Our community reached a watershed moment in Q4 of 2015: the first community authored algorithms were chosen and deployed with capital. We analyzed tens of thousands of algorithms, and then we made six-figure allocations to 3 of them. We are writing to the whole community to say thank you — this is something we accomplished together. We also want to share some details, and to encourage and inspire you to keep writing great algorithms.
Allocation and Compensation
The allocation process worked out just as we had hoped that it would. We approached each of the chosen authors with a contract. The terms of the contract promise that a portion of the returns be paid to the author as compensation. The contract also covers the other things you'd expect - length of the contract, maintaining the intellectual property as the author's, etc.
We then did some additional diligence with the authors and worked with them to make the algos more robust for live trading. For instance, one of our author's algorithms had some brittle rebalancing logic that failed during stress testing, and we asked him to correct that before we deployed it with real money. Once the contract was signed and diligence was complete, we deployed the algorithm using our capital.
Algorithm authors were paid for their 2015 performance, and we look forward to writing checks again.
These allocations are in addition to, and separate from, the real-money trading we have done for Quantopian Open winners. These new allocations were made on the basis of analysis by our quant research team, using tools like pyfolio tearsheets, and not the contest rules.
More Allocations Coming
We are making additional allocations this quarter and going forward. We expect our allocations to increase in size over time.
All algorithms with at least 6 months of out-of-sample data are being considered. We evaluate the algorithms by looking at their in-sample and out-of-sample performance; we never look at the code itself. As we have outlined, we are looking for well-hedged, low-beta, low-volatility algorithms. Obviously, they also have to be profitable. Finally, they must have low correlation with other algorithms we have allocated to.
Many algorithms we have considered were promising but fell short in one vital area or another. We've been contacting these community members and have been working with them on improving their algorithms. After additional out-of-sample time passes we hope to provide them with allocations.
These allocations are all being made from Quantopian's own balance sheet - we believe in this model enough to risk our own capital. This is proprietary trading, or "prop trading." We are using prop trading to refine our algorithm selection process, our risk management, and our algorithm portfolio construction. We are very pleased with the progress in all of these areas.
Our business growth depends on making much more capital available to your algorithms. More capital also means you can earn larger royalties by licensing to Quantopian. We are working to ramp both the number and the size of capital allocations to your algorithms by transitioning from prop trading to a hedge fund.
Keep Writing Algorithms!
These allocations are the latest step in the progress of our community and in our business, but it is far from the last step. The platform is improving and expanding. There is much more capital still to allocate.
Most importantly, there are more algorithms for you, our community, to write. These allocations are how we can convert your hard work and insight into your profit. The great algorithms you're writing today are the allocations we will be making tomorrow.
Note: Past performance is not an indicator of future returns. This note does not constitute an offer or solicitation to invest in any securities.