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Do quants need to know Accounting?

In my school's undergrad Quant program, we had Financial Accounting and Managerial Accounting, which were listed as prerequisites for our undergrad Finance subjects.

I am taking grad Quant now, and I have not seen Accounting ever turn up again except in Financial Statements. In fact, our first grad Finance course, Derivatives Pricing I (Chapters 1-11 of Hull's Options, Futures and Other Derivatives), has been added to the new curriculum of the undergrad Quant program, and I know someone who took it at the same time as Financial Accounting. This person did not even yet take Managerial Accounting.

Even though said Finance course can apparently be taken without Financial Accounting, I guess it's possible that Accounting may show up in future courses or in the real world.

If so, in what scenarios for example?

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It is completely useless for research/software (i.e., the technical side) in a short-term quantitative trading firm/fund. In fact it is detrimental because of the opportunity cost associated with not learning computer science/math/stats while you were spending time learning accounting. –  user2763361 Jun 21 at 8:36
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@user2763361 Please post that as an answer so that I can downvote it. –  user508 Jun 21 at 16:10
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@user508 Could you explain here in comments? That would be more useful to the community than a downvote. My point was specifically regarding research/software in short-term quantitative trading (e.g holding period 30 seconds). I don't see how this could be controversial. The opportunity cost of not learning more about hardware or machine learning is quite huge when the field is so competitive to get entry into. My firm gets over 100 PhD level applicants for each position. You can bet that we do not care in the slightest what they know about accounting. –  user2763361 Jun 21 at 22:20
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... and for good reason. They could have instead learned more about GPU programming, or digital signal processing... Opportunity costs actually exist because the candidates had finite time to study. –  user2763361 Jun 21 at 22:32
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@everybody: I am not a huge fan of this question but still it has received six answers already. And yet there is only one up-vote (full disclosure: the up-vote is mine). If you like the question, please do up-vote! –  olaker Jun 24 at 9:43

6 Answers 6

up vote 1 down vote accepted

Certain structural models of credit risk/default require some background in accounting, but not much. That these credit models are getting baked into the Basel regulations for CVA, CoCo bonds, and so on, makes it marginally more important to know. There's also an entire industry based on convertible bond and capital structure arbitrage where knowing accounting is vital.

Just do what interests you, and don't worry about anonymous folks saying this or that is crucial, they are only talking their book, as they say.

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Accounting is a vital skill if you end up in a managerial position, and unless your career goal is to always be a cog in someone else's clockwork, then you will eventually find yourself in a managerial/senior partnership position even through quant research. I still play a critical role in my firm's quant strategies team, but here's a few things I've had to do that relate to accounting that you'd find common on the buy-side:

  1. Fighting those inconsistencies in our PBs/clearing firms' trade execution reports.
  2. Negotiating fund administrators' fee structures and services and interfacing their platform(s) with our internal tools.
  3. Voting on the decision whether to take incentive fees or allocations.
  4. Voting on the decision on 475(f) election (at a multi-asset class hedge fund, where the proportion of short-term gain isn't immediately clear and knowledge of individual strategies' PnL was important in making this decision).
  5. Defending a cap table and business valuation (merger of two prop firms).
  6. Voting on a decision whether to restructure our fund management company as an LP (this was intricately tied to our partners' bonuses, because of changes to NII and SE tax policy arising from the Affordable Care Act).

Now, purely on the quant research and strategy development end, accounting is an extremely useful skill for obtaining and scrubbing your primary data source for trading decisions:

  1. Price-moving information, e.g. book value, debt/equity ratio, operating income to interest expenses, could be contained in unstructured accounting statements.
  2. Trading opportunities could arise from discrepancies due to reporting practices, e.g. mark-to-market, mark-to-close etc.
  3. Trading opportunities could arise from accounting inconsistencies, e.g. miscategorization.
  4. Market price of assets may be overestimated/underestimated significantly if they are based on expected future cash flows.
  5. Valuation based on discounted cash flow.
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It seems logical to me to have a Financial accounting course in a quant program. Quants can have a lot of different occupations, from derivative pricing to quant analyst in a "research" (i.e. analysis) dept. of a broker, a risk dept., a fund (as an analyst or as a potfolio manager), or quant execution trader (the list is far longer). In the case of being quant analyst in the analysis dept of a broker, you will need financial analysis for sure (just have a look at the CFA program).

You have in mind the occupation of quant in a derivative pricing team (can be in the equity of fixed income dept of an investment bank), it is not the only one. And to my eyes not a first choice today; it seems to me that liquidity is the hot topic nowadays, hence working around this area at very short term (intraday trading) or very long term (asset allocation), or around the topic of "collaterallization", or the funding of the bank, is nice. And financial accounting could be of use in some of these jobs.

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There are two reasons for a quant to know accounting. The first is that a fair number of "quant" problems are, or at least can be cast as, accounting problems. This includes time series or "non-parametric" analysis of accounting numbers.

The second reason is that accounting numbers are sometimes faked, meaning that a quant has to be able to deconstruct accounting numbers in order to be fooled. Enron Corp. looked like a good investment to many quants; until you realize that their numbers were faked.

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There are various kinds of "quants". If you are an equity quant building quantitative stock selection models using fundamentals such as price/earnings, EBITDA/EV, or especially accruals, then you should be knowledegable about accounting. If you become a fixed income derivatives quant, accounting is less important. Education should not be expected to prepare you narrowly for a very specific job.

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A quant may find accounting useful occasionally but it is really tangential knowledge. I would not consider typical financial or managerial accounting as pre requisites for a Quant Fin program.

That said, certain quants in fixed income or credit do end up dealing with intricacy of cash flows. Accounting background will help in those scenarios.

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"dealing with intricacy of cash flows" Explain please with examples iydmma? –  BCLC Jun 20 at 10:38

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