the first year. So let's just do simple math here. A million dollars times 10%, you made a hundred thousand bucks.
So people are like, oh man, Dimitri, that is awesome. That is amazing. I made a hundred thousand dollars and I don't work for anybody. Well, that's assuming you pay yourself nothing. That also assumes there are no costs associated with the trading. We're just going to pretend transaction costs disappear. Uh, we're gonna pretend the computer, the internet, um, the time, the textbooks, the learning, all that stuff just disappears. And we're gonna say you made a hundred thousand dollars and you paid yourself nothing.
Now, you could rewind this back and say, okay, Dimitri, let's say I'm really smart. I can get a 10% return, which, as a note, that's more than the market average here. So market average is between like six and eight percent with well diversification. If you're really smart, you might be able to knock in a 10% return here. So let's just say you can do 10% and you take a hundred thousand dollars every year. So you have a million dollars somehow, which we're not going to ask questions how you got it, but you have a million dollars. Uh, you can generate a hundred thousand dollars a year and you pay yourself a hundred thousand dollars a year. If you can consistently do that, you would make, yes, a hundred thousand dollars a year.
Now, when you looked at the two videos, which I'll link above or below, um, in the description, quants can work for firms making a hundred-ish thousand dollars to start. Now, the beauty of not working for yourself is you get paid your salary regardless of performance. That's what a base salary is. So you can start at a job, you could do sell-side, like me, and risk management, have low stress, uh, regular hours, work 40 hours a week, have great benefits on top of all this, which they don't include inside that hundred grand. And you can get paid, you know, 80 to 100,000 to start. Within a few years, you're probably making 120, 140, depending where you're at. New York City, you should be making a bit more. Uh, other places where it's cheaper to live, you'll be making a bit less. But in general, you're making 100 grand with essentially no stress or minimal stress because you're working for someone else who has to deal with all that.
Now, this also assumes the fact that you somehow know how to set up a hedge fund or a prop trading firm. Uh, you also know how to go through the proper regulations. You also have free data to you. There's essentially no costs associated with this. So, you know, you can see here, if you made that 10% per year at a hundred thousand dollars, it's more lucrative, less stress, and easier to actually work for someone else than it is to say, okay, um, the 10% is not guaranteed. I have to perform, and I have to do extremely well. And if I don't do extremely well, I might not get paid. So you might make, I don't know, say 6% for the year, which is about prime market average, six to eight. But you're a little bit on the lower side. You make 6% a year, you're only making sixty thousand dollars. And again, there's that risk associated with your performance here. So you can see it's more advantageous, just in this scenario, to work for someone.
Now, let's pretend somehow, I don't know, your family's super wealthy, you got the million dollars for free, and you're gonna compound that money 10% per year, right? That's what everybody likes to assume here. So if we take a million dollars and we compound that out at 10 years at 10%, if my math is correct, uh, you'll end up with 2,593,742.46. Now, you got to subtract out your million dollar initial investment, which your family gave you or you borrowed or something altered. That's not really a return, that's just assets you had. Uh, you take that out, you end up with 1,593,742.46. And now you divide out all that effort that you had over a 10-year period, and you end up with 159,374 and basically 25 cents. We rounded up, $160,000 a year is a terrible salary for a firm. Like, you could work somewhere five, ten years into a career and be blowing past two, three hundred thousand dollars, which we saw in the Carnegie email and report here. Again, you'll be making this towards towards some experience. This isn't like you just waltz out and make tons of money off the bat. But you can see when you started, you know, making around 100 grand, 90, 100 with benefits and all that kind of tight and everything for your base salary, it's much more advantageous and much easier to work for someone else in that scenario.
Now, in the case that you don't need any money and you compounded everything else, again, you're not making a whole lot of money. Now, the secret in finance though, and why people end up starting firms and actually making millions of dollars, which we want to talk a little bit about, is they're able to scale this. So to scale this in this scenario, let's say you could make 10% returns year over year and you could prove that you could do it. Uh, now it's much more advantageous to run out and find investors to raise 50 million or 100 million or 200 million dollars that you can scale the operations to now make the profits much, much larger. And now you can pay your employees those, you know, a few hundred thousand dollars to 250, whatever, in these ranges, and get some new employees and train them, you know, from about a hundred thousand up. And you can bring all this in and build a firm. But again, you have to go out and find investors.
So again, doing it independently with no investors, no team, nothing, sure, it might be possible. There's a lot of risk in it, and a lot of people lose money and get nothing for the year. Um, the expectation of returns though, it is usually much more advantageous to work for someone else. Now, that being said though, going through the scenario here where you go out, you find a bunch of investors, well, now you're tied to those investors, and now you have to report and deal with the investors. And now, as you start building a firm, you're going to have more and more legal paperwork, like thin, right? You have to deal with because you have to follow rules and regulations. And perhaps you're another country, as an example, and you have to do the same thing. Well, as these things start to scale, you'll start finding out too that your one strategy only worked for a short period of time. You have to come for the new strategy. And so now you start finding out you need to implement these things into automated systems. You need to have things set up. So you need data engineers. Uh, you need a Quant to come up with the strategies and build out, you know, the research portions of it. You need someone to execute this, which is typically like some sort of trader. And again, you needed someone to deal with all the investors, and you'll need a lawyer, and you'll need accountants. And as you see here, you'll probably need HR because now you have all these employees. And as these things start to grow, you might be, we'll put an air quotes, independent, but you're not independent anymore. Now you're just creating a firm.
And a lot of quants end up doing this, where they go and they work for someone else, they make some good money, they have some nice financial cushion, they take their ideas, their information, their network contacts to hire really good employees, and they start their own firms, and they become profitable and successful in that notion here. So I hope you guys get from this takeaway here, it's not like, like this, I don't know why this fairy tale exists where it's like, I'm gonna go out and become really, really smart, and because I'm really, really smart in quantitative finance, I'm going to make millions of dollars. There's just a lot of ignorance in that ideology here and kind of that storytelling. And yes, it is very romantic. It would be amazing if you could just quit your day job, work for yourself, sit here like in an office like I am doing my YouTube stuff, but instead just be trading and making millions of dollars. And it'd be great and wonderful.
The reality is though, is one, trading is very, very challenging. Markets are very brutal. To be competitive, you have to have a lot of resources and a team behind you to do it effectively and efficiently. And there's lots of other costs and overheads that come into this on the firm side as well. So building a firm is typically where you end up with, you know, there might be this romantic fairy tale of you starting your own trading ventures, and then if it grows and you are successful, it will turn into a firm. If you are not successful, it'll turn into you working for someone else. It's not realistically that fairy tale dream is kind of a tipping point where it's like, you might start in that ideology, but you're going to end up either working for someone else or creating your own firm and having a bunch of people work for you.
But, but in finance, if you cannot scale, it is not profitable. So that's why quants end up working for someone else. It's much safer, or they work for someone else for a while and then start their own fund because they have experience. So they can gain investors here. So if you don't have experience and you're nobody, it's really hard to get investors. If you've worked in the industry for a while and you know a bunch of people and you can prove that you can make a profit, it is much, much easier to get investors here. So you're gonna end up one of these two camps, either, you know, working for someone else, which isn't all bad, because there's a lot of the risks associated with running a fund that you don't see as a newbie, and the firm takes care of all that. They have people hired to do all that. They're experts in actually running firms and investment firms. And then on the other side, you might gain all that experience, gain a good network, build out your own firm, and do it yourself. But again, you're not really working for yourself. You have a lot of investors you report to, you have employees and teams to manage, and a bunch of other things that perhaps aren't as fun and exciting as building models and doing quantitative research.
So anyways, thanks for listening, thanks for watching, and as always, until next time. [Music]