Quantopian: Leveraging the Crowd to Generate Alpha
Quantopian enables anyone to build their own trading algorithm and win prizes for performance. In addition to providing a platform for creating and testing trading algorithms, Quantopian puts capital allocation in their own fund behind successful user created algorithms, sharing net profits with the algorithm author.
Quantopian is a crowd-sourced quantitative hedge fund that leverages its user base to generate investment algorithms. The company provides a platform for users to access market and company data, conduct research, and write trading algorithms right in their browser.
Top performing algorithms are rewarded with daily cash prizes, and the best performers are eligible for capital allocations within the company’s fund. As of 2017, over 160,000 users have submitted more than 700,000 algorithms. The user base has doubled year-over-year for the past several years and consists of a wide range of backgrounds from all over the world including finance professionals, software developers, data scientists, and student.
Users are incentivized to build algorithms in several ways. First, the Quantopian platform provides free access to market and historical data for research and back testing; individual users would be unlikely to be able to afford access to such data independently. Second, users are eligible to compete for daily cash prizes if their algorithms perform well. If their algorithms perform extremely well, users can choose to license their algorithm to Quantopian to put capital behind it in the actual market. Users who license their algorithms receive a share of net profits to compensate them. Users retain intellectual property rights over the algorithms they submit; neither the company nor other users can see the algorithm. Finally, Quantopian has successfully created a community amongst its users. On the website forums, users help each other through problems and discuss quant trading ideas. Members meet offline at local meetups and at QuantCon, Quantopian’s annual conference. The community has even taken up the task of improving the product. When Quantopian stopped building brokerage integrations, community members built an open source project to continue the work.
Value is created for users as they are provided a platform to access data and write algorithms, access to a community of like-minded individuals to interact with and learn from. Quantopian gets the value of gaining access to a wide array of trading algorithms they can leverage in the markets, without needing to hire a massive team of computer scientists and quant traders.
Users capture value from any financial rewards paid out by Quantopian, including the profit sharing on well-performing algorithms. Quantopian captures value by trading on the crowd-sourced algorithms and (hopefully) generating a positive return.
Quantopian faces several challenges in its crowd sourced approach to investing. The young $50M fund has had disappointing performance so far, down 3% as of late 2017. Regardless, investors continue to demonstrate their belief in the promise of crowd sourced investment. In July of 2016, Steven Cohen of Point72 Asset Management publicly committed to putting $250M into Quantopian’s funds. Another challenge will be maintaining the community and keeping users around, especially as other startups enter the space. The community is built on trust and guarantee of intellectual property rights. Quantopian needs to be sure to maintain this trust and not engage in any action that would alienate users, even if fund financial performance continues to disappoint.
Quant trading seems to be the future for hedge funds. Quantopian’s model of crowd-sourced trading algorithms provides an interesting alternative to the traditional model of staffing professional quant traders and computer scientists. Opening up the world of trading algorithms to anyone with a computer and bit of programming knowledge is a fascinating experiment in democratizing trading. In the long run, Quantopian’s success will be measured by whether or not it is able to deliver financial returns with crowd-sourced models. Returns have been disappointing so far, but it is early. Only time will tell if the crowd is able to win in the quant trading world.
Sources:
https://www.wsj.com/articles/want-to-be-a-high-frequency-trader-heres-your-chance-1521797400
https://www.ft.com/content/29b106d2-1f1e-366f-a967-c4be1e5940ba
https://www.quantopian.com/