Data Scientist at Hedge Fund Guide

In the high-stakes landscape of the finance sector, understanding the role of a data scientist at a hedge fund is critical. Our guide sheds light on how optimizing data-driven business decisions can maximize profits. Due to the sheer scale of these systems, even sub-cent differences can translate into multi-million dollar decisions.

Given the ever-pressing need for speedy and reliable business insights, there’s been a growing demand for hedge fund data scientists.

Hedge funds are high-risk, high-volume environments that utilize the powers of scale, all to “beat the market”. If you plan to change career paths and want to jumpstart your way into a Hedge Fund data science role, this article will be perfect for you.

Hedge fund data scientists specialize in data analysis, machine learning, and statistical modeling to make informed decisions. By analyzing large data sets, these data scientists create models to spot patterns, trends, and anomalies that feed into an information pool to power business decisions.

What is a Hedge Fund?

A hedge fund is an investment vehicle that aims to generate profit through a capital pool (i.e., consolidating funds from many sources and aggregating them as a single product). However, unlike other funds that also pool resources, hedge funds generate higher-risk decisions that, in turn, yield high returns while also creating barriers (or ‘hedges’) against potential losses. Typically, they have a higher barrier for entry and invest in a diversified portfolio, which can include stocks, bonds, and derivatives.

Because of their aggressive policies and strategies, hedge funds need data scientists to generate informed decisions through machine learning models, which enable the identification of trades and investment opportunities at split-millisecond speeds.

What do hedge fund data scientists do?

Hedge fund data scientists serve in multiple roles depending on the company. They’re involved on the backend by creating models to generate accurate predictions. On the frontend, they communicate reports to stakeholders. The role can be broken down into the following sections:

1. Data Analysis: They analyze large and complex datasets to identify trends, correlations, and patterns that can impact investment strategies. This generally involves analyzing financial data, market data, economic indicators, or alternative data sources, like social media sentiment, satellite imagery, or web traffic data.
2. Predictive Modeling: Statistical and machine learning techniques are used to create models that predict future market movements, asset prices, or other financial metrics. These models can help the hedge fund make more informed investment decisions.
3. Risk Management: Hedge fund data scientists use data analysis to identify and quantify risks associated with different investment strategies. Examples of this include creating models that predict the likelihood of different types of financial losses and analyzing the fund’s portfolio to identify areas of risk concentration.
4. Strategy Development: They work with portfolio managers and other investment professionals to develop and refine the hedge fund’s investment strategies based on their data analysis and modeling work.
5. Communication: Communicating findings to other members of the hedge fund, including portfolio managers, risk managers, and executives, is a significant part of the data science role. This could involve creating reports, presentations, or visualizations that explain their analysis and recommendations.

What does a data science career in a hedge fund look like? Here are some of the numbers to consider:

• Hedge fund data science positions can earn more compared to your average data science role. This report estimates the average yearly salary of a hedge fund data scientist to be around $150,000.
• The number of hedge fund data science roles has increased by a staggering 50% over the last five years. For context, the U.S. Bureau of Labor Statistics reported a combined growth rate of 2% for all industries in the past five years.

The answer to this question highly depends on the path you’re coming from, and even then, certain variables will affect your eligibility. Some factors to consider include:

• Prior knowledge/experience: If you’re coming from a degree that works with intermediate to advanced mathematics, this can be helpful for a career transition. Note: certain fields like statistics and probability, discrete math, and linear algebra may be more applicable than physics, calculus, or accounting.
• Business sense: A business-related degree or relevant experience can provide an advantage for switching roles. Economics and quantitative finance topics are particularly relevant for hedge fund data scientists.

Note: hard science degrees aren’t necessarily a guaranteed path into data science. If you’re coming from more health-related coursework, shifting to a data science role can be challenging if you don’t have a solid technical foundation.

The data science industry is notorious for having many professionals with graduate degrees. According to this study that looked at LinkedIn profiles, over half of the analyzed data scientists holding at least a master’s degree, with around 21% possessing a Ph.D. As such, for more advanced positions (including hedge fund roles), a graduate degree is preferred if not explicitly required.

While there’s no specific degree required for most data science roles, some degrees will be more helpful than most. Data science, computer science, quantitative finance, and engineering degrees provide a strong background in computing, statistics, data visualization, and complex financial models (helpful for FinTech environments).

While the full scope of a data science role can vary by the company, some essential skills remain universal, including:

• SQL: Data scientists in hedge funds handle relational data all the time, and knowing how to query is a very important skill. Our SQL learning path covers a range of easy to advanced topics, along with practice questions.
• A programming language of your choice: Being proficient in at least one programming language is essential. Certain languages are better for certain careers, and, for data science in particular, Python is one of the best choices. R is also useful if you want to learn something other than Python. Learning Python allows you to use essential mathematical tools like NumPy, Pandas, and visualization libraries, as well as automation and scraping. For more help learning Python, check out our Python learning path
  
• Data Visualization: Learning how to use visualization tools in Python or libraries in R (like Matplotlib, Seaborn, or ggplot2) is essential for communicating with your team and making data-driven decisions. Tableau is another powerful tool used for creating dynamic and interactive dashboards.
• Statistics & Probability: A strong foundation in descriptive/inferential statistics, hypothesis testing, probability distributions, and more are important for data science roles. These skills will be helpful for predictive modeling and developing data-driven insights. Interview Query has a Statistics and AB Testing course and a Probability course to jumpstart your data science journey.
• Data Structures and Algorithms: Start learning about basic data structures like arrays and linked lists. You can then proceed to abstract data structures, like deques, trees, and graphs. For algorithms, learning sorting algorithms, graph algorithms, and asymptotic analysis will be helpful.
• Machine learning: Creating machine learning models is a major part of working as a data scientist in a hedge fund. The models you create will be used to predict trends, optimize resources, automate tasks, and much more. To learn more about machine learning, check out our Machine Learning and Modeling learning path.
• Financial Knowledge: Understanding financial markets, trading, and investment strategies will be crucial to applying data science within a hedge fund context. You don’t need to be a full-fledged expert, but you should be familiar with at least the basics.

Testing your knowledge is an essential part of learning, as it helps you evaluate your understanding of a topic and identify areas for improvement. This can be done through self-assessments, peer evaluation (mock interviews), and/or solving interview questions and problem sets.

When preparing for an interview, it’s important to understand that interview questions often test not only your knowledge but also your problem-solving skills, ability to think critically, and soft skills for effective communication. Practicing questions is one of the best ways to tackle these areas. Some topics you may see in a hedge fund data science interview include:

SQL

1. Write a basic query that counts the total transactions in the table.

Given an annual_payments table, answer the following questions and output each of them as a table.

1. How many total transactions are in this table?
2. How many different users made transactions?
3. How many transactions listed as "paid" have an amount greater or equal to 100?
4. Which product made the highest revenue? Use only transactions with a "paid" status.

2. Calculate the percentage of total revenue made to date during the first and last years recorded in the table.

You’re generating a yearly report for your company’s revenue sources. Calculate the percentage of total revenue made to date during the first and last years recorded in the table. Round the percentages to two decimal places.

3. Find the average annual retention for a subscription product.

You’re given a table called annual_payments for an annually billed B2B SAAS subscription product. Users pay for three different products: 'PDF Editor', 'Cloud Storage', and 'Mobile CRM'. How would you formulate a query to calculate the average annual retention (for each subsequent year) at the end of the year?

Algorithms

1. Write a function to find the total profit from investing in an index fund.

You’re given two lists:

• A dictionary of deposits and withdrawals into an index fund with timestamps.
• A daily price of the index fund by date.

Write a function fund_return to calculate the total profit gained from investing in the index from the start to the end date. You may only purchase and sell discrete shares of the index fund. For example, if you have 23 dollars and the price of the index is 5 dollars, you can only purchase four shares.

Assume that the revenue (or loss) from the index fund is applied to the deposited funds at the beginning of every day based on the percentage increase in the price of the index and that the purchases (or withdrawals) are made before the end of each day.

2. Write a function to return the median value of a list.

You’re given a list of sorted integers in which more than 50% of the list is comprised of the same repeating integer. Write a function to return the median value of the list in O(1) computational time and space.

3. Write a function that filters out integers in an array if they’re less than another integer in a later index.

Given an integer array arr, write a function decreasing_values to return an array of integers so that the subsequent integers in the array get filtered out if they are less than an integer in a later index of the array.

Statistics and Probability

1. Find the probability of getting two cards of the same rank when drawing cards.

Let’s say that you’re drawing N cards (without replacement) from a standard 52-card poker deck. Each card is unique and part of 4 different suits and 13 different ranks.

Compute the probability that you will get a pair (two cards of the same rank) from a hand of N cards.

2. Describe the difference between z and t-tests.

What are they used for? When should we use one over the other?

3. Compare softmax and logistic functions.

What is the difference between them? What makes them useful for logistic regression?

To maximize your earning potential as a data scientist, check out this list of top hedge fund companies:

1. Citadel is a global hedge fund headquartered in Chicago. They’re known for their technologically-advanced strategies and data-driven decisions, creating an ideal place for data scientists. With a high compensation package for experienced professionals, Citadel certainly stands out.
2. Point72 is an asset management firm that uses AI and machine learning to guide investment decisions.
3. Millennium Management is a global investment management firm based in New York. They value integrating data science into their operations and offer annual salaries of over $200,000 for experienced data scientists.

Remember that compensation is just one factor to consider when choosing a company to work for. Other factors such as company culture, work-life balance, learning opportunities, and growth potential are equally important.