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About unfair allocation of capital at Quantopian

Suddenly I realized that the Quantopian brokerage connection with reasonable conditions to this community was discontinued. Now the offering is "If your algorithm receives an allocation, we will pay you a share of the returns that your algorithm earns on our capital. Our target is to pay you 10% of the net profit on your algorithm's allocation." This seems totally odd, 10% (!), and this seems to be a strong constraint to this raising Quantopian community. Before we could choose our own code (even if not so brilliantly performing, but still a working code with the possibility to go to the market at our own risk) but now we are not sure if our code (even if a simple modification of a cloned intelligent code built by any Quantopian). Is there a hope that the administration reconsiders their previous position? Are there other options outside to a more favorable environment? Can a Quantopian invest at least 1000 USD in a kind of Quantopian hedgefund?

7 responses

The idea is that the 10% is a good deal for authors, in the context of the hedge fund industry. Typically, there would be a 2/20 fee structure. The manager would charge 2% per year on capital from a customer, plus take 20% of any profit, as an incentive. So, Quantopian is splitting the typical profit (on the leveraged algo). Additionally, there is no risk to authors--it is just a licensing deal. Based on the information I have, I wouldn't consider it unfair.

I agree with Grant. The number that you should be focusing on is the 50% profit split between you and Quantopian, not your 10% profit share.

I agree with Grant and João.

The important question is, is the author getting a good deal? We think it's a good deal for the authors; other people in the industry say that it's a good deal; and the authors we're working with think that it's a good deal.

This thread, though, shows a big challenge in Quantopian's messaging that I haven't figured out how to solve. How do I best convey this deal on the allocations page, or in press releases? The best language I've found so far is "pay you 10% of the net profit." This language is both accurate and precise, which are necessary and important qualities for any explanation we give.

Unfortunately some people read the language and think "Why is Quantopian keeping 90% of the profit?" Of course, that isn't the case. The vast majority of the profit is returned to the investor who put up the original capital. A cut of that profit is shared by Quantopian and the author to compensate us all for the execution and use of the intellectual property.

Does anyone have a suggestion for a different way to convey this deal? Unfortunately I can't use João's language of a "50% split" because it isn't sufficiently accurate. Different investors have negotiated different deals with Quantopian, and the author's share might be more or less than 50% depending on the individual deal and the algorithm's performance.

Suggestions are most welcome.

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Well, it doesn't really matter if Quantopian puts up the capital. In fact, it say as much:

If your algorithm receives an allocation, we will pay you a share of the returns that your algorithm earns on our capital. Our target is to pay you 10% of the net profit on your algorithm's allocation.

It is just perception that one is getting treated unfairly, should the money come from Quantopian. The reward is the same regardless of the source of the capital.

To Grant, Dan & anyone else reading this, IMHO being paid "10% of the net profit" sounds like a WONDERFUL deal. Some people will complain about anything, but its hard to imagine why anyone who has really though this through can have a legitimate complaint! At least from my perspective, here are 2 alternatives: 1) I can take my own money and go trade it. Sure I get to keep all the proceeds myself, but I don't have a large personal account to start with, I have to keep continually exposing my real money to risk and, for any "little guy", the retail brokerage is high. My effective Sharpe ratio [ edit: oops, I meant my MAR = CAGR/MaxDD] is whatever it is for my trading system/algo after costs. Alternative 2) is that I take my algo and, if it's any good, then Quantopian will trade it for me using OPM. I have no associated costs, and I don't have to expose a single cent of my own money to risk, so the maximum DD% on my real money is zero. My effective Sharpe ratio [edit: oops, again I meant my MAR] is now (approximately) "10% of profit" divided by ZERO. Anyone can do that math! Its almost a perfect passive income stream. I love the idea! The only question I have is that Quantopian's statement of "10% of net profit" is ill-defined. Ten percent aggregated over what timeframe? How is it actually calculated and paid? Weekly / Monthly / Quarterly / Annually / Only once after many years at the end of useful life of the trading strategy, or what? This needs to be made explicit, please.

I can only speak from my personal experience but in my past I have "licensed" algorithms on the futures side of things (no equity ... yet).

In my case the profit sharing arrangement for futures algorithms was 30% net profit above high-water mark (paid quarterly) with zero capital input from my end with a non-compete (i.e. I owned algos and took no financial risk but the licensee had exclusive use of the "intellectual property" for the duration).

Now this may seem like a much better deal than 10%, but (and it's a big but) I had to create all the code myself in python and then have them port to their own custom c++ execution engine (which I had no access to). There were many other technical issues that one needs to deal with which I won't go into here but needless to say the hassles involved in such an endeavor and the ridiculous amount of time debugging/verifying such an arrangement compared to a much more turnkey arrangement one would have if they were to receive an allocation from Quantopian (plus non-exclusivity) evens things out imho.

Regarding the discontinuation of the brokerage integration, well there's nothing stopping an individual from using the Quantopian platform to develop strategies and then porting them to some other system and trading their own capital so I don't see the discontinuation of brokerage integration as that big of a deal, just a minor inconvenience.

TL;DR - Seems like a fair arrangement to me. If you don't like, roll your own.

Hi "Harlequin Sheep" & thanks for the info.

This will be (I hope) my first experience of licensing anything rather than simply trading my own modest little account. I absolutely do not for a moment under-estimate all the hassles you mentioned regarding software & implementation issues. I spent YEARS writing my own trading software for my own personal use and then I threw it all in the bin in less than a week after I found someone had come out with a much better integrated platform than my own and at very low cost. Similarly, for anyone like me who has plenty of trading experience but no experience with python, the Quantopian platform and all of the great help available both from the Q support staff and also from other Quantopian users is absolutely fantastic ... and its all for free!! Judging from a few recent (disgruntled and/or ungrateful) posts on the forum, it looks like some users just don't appreciate how good Quantopian really is in many ways.

Best wishes, safe & enjoyable trading, Tony.