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Investing in Quantopian's Hedge Fund

I've mostly been using Quantopian to pick stocks for me to invest in and have deployed an "engineered index fund" in my Robinhood account. But after watching the webinar on how to get an allocation I felt compelled to add a hedging element to my algorithm/index. I wanted to give back in a way to Quantopian for all the resources I've been able to utilize for free. I've entered three algos into the open/contest and I look forward to seeing how they do!

The trouble is that I have no intention to personally invest in these because they would require too much capital (at least $50K) to be effective. I am also young and have a high tolerance for risk so hedging is relatively unattractive to me at this stage in my life. But I'd love the opportunity to invest a small portion of my portfolio, say $10K, in these and similar strategies developed by the Quantopian community. Does Quantopian plan to open up their hedge fund to be available to users?

I know Quantopian is seeking institutional investment and opening up the hedge fund to the Quantopian community won't necessarily move the needle. But it may lead to increased excitement and buy-in from developers. It also may work to add even more camaraderie between users if there is a sense that each person is able to benefit from each other's successful algorithm development.

I know it's a long shot but I wanted to voice my interest in investing in our collective algorithms if made available. If not I'll continue to appreciate all the resources available to us for free. And I look forward to a friendly competition with all of you in the Quantopian open!

18 responses

Thanks for sharing your thoughts and motivations.

You are not alone. I talk to a lot of community members, and many share similar motivations. On one hand, it's interesting to write algorithms to trade with your own capital. On the other hand, it's interesting to write algorithms for an allocation or for the contest. For much of our community, they can't use the same strategy for both of those purposes. Amount of capital, risk tolerance, ability to short, etc. can all drive different requirements for the algorithms.

The good news is that much of the education we provide and best practices that we teach are applicable to both goals. It looks like you've taken advantage of that yourself, and we're very glad that you did.

I'll also suggest that sometimes the two goals can be pursued by the same strategy. If you create a factor that ranks all of the stocks in a tradeable universe, you can use that factor in a long-only strategy and purchase the top N names. If you use that factor in a long/short strategy, you can long the best names and short the worst ones. The same research is getting you progress towards both goals.

We're also working on increasing the incentive for you to work on that contest/allocation algorithm. Our summer press release about managing Steve Cohen's money had this quote: “These funds will permit Quantopian to make larger allocations and therefore pay larger royalties to authors of profitable algorithms. I expect this major incentive to galvanize both existing and new members, and propel everyone to new levels of creativity.” We are itching to make those new allocations, and we believe the rewards to the community authors will be considerable.

Finally, your question about accepting investment from community members. It's a good idea, and you are right about the benefits. I'm sure the community would be very motivated by something like that. Unfortunately, we can't do it at this time, with this financial vehicle, because we are prohibited by law from offering the opportunity to invest in the vehicle to the public (a.k.a., retail investors).

Some day in the future we may be able to offer additional financial products, including one or more that are accessible to the community at large. We chose the institutional path as our first investment product because we estimate it to be the most likely to succeed. If we can demonstrate success there it will open up the opportunity to other products in the future.

Good luck at the contest, and more to the point, good luck in your effort to get an allocation.

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Thank you for the detailed and thorough response Dan. Fair enough in regard to accepting investment from community members, maybe someday!

Since I posted this I actually worked a bit on the hedging algorithm to reduce the number of holdings (10 long, 10 short) and transactions (monthly) and have therefore made it viable for smaller accounts. I actually just opened an Interactive Brokers account (I had been only using Robinhood) and I initiated a full transfer from my Fidelity Roth IRA into it. Once its set up I'll do the same for my wife's account.

To satisfy my hedging interest/desire I'll allocate 12.5% to short positions which I found to "only" reduce the historical returns by 3% annually but the hedging dramatically reduced volatility and drawdowns (both the intensity and length).

Steve Cohen's investment is very exciting; it's only a matter of time before the broader investment community starts seeing the benefits of Quantopian's approach.

I look forward to seeing if the hedging algorithms I entered into the contest draw any interest from Quantopian for an allocation!

Hi Dan -

Another angle would be to have more of a co-op business model, with users having ownership and influence. In some respects, you are innovative, turning Wall Street on its head, and in other ways, not so much. You still hold the power; it is still pretty much a standard top-down capitalist enterprise, aligned with big money. There's no power-to-the-people revolution here, in my opinion. Quantopian is in bed with Wall Street, as far as I can tell. All legal and a thing of wonder, but it is what it is.

If you do go the route of offering retail products, hopefully you can build off of the Vanguard precedent, with mutuality baked in from the get-go. Their example would suggest that it should be possible to approach things differently from a fundamental perspective, and still make a decent living at it.

A concept that has been introduced by others on the Q site would be to provide a marketplace for user-to-user "signals" similar to the data sets provided by Quantopian, where a monthly fee is charged per unit time of usage. If Q were to do due-diligence on the signals, in some fashion vetting and monitoring them, then maybe there would be legal wiggle room for something other than the institutional crowd-sourced fund model. I would think that the Q research and risk management teams would have the "chops" for such an undertaking, once they get the fund off the ground. It might be something for the masses to do, while the limited few "managers" have algos running at 10's of millions of capital.

Yet another consideration would be to pay out for much smaller, incremental contributions. A quick glance at https://numer.ai/ suggests that they have somehow cracked this nut. For hobbyists and your aspiring, penniless student types, a little "beer money" might be more motivating than you would think. And a $100 payout for a guy in a mud hut with an internet connection could be very motivational.

@Dan

Can you explain what do you mean by prohibited by law to offer investing to the public? Services like Betterment and Wealthfront offer automated trading strategies (which Quantopian could offer too) so wondering if you could describe the difference between Quantopian and those entities in more detail and what would it take you to overcome that difference?

Hi Dan,

More thoughts on the topic:

  • I see that there are long-short ETFs out there. Would this approach be feasible for Quantopian and allow users to invest directly?
  • Regarding your support from Steve Cohen/Point72, could there be some discussion with them regarding broadening the participation and overall community benefit? It seems that with some creativity and a little pressure, the lawyers could sort something out.
  • What about Quantopian owners and employees? Will they be allowed to have "skin in the game" and invest in the Q fund?
  • How about "managers" who get an allocation? Will they be eligible to put in a little money into the overall fund? Or their strategy only?
  • I'd submit that the prospect of large, individual payouts to a limited number of individuals may not be as motivational as you might think, to stimulate the collaborative creativity of the crowd. It may just stir up greed, and squelch collective community spirit. Generally, hard problems aren't solved in isolation. But if the incentives are aimed at trying to identify a few isolated "geniuses" and profit off of them, then it could backfire. The Quantopian fund, in its current form, was not conceived as a community project, but one could imagine devising such a thing. The lawyers could be involved from the get-go, to ensure that it would be open to investment by the individuals who created it.

Hi Dan -

Thought I'd revisit this, if you are interested in exploring all potential angles. One thought is that cryptocurrency (e.g. Bitcoin) allows for frictionless micro-payments. So potentially you could get around the accredited investor legal jazz by simply giving users itsy-bitsy ownership of the fund, at no risk them, and then allowing them to cash out in Bitcoin. Presumably, the legal restrictions are there to protect small-time retail investors from getting hosed, but if fund ownership is at no risk, then perhaps the legal restrictions don't apply?

Of course if you sorted this out, it would dilute profits to Q, your external investors, and any Q users with allocations, but potentially would be one way of fostering crowd participation, and could have way of paying for itself. It would amount to a series of "attaboys" for contributions to the fund effort, instead of the all-or-nothing system that is in place now.

The counter-argument is that there are many benefits to users already, including free data, tools, education, trading, etc. But I'd argue that there's nothing like the direct simplicity of cash that can be converted into a something tangible (http://www.ebay.com/gds/100-Companies-That-Accept-Bitcoins-As-Payment-/10000000206483242/g.html ).

That's a good idea Grant!

Another idea I had was to set up something similar to Motif's Royalty Program. In their model if people invest in a motif made by a "creator" that person gets a cut of the commission. Couldn't Quantopian set something similar up?

Quantopian can/is theoretically not looking at source code yet are live trading the algorithms. So couldn't this be exposed to common investors? In this model a developer could market his/her algorithm for other investors to use for a low fixed fee per month. That fee could then be split between the developer and Quantopian. This model could represent a decent revenue stream for Quantopian. Yet it also will help motivate developers to not only write more algorithms, but attract both fellow developers and common investors to the Quantopian platform. I would think that the legality and risk here for Quantopian is muted and similar to the current setup? Quantopian and the developers are still not directly holding cash, and users of algorithms could end it at any time.

I think this type of setup is a win-win-win!
- Quantopian can build its community and develop another revenue stream.
- Developers are motivated to create and market algorithms and incentivized to make more sustainable ones that will not only attract investors, but keep them.
-Common investors not interested in writing code but still want access to low cost investment products will now have that source.

Above, Dan states "we are prohibited by law from offering the opportunity to invest in the vehicle to the public" but presumably there would be a form of ownership that would be acceptable. I kinda get the sense that Dan didn't go to Fawce and say "Hey, we'd really like to make this happen. Is there any way we could get some form of ownership of the crowd-sourced fund by the crowd itself?" I have to think that the accredited investor legal jazz only applies if one is an "investor" putting personal capital at risk. For example, I think I've had at least two opportunities to get tee-shirts, by ranking highly in the Quantopian contest. It is a fine way to show appreciation, but another approach would be to issue "micro-shares" in the Q fund. There are probably many other opportunities to award microscopic pieces of the pie to folks who don't have the horsepower/ambition/time to get allocations as managers, but have made contributions to the collective effort.

The larger issue is the Quantopian business structure, given its crowd-sourced, collective approach to the fund. Unless I'm missing something, it ain't gonna happen, but it would seem that a cooperative business structure as described on https://www.sba.gov/starting-business/choose-your-business-structure/cooperative might be a better match than whatever they have now. In this context, it would be much more natural to think along the lines of user-owners and what role they should play in the enterprise, including having some ownership of the fund they create.

One of the early blog posts by Fawce kinda had the feeling of a collective, community effort (see https://blog.quantopian.com/quantopian-manifesto/ )--at least that was my interpretation at the time. I give Fawce & Co. credit for being able to realize many of the elements of that blog post, but, in my opinion, there needs to be some reflection on the "community" piece of the puzzle. I completely understand the approach of creating an investment vehicle that can be offered to family office/institutional investors. But not providing some way for the masses to participate in their own creation is not cool.

Vladimir - The companies you name are Registered Investment Advisors. That's a necessary step before giving retail investment advice. Being an RIA also precludes many types of investments. We can't pursue the strategy we've chosen and provide it to retail. We may pursue different financial products in the future, and those might be accessible to retail investors, but that's not any time soon.

Stephen - that's definitely an interesting idea, and it's one that we've explored. I would describe it as Quantopian-as-marketplace where investors and algorithm authors find each other. We definitely gave that one a good, hard look. We even ran a couple experiments to test the supply and demand. In the end, we didn't think we could make it into a compelling business, at least at that time. It may be something that we revisit in the future, though, as quant investing becomes more commonly understood by the retail investing community.

Like I said earlier - "Some day in the future we may be able to offer additional financial products, including one or more that are accessible to the community at large. We chose the institutional path as our first investment product because we estimate it to be the most likely to succeed. If we can demonstrate success there it will open up the opportunity to other products in the future." The same sentiment applies here.

Grant - You've got too many ideas in here for me to reply to them all, but I think I can reply to the theme. I understand that we're not using the corporate structure that you prefer. At various points in Quantopian's development we've considered different structures, and we're using the one that we think makes the most sense. You and I come at this from different perspectives, and with different experiences, and with different sets of knowledge. I think I understand what you're looking for, but perhaps you also understand why we've chosen the course that we have.

We are immensely proud of the way we are making quant finance accessible to everyone - free education and a free platform to anyone with an interest and a web browser.

I like the idea of Quantopian-as-a-marketplace! I think there is a real market there and would go as far as to say that you don't need to wait until quant investing becomes more commonly understood by the retail investing community. I first came to Quantopian to use its development platform to write a robo-investing "algorithm" to rebalance ETFs when money came available, to utilize tax loss harvesting, and to add a small amount of timing through the use of limit orders (then I started exploring pipeline and dove in deep...). This type of functionality is remarkably simple yet some financial institutions still charge exorbitant fees for this.

If we want to Level Wall Street's Playing Field it may be easiest and more effective to start by offering simple strategies focusing on ETF rebalancing, not quantitive algorithms that the common investor may get scared about. At least as it regards to spreading the platform to folks less inclined to write code. In my experience common investors are very untrusting of "algorithms" and they fall victim to the perception the financial community has falsified and spread: "investing needs to be complicated and carried out by people that do this for a living." In actuality the opposite is more often true: simple and low-cost strategies will outlast and outperform the complicated and expensive ones.

This all being said, I understand that you'll have more success in other business avenues if/when the first focus and goal starts bearing fruit. So to that end, I'll make a concerted effort to develop strategies that can attract allocation and provide steady returns to Quantopian's investors. But if/when the Quantopian-as-a-marketplace option starts becoming a more likely possibility please let us know. There may be opportunity for other community members to attract capital allocations from outside investors that are sick and tired of being screwed by traditional financial institutions. I am very motivated to level wall street's playing field for simple strategies, not just hedging algorithms that most retail investors wouldn't have any interest in considering.

Hi Dan,

I think the bottom line here is that you are not interested in offering ownership in the Q fund to users, by issuing free micro-shares, right? Or would it not be possible from a legal standpoint? What's the story? Your legal dudes should be able to advise (or invite them to comment here directly).

Another comment here is that users are the product not the customer. The customer Quantopian needs to land is Steve Cohen/Point72. And then more family office/institutional investor customers in short order. As I understand, that is the business: users are producing the product (or are the product, in some sense), so that customers can buy it. If I understand correctly, the offering of "free education and a free platform to anyone with an interest and a web browser" is so that products (i.e. algos) can be produced for customers. The leveling of the Wall Street playing field is that Quantopian is setting up a hedge fund R&D department that is global, so that quants can be recruited from far and wide, and from diverse backgrounds. As far as I understand the business model, the retail side is not the driving force here. Yes, users can home-brew their own ETFs re-balancing schemes, trade them on Robinhood or IB, and maybe do better than just plunking their money down in a Vanguard fund/ETF, but my read is that Quantopian isn't trying to play in that space. If you just look at About Quantopian, it is pretty clear:

Quantopian is a crowd-sourced quantitative investment firm. We inspire talented people from around the world to write investment algorithms.

Quantopian provides capital, data, a research environment, and a development platform to algorithm authors (quants). We offer license agreements for algorithms that fit our investment strategy, and the licensing authors are paid based on their strategy's individual performance. We provide everything a quant needs to create a strategy and profit from it.

As Dan says to me above, "I think I understand what you're looking for, but perhaps you also understand why we've chosen the course that we have." I would agree--I get it. But part of what is missing, I think, is substantively fostering a culture of "we are all in this together"--there would be a benefit, I believe, in doing a head-scratch on what role the users should have in the business (just as a brick-and-mortar hedge fund needs to do). I've been reading Black Edge: Inside Information, Dirty Money, and the Quest to Bring Down the Most Wanted Man on Wall Street by Sheelah Kolhatkar (the "most wanted man" is Steve Cohen), and it would be a shame if the culture described there takes hold at Quantopian (the top-down culture being "It's my business, my capital, I'm the boss and so get to call the shots"). My intuition is that Quantopian is missing something in their business formula. When users say "Hey, we'd like to be able to invest in the fund" and the response is "Sorry, can't do that" it sends a message, and gives an indication of how Quantopian is approaching things. Yes, there is hope down the road that other investment vehicles would be developed, but it seems that with a little creativity, something could be devised to give users a small "piece of the pie" now.

Grant, you've made some very good points and I would like to second them.

I am very appreciative of what Quantopian has offered me (and others); and I understand why you (Quantopian) are first and primarily going after the institutional investment side. But I think you are missing the bigger picture in terms of sustainability. This thing can grow on two sides: the institutional capital side, and then on the people/users side. Only if these two grow together will this project/company sustainably grow and truly lead to fulfilling the company's mission: "level wall street's playing field."

Quantopian needs to make a concerted effort to offer a product to folks that aren't willing to home-brew their own code. At least in my mind, there needs to be an offering for those folks to help continue the spread of the Quantopian development platform. It would be more holistic if Quantopian could pursue the institutional investors but in parallel provide users the means to pursue and help (truly help through simple, much lower cost, and engaging/interesting/exciting strategies) retail investors. This two pronged approach would lead to faster user growth while also motivating authors in two arenas.

@ Stephen -

Quantopian needs to make a concerted effort to offer a product to folks that aren't willing to home-brew their own code.

I'm not sure what your angle is here. This can already be done. One can write an algo that periodically re-balances a portfolio of ETFs, for example (or have someone write it for you). The problem, I suspect, is that there's no money in this pursuit, and one would be competing with Vanguard, etc., "smart beta" ETFs, etc. for 0.1%/year fees on investor capital.

Overall, the whole thing is a bit of a mystery to me, since Quantopian hopes to get to 1M users, but what would they all be doing? Presently, out of 100,000, only a few hundred are trading real money, and Quantopian is not pushing for real-money trading, as far as I can tell--the focus is on getting users to follow the workflow and write $10M long-short algos that can be evaluated for the fund. On the retail side, my sense is that the big market is in supporting what would traditionally be termed market speculation (which I guess is easier at lower levels of capital when trading futures, which might explain why Quantopian is developing futures trading). Perhaps with futures there will be better overlap between the kind of strategies retail traders would pursue with small amounts of capital, and what would be needed on the hedge fund side. Or maybe the idea is that attracting and retaining talented, experienced traders to the platform will be a lot easier if futures are offered?

@ Grant -

I know that there are a ton of smart beta ETFs (like the iShares ones) out there and there are also a growing number of robo investor services (Betterment, Wealthfront etc.). My angle with how Quantopian can compete against these is primarily due to the availability of customization options. Quantopian's motivation for "competing" here would be to bring in users like myself who had the following progression:

  1. Attracted to Quantopian for low-cost and customized robo investing service (see my first post/algorithm)
  2. Intrigued by pipeline and the ability to own individual securities within asset classes to mimic their performance while providing a bit more engagement and excitement
  3. Inevitably started exploring a customized factoring approach (value, size, quality, volatility, and momentum in that order)
  4. Added in a hedging element to compete in the Quantopian open and "give back" to the company/community who has given me so many resources and enjoyment with investing that enabled me to find investing fun again

Quantopian can make investing in smart beta strategies more accessible and more fun by enabling retail investors to own the individual securities. No other robo investing service or smart beta ETF gives you that sense of ownership and excitement. And no other service lets you tailor your strategy to meet your personal ideas and hypotheses. I really like the idea of Quantopian-as-a-marketplace, to help encourage others to move towards rules based and low cost investment strategies.

But to your point Grant (and why I originally started this thread), I really think it should be higher on the list for Quantopian to enable its users to invest in our collective algorithms and ideas. The reasons already stated make a compelling case for why this is in Quantopian's best interest to keep their users engaged, and the community growing.

@ Dan / Quantopian,

If there was a means in investing in the Quantopian fund, I would immediately allocate $10K. And I know that doesn't move the needle on its own; but let's assume that 5% of users would do the same. There are now over 100K users, meaning there is conceivably 5,000 folks who would be willing to allocate $10K to the Quantopian fund. That represents $50M which I would think Quantopian should take notice in. Why don't you poll the community, ask users if they would take advantage of such an investment if made available to us?

Also, if the development of Quantopian-as-a-marketplace is on the list, just towards the bottom, would you ever consider a scenario where separate companies can build out their own investing software/service using your platform? In this scenario this company would have users open their own Robinhood or IB account, link a Quantopian based algorithm to it, and charge a low cost monthly fee for the service (say $10 a month, but tiered depending on total amount of capital). This fee could be split 50:50 between the company and Quantopian. This would enable other users, like myself, who believe they have marketable investing ideas; but they don't want to rebuild all the functionality already built by Quantopian. This would benefit Quantopian by providing a potential revenue stream, incentivizing users to market their ideas, and it would help spread and grow the community. Most importantly it would start to pave the way for truly leveling wall street's playing field for retail investors, not just institutional.

@ Stephen -

If there was a means in investing in the Quantopian fund, I would immediately allocate $10K.

My sense is that your response is exactly the kind of thing that the regulations are there to prevent. Although given all of the whacky investments that are available to retail traders, the whole regulatory structure may just be a bureaucratic waste.

Above, Dan's response to your question was:

Unfortunately, we can't do it at this time, with this financial vehicle, because we are prohibited by law from offering the opportunity to invest in the vehicle to the public (a.k.a., retail investors).

I don't doubt that they wouldn't be able to take your $10K, but I do get the sense that there might be creative ways of circumventing the legal restrictions. But I can understand that entertaining such things could be a big distraction for them, with an unclear outcome in terms of motivating users. It is just a bit frustrating to get the sense that they might not have tried very hard to extend fund participation to the crowd. It sends the wrong message, in my mind. But then, one could argue, "Hey Grant, why don't you write a decent algo and get an allocation?" Fair enough. I do think that the pie is pretty big, and that anyone who can come up with "conforming" yet "orthogonal" algos can get an allocation, and thus benefit from the fund concept.

@Stephen
Stephen, what's your hedging system based on? How did you chose short positions? Is it fundamentals based? Do you know of any simple fundamental hedging strategies?