if the models created by these quants are so great, why don't they just go open their own hedge funds? Why bother working for others?
as a rule, quants are not entrepreneurial and many are not very interested in $$. they are scientists, basically. http://www.amazon.com/gp/reader/0471394203/ref=sib_dp_pt/102-6638098-6101735#reader-link this is an excellent book, if your interested in the "whys" of quants. surf
the guys i know got in to this field only for the money. most are way over qualified for what they are doing.
The difference between coming up with a robust trading model or methodology, and launching, funding and managing an ongoing, structured OPM trading business based on that model is kind of like... the difference between knowing how to swim and finishing the Ironman Triathlon. In each case, the former is a necessary, but rather not sufficient condition for the latter. As Curtis Faith pointed out just today, running a hedge fund is much more about marketing and operations than trading. And, as an ex-quant, I would add, there's a little something called execution to get from modeling to trading, even for yourself. In addition, 1) liquidity / scalability constraints and 2) psychological challenges of OPM are both critical issues to consider and may put the kibosh on your otherwise best-laid master of the universe plans.
It's a little puzzling that nobody has mentioned the obvious... They have absolutely no clue how to make money... It's all pretty much random.
No, that is not why. It comes down to the initial consideration of four things, two pairs of pairs. One pair deals with the EMH regarding theory and the empirical aspect. Since the reality is that the markets do not arbitrage out the variations successfully, then there is something else still unaccounted for. So, nowadays, that other something else is dealt with under behavioral finance which, in turn, necessarily deals with the theory and the empirical aspects of this still present something else. In the final analysis, all parties who deal with these four aspects have missed the boat. And they all, with few exceptions, stay focussed in one or a combination of these four aspects. Certainly, the future will address the real solutions to the unaddressed opportunity. Throughout cultures and civilizations these kinds of circumstances, conditions and situations have occurred. The place holding concept, or the lack of it, stymied the world's progress until the need for the place holder was recognized. This is the profound example of why there was no progress beyond algebra and into the calculus. Literally, civilizations ended without the breakthrough and, then, a civilization did come along that allowed for the required nurturing. Don't expect progress from within the financial industry when it has steeped itself in the wrong kettle of soup. The soup will have to simmer away and the pot watchers leave the scene as well. It is more usual that a system dies than grows when a systemmic malady holds it in it's grip. Mind over matter has occurred, but it is not likely that investments made in physicists will remedy the problem to create an outgrowth of a model (of four parts) when the modellers are looking more and more profoundly at the details and just creating more iterations of the same ilk. After going through the four parts of the two pairs it is very very evident where the problem lies. A non solution is being affected and that is abundantly clear as depicted by the measures now in play and the extent of the measures. It is stated that there is a horse race at present. The fact is that many are beating their dead horses still. I look forward to the glue that is created and, further, its application to the marred structure of the financial industry. At least then, the furniture can be used and occupied by the successors to this episode in our culture.