Analysis: Alternative to a PhD as a way in for quants

When it comes to post-graduate qualifications in finance the range of options is extensive. One relatively new kid on the block is the master in financial engineering. But how does it differ from a straight master in finance?

According to the International Association of Financial Engineers, a US-based not-for-profit society dedicated to fostering the profession of quantitative finance, financial engineering is “the application of mathematical methods to the solution of problems in finance … [It] draws on tools from applied mathematics, computer science, statistics, and economic theory.”

Steve Allen, co-chair of the IAFE education committee, says: “Traditionally, a PhD in a numerate discipline has been the best route into a quantitative job in the financial sector. Increasingly, the master in financial engineering offers a viable alternative.”

Students usually enter a programme directly from an undergraduate degree, or after a couple of years of professional experience. Given the heavy quantitative focus of the programme, the majority come from numerate disciplines such as engineering, physics, mathematics and computer science.

Graduates can expect to go into a range of fields where computational skills are fundamental, including trading, asset structuring, product pricing as well as risk management.

“Risk management has always been at the heart of financial engineering degrees,” explains Mr Allen. “Since the economic crisis, demand for these skills has increased.”

Nonetheless, according to Oliver Chen, programme director at the National University of Singapore’s risk-management institute, good financial engineering programmes should focus on more than just quantitative methods.

“The recent crisis shows many examples of what happens when people blindly follow a mathematical model without thinking of the interplay with real markets.”

The NUS masters in financial engineering, launched in 1999, mixes theory with reality. “While mathematics and computer programming are key parts of our degree, the greatest emphasis is on the actual application of maths and programming to finance,” says Mr Chen.

Students on the NUS programme tend to have about five years work experience, although not all have worked in finance – about half enrol with the aim of moving into the sector on graduation. About 90 students joined the programme in 2009, with 10 taking the course via distance learning.

However, according to Estrella Frutos, programme director of the London Business School masters in finance degree, “those interested in understanding finance in a broader sense might consider a master in finance instead”.

While some of the topics covered by financial engineers may be included in a master in finance degree, the core content of the programme tends to be less specialised.

Students are able to focus on specific areas, such as risk management and private equity, or to stay general and broaden their knowledge of the industry.

The LBS master in finance programme, in contrast to most, requires a minimum of two years relevant experience as well as an undergraduate degree and a good GMAT score.

Most students have spent considerably more time working in the finance industry, with an average of six years professional experience. Typically, 70 per cent of the class come from financial institutions; a further 10 to 15 percent are from a consultancy background; the remaining students come from a industry and public sector bodies, including central banks.

The diversity and depth of experience of participants is one of the programme’s strengths, explains Ms Frutos.

“The programme is very interactive, with case studies used on a regular basis. Although the participants learn from LBS faculty, they also learn a great deal from each other,” she says.

The programme is available as a 10 month full-time course, or 22 months part-time. In 2009, 122 students enrolled on the full-time programme, with a further 72 participants studying part-time. Some 80 per cent of full time participants are self-financed and, consequently, highly motivated.

“A few participants on the part-time programme fly in to London from Europe every other weekend, balancing their studies with full-time employment outside the UK.

“Proximity to the city of London, arguably the financial capital of the world, is an important factor in attracting talented individuals to the LBS programme,” says Ms Frutos.

Indeed, securing a new job in the city or taking the next step up the career ladder with a current employer is top of the list of reasons for taking the degree.

Improving confidence with complex financial theory is another motivation, particularly for those without academic grounding in finance.