EP11 - Quant Products

How quants create consumer products. Learn about factor ETFs, dynamic pricing, yield management, weather derivatives, and quant products in everyday services.

Tweet coming soon

I'm done with the Quant stuff. It's too abstract.

Quants don't create products! I want to build real products. Like toaster ovens. Or shampoo. Things people can touch!

Touching things is overrated.

See this? This is an **Index Fund**. It's Passive. Simple. Safe.

Shez, an **Exchange Traded Fund (ETF)** is a **Robot in a Box**.

Inside this ticker symbol is an algorithm. It dictates exactly how to rebalance, how to reinvest dividends, and how to execute billions in trades without moving the market price.

You aren't buying a basket. You are renting a **Quant Strategy**.

Meh. SPY is simple math. "Buy the biggest companies."

Quants are supposed to be geniuses. Where is the "Genius Product"?

Why don't they sell "Super-Return in a Bottle"?

They do.

Pick up that box. **MTUM** (Momentum).

"iShares Momentum Factor."

Thirty years ago, if you wanted a Momentum Strategy (Buy winners, sell losers), you had to hire a Hedge Fund Manager.

He would charge you **2% of assets + 20% of profits**. He would buy a yacht with your fees.

Today, Quants wrote the code, fired the manager, and packaged the strategy into this ETF.

You get the same math for **pennies**.

An ETF is a **Frozen Algorithm**.

The Quant builds the logic once. "If stock went up 10% last month, buy more."

Then they mass-produce it.

So... these are all just old Hedge Fund secrets?

They are **Factors**.

Academic Quants like (Fama & French) discovered them. Industry Quants productized them.

Okay, so they make products for *Investors* and *Rich People*.

But what about normal people? My mom doesn't buy Factor ETFs.

She buys plane tickets. She watches Netflix. Quants don't make those.

You're cute. Normal people don't buy Quant products directly.

They buy products **Powered** by Quants.

It's a ticket to Tokyo. Price: $800.

Hey! It went up! Why?

This is **Dynamic Pricing**.

The airline has a fixed inventory (Seats) that expires at takeoff (Time Decay). They use a **Probability Model** to maximize revenue. It's a **Yield Management** problem.

The Algo thinks: "There are 5 business travelers who usually book 2 days before the flight."

"If I sell this seat to Shez now for $800, I lose the chance to sell it to Business Guy for $2,000."

"Therefore, raise price."

That's just price gouging!

It's **Inventory Optimization**.

Without Quants, the ticket would be a flat $1,500 for everyone. You wouldn't be able to afford it.

The algo subsidizes your cheap ticket by overcharging the businessman. It's a **Price Discrimination** problem.

Let me guess. Surge Pricing?

That's Uber's marketing failure. A better name would be **Liquidity Management**.

Without Surge, 90 people get no ride. First come, first served.

With Surge (Quant Pricing), the price goes up.

20 drivers sleeping at home see the high price. They wake up and get in their cars. The Supply increases.

The Algorithm uses Price to **Manufacture Supply**.

It balances the equation.

So the product isn't just the car ride. The product is also **Reliability**.

Correct. Uber hired a Quant to ensure a car actually shows up for people who need it.

They are everywhere, aren't they? Hidden in the pricing label.

AdTech. Insurance. Logistics. Energy.

Any business that deals with **Uncertainty** or **Scale** hires Quants to build the engine.

What about this? Farmers grow corn. There is no math there.

How does the farmer afford to grow it?

Farming is gambling on the weather.

Quants created **Parametric Insurance**.

"If rain < 5 inches, pay Farmer $100,000."

A Quant modeled the weather distribution, priced the risk, then sold the contract to the farmer.

Without that contract, the bank wouldn't lend the farmer money for seeds.

No Quant, no corn.

So quants actually build the operating system of the economy.

And they stay in the back room. They are the **Backend Developers** of capitalism. That's why you rarely hear about them.

We don't care about the user interface (Charisma, fanfare).

We care about the **Logic**.

Does the market clear? Is the risk priced correctly? Is the inventory managed?

So this box... is essentially a generic drug?

The Hedge Funds invented the molecule, and now I can buy the generic version at CVS?

Every **Alpha becomes Beta**.

Yesterday's secret sauce becomes today's commodity product.

Quants do the math, then sell the results.